For the last few years India has been something of a hotspot for business and property developers, with economic growth only matched by the massive increase in capacity in China. However, as the global recession continues to march forward there are grave concerns about the impact this is having on the Indian property market. Shares in India’s major property development companies have collapsed, the stock market is reeling from a lack of confidence and investors are pulling back from acquiring properties in the belief that they will fall further.
There is no doubt that the boom times are over for the moment but many believe that the fundamentals which made the Indian economy such a powerhouse over the last few years are still there and longer term there is great potential for significant capital growth.
So what is happening now?
The last few years has seen investors from all corners of the globe check-in to the Indian property market which has proved very very lucrative for many. However the massive inflow of foreign investment has pushed prices higher and higher and in some ways has disconnected the first-time buyer from the average property value in India.
While we have seen the multi-million-dollar homes grab the attention of the press, much like in the UK, there are very few $50,000 homes for those looking to get onto the property market. This has affected domestic demand somewhat and resulted in a two tier system and a massive gap between the two tiers. In a traditional property market first-time buyers would look to move up the ladder in due course but for many, the jump from a $50,000 home to a multimillion dollar home is just not possible.
The stock market
Nowhere is the collapse in Indian property development companies more prominent than the stock market where India’s largest development company has fallen by a whopping 80% over last year. DLF is controlled by property tycoon Kushal Pal Singh who himself has lost a massive $39 billion in the stock market collapse. While his stake in the company is still valued around $8 billion this is a massive hit and one which has been felt in many corners of the Indian property market.
When you consider the likes of Goldman Sachs, General Electric, Blackstone and even Donald Trump were only a few months ago suggesting that the Indian property market and the economy as a whole would lead the world higher and was the next big boom time there has been a massive change in sentiment. The problem now is the fact that overseas investors have fled the scene and the economy is now struggling to sustain recent growth rates.
Even though the official Indian interest rate is 7.5% the average loan rate is around 12 to 13% which is a massive markup and one which is strangling the domestic property market. As more and more property investors and property owners are unable to keep up their loan repayments the deluge of property coming onto the market is growing by the day. While the banks would prefer not to repossess homes and dump those on the market there is a feeling that this will happen in due course.
Many are now calling on the government to address the problem with interest rates although with inflation still a concern it looks as though there will be no short-term fix. The longer these high finance costs remain the more people will suffer and the more homes will ultimately be placed onto the market.
When you consider that residential transactions are down by over 50% on a like-for-like basis there is real concern that the market is set to implode. While we have already seen a significant reduction in all areas of the Indian property market the effect has been felt more acutely in the luxury end where prices are expected to fall by up to 30%. Indeed we are already seen property developers trying to attract more interest with offers of cars and even gold bars!
The worse the situation becomes the less chance of investors stumping up cash to buy property even at current levels. The reduction in demand for property worldwide has hit the Indian market very hard and there is currently massive oversupply in the higher end of the market with fewer and fewer investors willing to even acquire properties at distressed prices.
Is there still hope for the market?
When you sift between the deluge of negative and depressing information coming out of the Indian property market at the moment there is one interesting fact which could be the light at the end of the tunnel. Currently India is said to have a shortfall of 25 million homes and while these may be towards the bottom end of the market there are still profit margins to be made and customers willing to pay money for their own property.
If property investors decide to move into this area it could help to take up some of the slack in industry and tied over workers, business and investors until the more luxurious end of the market recovers. However, at the moment the oversupply towards the higher end of the market is the main concern and we are set to see some dramatic price addictions as investors and developers look to raise their capital levels as soon as possible.
To those who follow the Indian economy and society as a whole it may come as no surprise to see the property market split between the lower and more luxurious end of the market, as has often been the situation in Indian society. At the moment there appears to be very little property available in the middle range and until this gap is filled the market will never fully develop as first-time buyers are not able to upgrade their properties in due course as the difference in prices is too large.
In order for the Indian property market to recover in the short to medium term we will need to see a reduction in base rates and loan rates although this is unlikely to happen until inflation is totally under control. The fundamentals for the Indian market are still there and many view the current situation as nothing but a short-term glitch in an overall upbeat picture.