‘Room for more correction in realty prices’

Credit Suisse Group is a leading global financial services company. It is also one of the largest capital providers to the real estate industry. Last year, the bank provided capital worth $41 billion. Most of this money was disbursed as debt. In India, Credit Suisse is making investments as a private equity player. It has already invested Rs 300 crore in Pune’s Vascon Engineers and $55 million (about Rs 220 crore) in Apeejay Group’s Park Hotels. Tinesh Bhasin spoke to Sameer Nayar, Head of Real Estate Finance - Asia Pacific, Credit Suisse, for his views on the country’s real estate industry.

Can we have your views on the country’s real estate sector?
Organised real estate in India is at a nascent stage. But developers are adapting to the process fairly quickly. In the process, valuations have gone up dramatically and they are unsustainable. Run-up in the land price has happened too much fast. A short-term squeeze has started. Prices are going down in many regions. And, there is still more room for correction. Long-term picture still looks good.

Do you expect correction going forward and how much?
Almost all the real estate markets are witnessing slowdown with few exceptions. Mumbai, for instance, has not witnessed a correction. It is a small market in terms of new supply coming in.

Does the staggering ambition of developers bother you? Many realtors are talking about constructing multi-million sq ft in the next five years.
I agree that companies are giving astounding figures on how much they will execute in the future. People who did a million sq ft a last year are talking about constructing double or more in the next year. These targets are difficult to accomplish as execution would be a big problem. If you talk to any construction company they will tell you these targets cannot be delivered. These projects are bound to be delayed.

How do delays impact real estate companies?
Delay in projects will affect the quarterly numbers. This will have a direct impact on their stock prices. Then the phenomena will have multiplier effect. Developers will become less aggressive with such targets. They will slow down on new acquisitions.

How do you see the credit squeeze affecting developers? Debt from bank has become expensive as well as difficult to avail.
The capital surely is not easily available. Things are going to get worse going forward. Real estate companies will find it difficult to complete projects. Though lot of money is available as equity, debt comprises 60-70% of the entire project. Currently, developers are over-extending themselves with too many projects at the same time. Larger companies are still well positioned financially.

Has this credit squeeze helped private equity funds to do more deals?
A year ago, 10 people would go to a developer and offer money. Now developers are approaching PE funds for partnerships. The credit squeeze has made valuations more realistic.

The deal flow has also started increasing as many projects are reaching the next stage of development. Past one or two years developers have segregated land (mostly agricultural land) and now is the time for construction. As PE players cannot invest in agricultural land, we come in at the construction stage.

Real estate fund are taking about astonishing returns on investments, 100% in some cases. How real are these numbers?
Returns in the past 2-3 years have been extremely high. It was primarily because the market was good and a portion of project was sold in advance. These projects are now reaching the delivery stage in a market that is witnessing a slowdown. I anticipate the returns will be mediocre (between 15% and 20%) from here onwards.

Do you see the subprime crisis affecting the real state industry?
In the long term, subprime crisis will not have any impact on the industry. There is a positive impact in the short-term. Investments from US are flowing in Asian countries such as India, China and Japan. The continent is currently considered as the safe heaven for these investments.