Like many real estate sectors, the Indian retail property sector relies solely on continual growth to survive and that growth has come to  a standstill over the last few months as the credit crisis takes it’s toll.

Shopping Mall development in India Stops

This is by no means a local problem and India is not the only newly emerged market to feel the pinch. Dubai’s luxury property market has collapsed, seeing falls of 70% in value last year alone; the Moscow luxury retail market has also collapsed, leaving gaping holes in the high streets, British property continues it’s decline and with 50% of estate agents closed, the UK high streets are also devoid of tenants.

Retail real estate in India was one of the hottest property sectors until last year, but development has all but stopped. Falling demand for retail goods, coupled with growing unemployment and lack of credit means no more new malls for a while.“Owing to volatile market conditions, insecurity of jobs, there has been a decrease in the number of footfalls in the malls in Pune. The footfalls also vary from location to location and depend on the new schemes introduced from time to time to attract customers. Also, during the present uncertain times, even those who do visit the malls do not necessarily end up buying things.” said Kishen Milaney, property consultant, Kaypee Shelters.

There are around 60 business locations in the heart of the Pune, as well as in the newly developed residential zones and IT parks.

“About 20 to 30 malls of various sizes are in the making. It is not clear how many will be completed as some are looking for better brands. Some may even change hands,” Milaney said.

Big Bazaar, which has six stores of various sizes spread across Pune, says luxury items like furniture and electronic goods had taken a hit.

“Today, there are many malls being planned — however, due to the economic slowdown, we expect many of these to see only partial occupancy until things improve,” said Anand Dutta, head (retail) Pune, Jones Lang LaSalle Meghraj.
However, the real estate developers are pinning their hopes on the IT sector and believe that the fact that Pune, as a traditional automobile manufacturing hub, will continue to provide impetus to the city’s retail realty sector.

Over the past 3-4 years, Pune has seen considerable growth in the IT sector, placing it close behind Bangalore and on par with Hyderabad. In the same period, the retail sector has ramped up to introduce a number of malls in response to the increased spending power and demographic changes.

There are about six under-construction malls, each measuring over 500,000 sq ft. At present, Pune’s retail-scape accounts for approximately 5 million sq ft.

There are about four-five townships of over 100 acres each planned in the city, and retail would be an inherent component of each of these. The scheduled townships will open up new frontiers, as will the proposed international airport, but whether these developments will be able to find financing remains a big question mark.

Optimism - or Denial? Indian real estate magnate Niranajan Hiranandani does not expect property prices, which have dropped by about 25% in the past year, to decline any further. “Rates have fallen by about 10-25 per cent over the past year-and-a-half. I do not expect rates to fall any further. So, I think people should start buying homes now,” Hiranandani Constructions Managing Director Niranjan Hiranandani said last week.

Niranjan Hiranandani - Calling "bottom" since the downturn began.

Describing ICICI Bank’s step to cut interest rates on new home loans by 0.50 per cent as a “good move”, Hiranandani said demand for property had begun to pick up now. “People do want homes. I think the SBI’s 8 per cent interest rate and the ICICI Bank reducing home-loan rates is a good move. Demand for property has begun to pick up now,” he said. The next three to six months would witness a further rise in demand by around 25 per cent, he said.  However, it would take a “full year” for the residential segment to see a complete revival, he said, adding the sector should begin to perk-up after June. Economic Times India. Just exactly where he gets this time frame from is a mystery and we can only assume that Mr. Hiranandani has some sort of divine inspiration working for him.Either that or this was just a prayer to the property gods.

Property developers have been calling bottom since the downturn began and the reaction to this statement was negative from just about all concerned. My favorite comment is “Mr. Hiranandani, you already lost 82 prospective customers just in 18 hours since this article is published. Make some more such statements and you will loose 1000s of prospective buyers. Then you can keep playing with your ‘Investors’.”

A recent initiative by the Indian government to prop up property developers by allowing banks to restructure and extend loans is backfiring and turning into another fiasco. Last December, the Reserve Bank of India (RBI) relaxed a key rule on restructuring bank loans to the real estate sector as a one-time measure to help Indian real estate developers cope with falling demand and a credit crunch.

The key requirement from the government was that developers agreed to reduce property prices. Which they now flatly refuse to do. Despite falling demand and dropping prices in the market, newly built properties are still being advertised (but not sold) at artificially high prices.

Bankers have now complained to the Central Bank that after making use of the relaxed rules, which permit banks not to classify loans to real estate firms as bad loans the moment they are restructured, builders continue to hold on to artificially-inflated prices. During a meeting with the RBI’s deputy governor Rakesh Mohan on Thursday to discuss monetary policy issues, a senior banker pointed out that the RBI’s relaxation had provided builders with an opportunity to hold on to high property rates that were quoted before the market slump.

“There is a feeling among bankers that builders are choosing to retain assets on their balance sheets rather than reducing prices and getting rid of assets,” said one banker, who asked not to be named. “In other words, to overcome the liquidity crisis, builders are pushing for restructuring of loans rather than selling off assets or reducing property prices.”

Several developers such as DLF, Unitech, Sobha, Omaxe, Parsvnath Developers and Housing Development and Infrastructure have approached banks to restructure their loans.

The developers, of course, are  blaming the banks for causing the market slump by over-charging for home loans.

Several public sector banks recently cut rates charged on loans for affordable housing. Many of them now charge a fixed rate of 8.5% for loans up to Rs 500,000 and 9.25% for loans up to Rs 2,000,000.

Pune, India seeing construction projects cancelled and workers laid off

Falling sales, dropping prices and cash shortages have cause the cancellation of more than 450 real estate projects in Pune, leading to around 5,000 construction workers and many others being made redundant.

The Promoters and Builders Association of Pune (PBAP), a body that represents a large number of real estate developers in Pune stated “Construction of cheaper flats is impossible for builders at a stage when there is severe credit crunch and the buying power of Pune residents has got stagnated due to higher home loan interest rates. This has formulated into a ‘deadlock’ which seems difficult to get resolved without active steps by the government of Maharashtra and Pune Municipal Corporation,” said PBAP president and Kumar Builders chairman Lalitkumar Jain.

Pune, like many Indian markets became over heated with the rapid growth of information technology, automobile, manufacturing, education and services over the last few years, resulting in a 200% price increase over just 3 years. The PBAP is trying to blame the sudden fall in sales on higher interest rates. “We have come to a situation where we have asked all our members to sell flats at the lowest possible rates because banks are not keen on financing our new projects and unless our present flats are sold, we cannot start new projects,” Jain stated.

This is of course, just hot air. Prices in India have merely reached unaffordable levels and a major price correction is now under way.

The PBAP also blamed PMC for severe increase in various premium and development charges, which the builders have no option but to pass on to the end buyer. “Our survey show that by December 2009, there would be only 16,000 ready-to-sell flats available in Pune while the demand is of more than 50,000 units. If the demand-supply gap continues, there are no chances of prices falling,” Jain added.

Mr. Jain appears to be under the delusion that demand is the only determining factor as far as prices are concerned. The demand is irrelevant if no one can afford to pay.  Like many other markets, until prices for real estate reach affordable levels, the Indian property market will continue to stagnate. Indian property developers have been dropping projects fpr the last year now.Gone are the days of property developers in India wringing enormous profits from house building at the expense of the smaller investor. The recent Satyam scandal has also caused confidence in the markets and government to fall to an all time low. Drop your prices Mr. Jain.

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