The unfavourable macro-economic conditions of slowdown in economy and GDP growth, muted FDI flows, increasing inflation, fluid stock market, rising interest rates and negative business sentiment that caught both developers and property buyers/investors in a quagmire, has cast its shadow over the real estate sector in 2012.

By Vinod Behl, Editor, Realty Plus

Liquidity crunch was the bane of real estate in 2011. The average cost of debt for realty sector shot up substantially, adding to developers' debt burden. As a result of this, few developers sold their non- core assets and even scaled down their projects. Yet there were many who could not complete their pending projects.

Residential segment, principal demand driver for real estate remained restrained. Key market indicators like sales & absorption were low due to prohibitive prices and high home loan rates. Prices in NCR & Mumbai peaked to 2008 boom time level. Home loan rates shot up by over 3 percentage points.

Buyers' hopes of price correction were dashed as despite pressures of low sales volumes, developers stuck to high property prices due to high input costs. The cost of cement and labour were doubled, land and credit costs also went up substantially. Consequently, home sales were significantly hit. So much so that even affordable housing that led to residential real estate recovery in 2010, too faced slowdown especially as NCR suffered a setback due to land rows.

Developers were on the horns of dilemma. On one hand, there was desperation to raise funds through advance bookings from new projects and on the other hand, they were faced with the execution challenge to complete ongoing projects rather than launching newer ones . Majority of developers preferred to deliver the committed projects thereby resulting in a dip in new launches. Commercial office real estate suffered due to slowdown in demand and over-supply situation. And because of dip in demand for corporate leasing & over-supply hang, there has been correction in rentals.

For the retail segment, the year 2011 was marked as a year of renaissance and maturing market as retailers expanded their footprint in not just tier-I but also in tier-II and III cities with both mall and high street space leasing picking up and rentals firming up.

Against this backdrop, the year 2012 begins on a gloomy note. However, the likely drop in interest rates in the next fiscal may prove to be a boon for both developers and property buyers. It will bring down cost of funds for developers, thereby easing their debt position and lower home loan rates that will push up housing demand. But though transactions may go up, not much price movement may take place. Not many new project launches are expected and project execution and delivery remain the biggest challenges.

Commercial office real estate that was under stress in 2011, due to slowdown in demand and over-supply situation, will largely remain stable and stagnant as unlike residential segment, this segment is more attuned to global economic scenario. However, there will not be much drop in absorptions or rentals.

Retail segment which witnessed expansion in not just tier-I but tier-II & tier-III cities, with leasing and rentals picking up, is expected to continue its forward march. Especially, the expected FDI in multi-brand retail in coming fiscal will not just perk up retail realty but also give a big boost to real estate as a whole.

Going forward, as the economy improves following expected political stability in the second half of the new year, despair may well give way to cautious optimism. But with challenges like high input costs, liquidity crunch and expected escalation in property prices due to new land acquisition policy, the year 2012 may well bring mixed fortunes.