Oh, no, we’ll do it like ‘em Indians!

What transpired in the world economy last month will undoubtedly be remembered as an epic turning point by future economic historians. Credit and finance markets crashed like nine pins across the world. The thunder effects of which were felt in India as well, as stock markets dived southwards, with the Bombay Stock Exchange Sensitive Index dropping by 469 points on September 15. The same week when Lehman Brothers collapsed, AIG got nationalised, Merrill Lynch acquired Bank of America; Washington Mutual and Wachovia got washed out, the Indian realty index (which was the worst hit) fell by 7.6%. Since then, despite the fact that stockprices in India have seen colossal swings, shares of real estate firms have continued to be in a depressing mode, declining a total of 20% (as on October 1, 2008). Many analysts had claimed that all this would finally force the Indian real estate players and the industry to consolidate.

Interestingly, the market though is still very optimistic. “Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term,” says a recent FICCI-Ernst & Young report on the Indian real estate market. Will the uncertain realty scenario lead to some expected marriages of unlikely bedfellows in the real estate industry? Some feel that consolidation is evidently inevitable. With the cost rising and non-availability of enough funds becoming a threatening issue, consolidation seems to be the only safe way out. Many feel that not only the smaller players are feeling the heat but rising input costs and the demand slowdown have even scarred the established players. Pradeep Jain, Chairman, Parsvnath Developers elaborates, “The construction sector is feeling the heat of rising steel and cement costs as they contribute heavily to the total cost (about 15-20% and 10-12.5% respectively)... This has put a question mark on our efforts as developers to provide affordable housing facilities to middle and lower middle segment buyers.”

Deepak Parekh, Chairman, HDFC, also voiced his concerns over the distressed situation and said, “The present situation may call for some consolidation within the sector. I believe consolidation has already started taking place in the real estate sector.” The magical spell, which the sector was enjoying for the past few years is clearly getting over.

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).