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Real estate: Not getting real enough

By Shobhana Subramanian & Varun Sharma in Mumbai
December 11, 2008 11:31 IST
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Over the last weekend, the central bank has tried to address the biggest near-term concern for property companies --bankruptcy -- says a CLSA report. The one-time move, which will allow banks not to classify commercial real estate loans as non-performing loans, will reduce the near-term risks for some property firms.

Already, rating agency Fitch has downgraded DLF's 'single loan sell down transactions'; among the reasons attributed is the significantly high receivables from DLF Asset (DAL) -- of Rs 4,800 crore (Rs 48 billion) -- a company promoted by the promoters. Fitch points out that DLF has repayments to the tune of Rs 6,500 crore (Rs 65 billion) coming up in 2009 and notes that the increase in DLF's consolidated debt, to Rs 14,600 crore (Rs 146 billion), is largely due to mounting receivables from DAL.

Unitech too needs to be ready with some Rs 2,600 crore (Rs 26 billion) next year and the Delhi-based firm is in the process of selling some of its properties to raise funds. Even if the central bank is going all out to help  builders -- it has reduced the provisioning for standard assets for commercial loans and loans below Rs 20 lakh (Rs 2 million) can now be part of banks' priority sector portfolio -- their troubles aren't likely to end in a hurry.

The real problem is that they aren't selling or leasing enough. As Morgan Stanley notes, despite developers having cut prices by 10-15 per cent for ongoing and new residential projects located across the country, home buyers don't seem enthused. That's why cash flows of developers aren't likely to improve in a hurry.

With consumer sentiment weak in a slowing economy, and interest rates still high, buying isn't likely to emerge soon. Moreover, banks and other lenders are making their lending norms more strict. Home loan firm LIC Housing Finance  is understood to have changed the method for calculating the loan limit for a borrower -- the monthly instalment cannot  exceed 50 per cent of the individual's net salary.

All in all, it's going to be a while before home buyers get comfortable with the cost of both the property and the loan.

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Shobhana Subramanian & Varun Sharma in Mumbai
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