Representative image of a building
Credit: iStock Photo
By Andy Mukherjee
With markets from Tokyo to New York on edge this week, the warning sign flashing around a large Mumbai builder didn’t get much attention. But Indian investors were keeping a close eye. When Oberoi Realty Ltd. missed analysts’ forecasts for sales and profit and posted a smaller operating margin in its residential unit, there was a stampede to get out of property stocks.
Unease with India’s real-estate developers has been growing for some time. The BSE Realty Index is down more than 30% from its peak in June 2024. This week, though, the sense of foreboding deepened. And the reason for that goes back to the stock market.
When the economy reopened after the pandemic in late 2021, retail investors’ financial portfolios were stuffed with hefty gains from the previous two years. As some of that wealth began to chase new homes, builders’ stock prices began to zoom. And they responded by buying up land at crazy prices and launching a flurry of new projects. The market saw their bulked-up balance sheets as a sign of confidence — and rewarded them with higher valuations.
Then the music stopped.
The froth in equity valuations became a drag on investors’ returns. With white-collar wages battling the combined threat of artificial intelligence and geopolitical uncertainty, affordability became a concern for the middle class. It’s only India’s extreme wealth inequality that kept the market propped up last year. Buyers of homes priced above 100 million rupees ($1 million) did the heavy hitting, especially in large urban centers like Mumbai, India’s financial and entertainment capital. However, nationwide sales growth has peaked, and developers are feeling the pinch.
Credit: Bloomberg
There is no overhang of unsold apartments, whose inventory in the top eight metropolises is equivalent to what would ordinarily sell in 19 months. That’s the lightest load in at least 2½ years. But as Liases Foras, a property research firm, has argued, the problem is with constructing what has been sold.
In 2017, when India brought in regulation to check delayed deliveries and broken promises, builders were putting 3.3 million square feet of new supply on the market. Back then, they were able to complete construction on 2.4 million square feet, or 74%. Last year, when they were hawking 3.6 million square feet, they finished only 2 million square feet, or 57%. “Slower construction means delayed revenue recognition, higher execution risk, and potential defaults,” the researcher said in a November report.
It also means lower margins. That’s because the annual price increase of homes under construction is not enough to compensate builders for inflation. Nor can it sustain demand from speculators who book multiple apartments in newly announced projects, hoping to flip them closer to completion. No wonder then that the stock market has soured on property firms.
The broader implication is that developers’ keenness to lift their valuations by launching new projects is not resulting in commensurate economic activity.
Credit: Bloomberg
How much further will the current bout of pessimism run? The answer depends on how the industry boosts its efficiency. In Delhi, hazardous air pollution, already a serious impediment to outdoor work, has led to construction bans. In Mumbai, builders struggled to get environmental clearances last year.
Skilled plumbers, electricians, and carpenters are earning better in the gig economy than on real-estate projects. Meanwhile, giving cash to women has become a part of the standard toolkit for politicians to win state elections — that promise of free money could be affecting their participation in construction crews far away from their village homes. (Women, often hired together with their husbands to headload bricks and cement bags, break stones, mix mortar and cement, sift sand, or clean, account for 11% of India’s construction workforce.)
A simpler explanation for the slowdown in construction may be that builders are starting to run out of funds as demand slows down.
If completions continue at their current pace, buyers may turn anxious about financially weaker players’ ability to hand over finished homes. The so-called pre-sales model, in which a booking amount is paid before construction has even begun, may come under question, as it has in China. But there the problem is many times bigger. China Vanke Co. alone has 132 billion yuan ($19 billion) in presold properties pending delivery, according to Bloomberg Intelligence analysts Kristy Hung and Kingsley Chan. That’s nearly a quarter’s worth of residential real-estate sales in India — by all companies.
Vanke’s liquidity crisis is set to choke construction funding amid faltering sales and strained financing, the analysts note. A similar point of panic hasn’t arrived yet for Indian developers, but fear has definitely made an entry.
(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)