Price corrections on its way?

I believe poor demand for properties, higher interest rates and US slow down is significantly hurting real estate developers. I attended Bangalore Real Estate Expo on October 25 & 26 and unfortunately found poor response from :( My analyst friends in Mumbai told me that there were no bidders for MMRDA's Wadala Land and Railways properties as well. Investors believe property rates are too high in this uncertain and slowing economy. Even IT/ITES firms, who are the biggest consumers of commercial properties, have reduced hiring by over 50% and not looking for newer properties. I believe there would be lower consumption of both residential and commercial properties in the next couple of years, much below the estimate of developers. This has already led to a miss match between demand and supply. Hence, prices has to come down if developers do not want to hold on to their properties (inventories) forever.

I spoke to several Tier-2 &3 developers at Bangalore Expo who admitted to reducing rates by Rs. 200-300 per sq. ft. on their properties in South Bangalore. Same was true with those who were launching projects in other areas of Bangalore. Many developers are offering freebies such as cars, plasma TV, and wood work. One developer was offering Honda Civic on his 1 crore+ property in Electronic City! Big boys like Mantri Realty and Brigade haven't lowered the prices till date. I spoke with an analyst in Mumbai who said property prices have already come down by 5% in some areas but not everwhere. He said the market should see many distressed assets in near future as many of youngsters are fully leveraged and if they see any cut in salary or loose job, it would be difficult for them to servive. This will be another harsh reality if there is slowdown in our economy or corporates trim employees in future.

Another important factor that I would like to discuss is the financial condition of real estate developers. Most of them are over leveraged i.e. have huge amount of debt that they raised to fund their aggressive growth. Nobody even in his wildest dream would have imagined of this bleak scenario a year back, when our developers were busy planning and launching projects after projects. With the slowdown in the demand, developers will face severe pressure to honor their interest payments on debt. They have to trigger the demand by lowering prices in this higher interest rate environment, if they do not want to default on the payments. However, big firms so far have resisted the idea of lowering prices. I find this strategy quite strange because this might aggravate the situation even further. They are willing to hold on to inventories with high cost debts , hoping markets to improve further. But once they start defaulting on debt payouts they will have to offload or dump the inventory in the markets leading to chain reaction and a overall loss of confidence.