The crisis in the US financial market will hit the Indian real estate sector hard. The sector was already reeling under tremendous pressure as RBI increased the interest rates to contain inflation, besides restricting the fund flow in it. Consultants said that in the present circumstances the real estate prices will go for a sharp correction in the short to medium term. The financial crisis in the global market will affect the availability of fund for the domestic realty sector. As RBI has already put restriction on Indian banks to finance real estate companies in the country, they are depended on foreign funds through FDI route for their fund requirements. But, a senior consultant said following the development in US, many of the private equity funds are returning back to their mother countries. The source said that many of these private equity funds were launched by investment banks. But, now as the fate of these investment banks is uncertain, their capability to raise funds in their country is doubtful. This will put severe constraint on availability of funds in India. A large player in the sector said that as the availability of funds from banking sector is restricted for the realty sector, they are forced to borrow from the high net worth individuals at high interest rates at around 20%.
At the same time, the crisis in the global market has affected the demand for the real estate space in India. The development in US has affected the global economy, which has forced many of the global majors to either postpone or cut the expansion plan. According to a source in the industry, Google has cut its expansion plan substantially in the NCR region. Earlier, the global major has expressed intention to take lease of 5 lakh sq feet of the office space. But now, it is learnt, it has cut its requirement to only 3 lakh sq feet.
Similarly, German major SAP, which had shown interest to open its operation in Gurgaon in the NCR region, has now postponed the plan. A number of small and medium size companies, the source said, has followed the wait and watch policy as the global economy has facing the turmoil. This has affected the demand of the real estate space. Global consultancy firm now predict with the cancellation and postponement of the expansion plan of companies, many of the regions like NCR, Bangalore and Pune will face the situation of oversupply in the office space. The rentals in these areas are projected to fall by 25 to 30% in the next 12 months. The worsening condition in the demand for office space indicates the slowing down in the economic activities in the country. This will affect the demand for the residential space also. Further dip in the demand for real estate will affect the sector very badly. This will starve them of fund. The fund flows from all the possible ways are getting constrained. Funds from banks are already not available. Private equity source has also dried up. And the demand from end users is also getting affected.
Warren Buffett's has announced plans to invest USD 5 billion in Goldman Sachs. This investment works out to nearly 9% stake in Goldman. Buffett called the credit crisis as the economic Pearl Harbour.
