By Nirmal Bang

The unprecedented recession we witnessed in the past fiscal year has taught real estate players in India a lesson the hard way. After the hey days of the year 2006 and 2007, when every other real estate player went on a huge land banking drive and debuted on the bourses with a bang, the impact of the subprime crisis as well as the global recession left them in the lurch.

Liquidity got sucked out of the system in no time and the very banks who were ready to lend to the developers during the boom and had committed to lead in stages, did not keep their word. Sources of funds dried out and realty players were on the brink of insolvency with highly leveraged balance sheets. Already reeling under the burden of debt, a number of Indian realty players would have gone belly up had the Reserve Bank of India not stepped in and allowed banks to restructure their loans.This gave some breather to most realty players.

The improving market conditions from March ’09 to April ’09, opened another window of opportunity for realty players in terms of the ability to raise equity capital through a qualified institutional placement. Since April ’09, developers have raised Rs 13,000 crore and about Rs 7,000 crore is still in the pipeline.

Most developers have used the funds raised through QIPs to repay debt. With concerns over high level of debt dispelled, companies which were able to raise funds saw their stock prices rising as well. Property stocks have bounced back sharply since their March ’09 lows given that concerns on liquidity and residential demand have been addressed. The BSE Realty index has increased 135% in the past six months and has outperformed the Sensex by 47%.

Apart from QIPs, developers also worked towards the sale of non-strategic assets as well as land parcels to raise funds and reduce debt. For instance, Unitech raised Rs 1,000 crore from the sale of two hotels and school plots in Gurgaon and an office building in Delhi and has also received Rs 386 crore from its telecom subsidiary Unitech Wireless as a repayment of loans after it reduced its stake in the telecom company Telenor.

Further, moving drastically away from their earlier strategies, capital-intensive projects were scrapped or deferred and ‘affordable housing’ became the buzz word for players across the board, with the objective of reducing the overall cost of homes.

This was achieved with the launch of new projects where, in addition to low per square feet prices, developers also offered smaller sized homes. With a sharp correction in property prices, drop in interest rates, economic revival and some clarity in the job markets, home buyers came back and gave the much-needed shot in the arm to the developers.

Government intervention also gave some fillip to the realty market. The government gave a 1% interest subvention on home loans up to Rs 10 lakh for homes costing up to Rs 20 lakh. The first 12 installments of all loans sanctioned and disbursed during the 12 months from the date of publication of the scheme will be eligible for interest subvention, the new diktat said.

Driven by price corrections, softening of interest rates and improved liquidity, the real estate industry is on the path of recovery on the back of improved demand in the residential segment, mainly in the metros of Delhi as well as Mumbai.

Though developers are gung ho about a “faster-thanexpected- recovery” real estate experts say that the residential market recovery is still restricted to Mumbai, where there has always been a demand for housing and the Delhi NCR and has not spread to level II cities such as Kochi, Chandigarh and Pune.

Also the commercial property business remains dull for developers. According to market watchers, the situation in the commercial office space segment in 3Q CY09 seems to be more of a mixed bag with demand improving quarter-on-quarter (Q-o-Q), though not close to the highs made earlier.

Rental correction is still continuing, though it is more localized now within each city and is at a slower pace. At the same time, the supply is relentless, leading to vacancies staying at uncomfortably high levels. Developers too prefer selling commercial projects instead of leasing them. This strategy provides funds for construction of the project thereby reducing the need to take on debt. In some cases, developers are also converting commercial projects into residential ones.

Keeping all this in mind, realty developers face two key challenges going ahead. The first is the timely execution of new projects and second it is to keep prices under check, so as not to dampen the demand. Adaptability in these times is what will separate the men from the boys among realty players. Though a lot has changed over the past year in the realty market, some developers have shown their strength fundamentally and have come out of the woods.