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Mumbai Land Prices May Fall 30% on Cash Crunch, Oberoi Says

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July 27 (Bloomberg) -- Mumbai land prices may fall as much as 30 percent over the next year as higher borrowing costs force some indebted developers to sell real estate, Oberoi Realty Ltd. Chairman Vikas Oberoi said.

“Land will be the first thing to get corrected,” Oberoi said in an interview at the company’s headquarters in the Goregaon district of Mumbai. “The government has induced artificial pain, with the Reserve Bank of India increasing rates and telling banks not to lend to developers. We will see a cash crunch.”

Developers face borrowing costs of more than 20 percent, Oberoi said. His company, with no debt and about 14 billion rupees ($317 million) in cash, will take advantage of falling prices to buy land, he said. India’s third-largest developer by value sold shares in an initial public offering last year that was underwritten by Morgan Stanley, the New York-based investment bank.

The Reserve Bank of India, in a bid to reduce the highest inflation rate among major economies, yesterday raised its benchmark interest rate by 50 basis points to 8 percent.

India’s benchmark wholesale-price inflation, which quickened to 9.44 percent in June, may remain close to 10 percent until November, according to HSBC Holdings Plc and Yes Bank Ltd.

‘Huge Premium’

“Clearly there is a huge premium that is built into real estate prices,” Reserve Bank of India Deputy Governor Subir Gokarn said in an interview in Mumbai today. “If supply exceeds demand, then prices must come down. If prices are not coming down, it’s a problem with the sector, not the environment.”

The Bombay Stock Exchange Realty Index dropped for a second day, losing 1 percent at the close of trading in Mumbai. The index has declined 26 percent this year.

India’s real-estate industry will face “large-scale distress” amid rising borrowing costs and shrinking access to credit that may force developers into fire sales for assets, Amit Goenka, national director of capital transactions at the Indian unit of Knight Frank LLP, said in an interview in April.

Indian developers will have to repay 1.8 trillion rupees of debt to state-run banks, private equity funds and other lenders over the next two to three years, Goenka said. Cash flow may also come under pressure as creditors seek earlier repayments, he said.

Home-Sale Registrations

Mumbai home-sale registrations fell to the lowest level in two years in June as higher rates and home prices curbed demand, according to broker Prabhudas Lilladher Pvt.

“When the developer gets into a cash crunch, he’ll first stop buying land,” Oberoi said. “There is a tussle between the buyer and seller and the first effect of that will come when developers will be shy of buying land.

‘‘If the cascading effect happens, it will start with land prices coming down,’’ he said. ‘‘If things aren’t moving, developers will be willing to shave off between 10 percent and 30 percent on land prices.’’

Deals between developers at lower prices are possible, said Ashutosh Limaye, director of strategic consulting at the local unit of Jones Lang LaSalle. He said he doesn’t expect properties to be sold at auction at discounted prices.

‘‘Even today, developers are showing up for land auctions,’’ said Oberoi. ‘‘The first level of pain will come when a company says it won’t sell cheap but also won’t buy expensive. That’s the time I’ll start buying.

‘‘Right now, we are looking at land, but I still end up being the third or the fourth guy in terms of price,” he said.

Oberoi Realty reported a 58 percent gain in earnings for the three months ended March 31 as the company generated more home sales in India’s most expensive real estate market. Competitors that become laden with debt create an opportunity for Oberoi, the chairman said.

“It’s music to my ears if somebody blinks and we get land cheaper,” he said.

To contact the reporter on this story: Pooja Thakur in New Delhi at pthakur@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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