Crack in Indian realty firms

Future economic historians may remember the month that just ended as
Black September. Lehman Brothers collapsed; the Bank of America acquired
Merrill Lynch; AIG was nationalised; banks such as Washington Mutual
and Wachovia were wiped out. As credit and finance markets around the
world tumbled like ninepins, so did stock markets in India, with the
Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469
points on September 15. The worst affected was the realty index which
dropped 7.6% on the same day. Since then, while stocks prices in India
have seen massive swings, shares of real estate firms have remained
depressed, falling a total of 20% as of October 1.

In addition to housing stocks, home prices are taking a beating. By
some estimates, prices have dropped by 25% in certain urban markets.
While in the US – and also in Britain – the subprime mortgage mess has
seen home prices fall dramatically, in India, such slowdowns have been
rare – at least in the past. Prices may soften, sales activity may slow
and occasionally a distress sale occurs, but there has not been an overall
fall in home prices. "India has not seen a boom-bust cycle in real
estate mainly because the industry is still nascent," says Anurag
Mathur, joint managing director of Cushman & Wakefield, a global
real estate solutions company. "India has not seen a boom and bust
cycle in almost any sector," adds Rajesh Chakrabarti, a professor
of finance at the Hyderabad-based Indian School of Business (ISB). "While
there have been variations, we have not had cycles of the kind we see
in the developed countries. It is only after liberalisation that the
Indian economy has been seeing more cyclical movements."

According to Irfan Razack, chairman and managing director of the Prestige
Group, a Bangalore-based real estate developer: "We have boom and
bust cycles in India but because of our huge population, the demand
keeps growing and that sustains the industry. You can build for the
next 100 years and there will still be demand for housing in this country."

India has inadequate data on the real estate sector. For instance,
no one tracks housing starts, an indicator that is regarded in many
countries as an important yardstick of economic health. However, several
real estate companies have gone public during the past couple of years,
which makes information more transparent. Secondly, equity analysts
have begun tracking these companies and the real estate industry.

Still, confusion continues. Consider the reaction of the markets to
the Lehman collapse. Real estate was hit for two reasons. Lehman had
invested $200 million in DLF Assets, a company belonging to DLF, India’s
largest real estate company. It had also acquired a 50% stake in Unitech’s
Mumbai project for $175 million. (Unitech is India’s second largest
real estate company.) Among other Lehman investments or proposed investments
were those in the Mumbai-based Peninsula Land Ltd. and Housing Development
& Infrastructure Ltd. (HDIL).