Liquidity crisis have hit Mumbai’s real estate market, leading to an increased vulnerability in the region, even more than the National Capital Region (NCR). The state is grappling with the lack of lenders and is showing deeper signs of distress, reflected in the schemes and discounts offered by developers.
Most lenders and institutional investors are wary about investing in Mumbai, after the serial defaults by Infrastructure Financing and Leasing Services Ltd last September. They are focusing on the more stable residential markets in the South at this juncture.
The impact of the crisis on Mumbai is just unfolding, while NCR is coming to terms with the slowdown, as per the industry experts. Moreover, concerns over builder cash flows have risen with the National Housing Bank advising home financiers earlier this month to desist from financing subvention schemes.
Sharad Mittal, the chief executive of Motilal Oswal Real Estate said “We’ve been cautious about investing in NCR, and now, Mumbai. NCR’s problems are already out in the open but in Mumbai, the leverage levels of developers are high and total exposure of NBFCs is the highest.”
“The cost structure (of projects) is skewed due to high land prices and the premium FSI (floor space index) that needs to be paid by developers —as a result prices can’t drop dramatically,” he added.
The situation has worsened in the Mumbai Metropolitan Region (MMR) after the NBFC crisis because cash flows are weak and external financing is not easily available, said Gautam Chatterjee, the chairperson, Maharashtra Rera (Real Estate Regulatory Authority).
As per Rera estimates, MMR has 48 percent unsold inventory, but developers have launched more projects despite weak demand.
“How are they so bold when it’s tough to sell an existing stock? Builders say that sitting on land is expensive and they have to launch. But the major challenge today is high-value projects, which are incomplete or not selling,” Chatterjee said.
According to a Knight Frank India report, residential project launches rose 22 percent in Mumbai between January and June 2019, compared to the same period last year. Even as subvention schemes, direct discounts, and freebies dominated the market, weighted average prices have corrected 12 percent in the past three years.
Predominantly an investor-driven market, NCR’s troubles have been largely developer-created wherein Gurugram was focused on the luxury or upper mid-segment with affordability being a critical reason for the slowdown in sales. In Noida, the land was given to developers on credit, which led to irrational expansion.
The developers overestimated demand and the purchasing power of customers, which mounted challenges on Mumbai. With increasing supply, prices came under pressure, leading to an increase in inventory of under-construction properties. Luxury is the hardest hit but even mid-segment project prices are equivalent to luxury properties in Bengaluru, Pune, and Chennai.
Refinancing became tough after the liquidity crisis, making it more challenging for Mumbai developers.
“…Easy availability of debt postponed price correction in Mumbai. Lenders provided debt for redevelopment including slum redevelopment, where rehabilitation portion was not handed over to existing dwellers. This led to over-leveraging of developers since their right to free sale portion is not fully paid till they deliver the rehabilitation portion,” said a top executive of a private equity firm, who did not wish to be named. “With downward pressure on prices and unfulfilled commitment, projects are getting stuck due to cash flow problems and mounting debt.”
Sales have been good for established brands, but 80-85 percent developers in Mumbai are not selling well, said Niranjan Hiranandani, the managing director of Hiranandani Communities.
“More than half the developers will find it tough to survive if the liquidity crisis continues and recovery, right now, seems a long way off,” he said.
According to the CEO of Liases Foras Real Estate Rating and Research Pvt. Ltd, Pankaj Kapoor, for the next two years, prices are unlikely to appreciate. The builders were not in a hurry to sell earlier due to the availability of the funding. However, the scenario has completely changed at this point.