Real estate companies need to bring down prices to boost demand.

Nov 24. Mumbai

By Nitin Kalani

Real estate companies that are currently going through liquidity crisis owing to fall in demand, need to correct prices they offer. Most of them are slowing down their construction and expansion activities. While some have freezed their hiring, and others like Lodha group for instance have downsized thier manpower.

The blood bath in the real estate sector is now clearly getting reflected in the balance sheet of leading developers. The recent results of major real estate companies have revealed that bottomlines have indeed been hit badly. While DLF’s earnings in Q2 Financial Year 2009 came down by 4% as compared to the same quarter last year, Unitech’s earnings came down by 12% as compared to last time. Ditto is the case with other real estate companies such as Parsvnath, Ansals and Omaxe.

To boost demand, real estate companies are trying to lure buyers by offering fancy incentives like fully furnished homes, free car, buy one flat get one free etc. However, these tactics won't be of any help. Buyers are aware that real estate prices are artificially steep.

A quick correction in prices is the need of the hour. Buyers have put on hold their purchase plans as they are expecting the prices to come down by 40-50%. The recessionary climate further compounds the situation. Fear of umemployment, and due to lack of jobs in the market, the salaried class have resorted to freezing their discretionary spends adding fuel to fire.

Prices have started to come down and they are already down by 40% in some places. However a further correction is expected as the marginal price correction has failed to boost demand.

What can realty players do?

Many real players are changing their focus and business strategies. Even real estate major Unitech has changed its product portfolio and included more mid-income housing projects to push up sales. Infact, the property markets around the world, particularly Asian markets have been affected by slowing economic growth and unsettled capital markets.

What can government do?

Government needs to understand that various other sectors thrive on real estate like cement, steel, and other ancilliary industries. Real estate is the largest employer for skilled, semi-skilled and unskilled workers. The government should consider offering tax breaks to this industry. It can also offer stamp duty and registration. This will encourage demand and provide relief to cash-ridden real estate companies.

As far as real estate is concerned, the home loan rates need to be reduced. Also this sector should be treated as urban infrastructure on par with other sectors. Financing real estate liberally is also needed. The correction in repo rate and CRR by RBI is definitely a welcome move.