Ireland, the US, the UK, Spain, China: now there’s a real estate bubble bursting in India. Real estate firms, badly affected by the central bank’s efforts to fight inflation, could trigger a string of defaults with repercussions beyond India’s borders. The FT has the story:
The Indian real estate sector, once the realm of high-risk investments with astronomical returns, is facing a liquidity crisis in the face of escalating commodity prices, interest rates and inflation.With the sector carrying a debt burden of about $24.6bn in the year to July 2011–up almost seven times from $3.8bn in September 2005–many small- and midsized Indian property groups face the risk of default. Major developers are delaying projects, discounting properties and looking to sell big assets.
Real estate and construction companies are having difficulty auctioning off their buildings. The effects of inflation in other industrial sectors will only magnify the damage:
Ramesh Nair, a managing director of real estate consultancy Jones Lang DeSalle, adds that the government’s Rs3.14 per litre petrol rise would further hurt the industry.Those higher costs, coupled with project delays, have caused private equity investment in real estate between April and August to drop by 20.2 per cent–at about $831m, down from 1.04bn during the same period last year–according to Venture Intelligence, a research firm. It all adds up to Indian property launches being down 42 per cent in June compared with the average number of launches in the past 12 months, according to Kotak Institutional Equities.
Let’s hope the economic consequences will not be as severe as those in other bubble prone markets around the world.