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Real estate sector to see consolidation soon

india Updated: Jun 24, 2007 12:07 IST

After mergers in the Indian sky, it is now time for consolidation in real estate sector which is feeling constrained by rising interest rates and falling inflow of funds, industry experts feel.

"For big developers there is no impact of rising interest rate but small players are finding it difficult to raise money for their proposed projects. They would need to sell their projects to big developers," Ansal API Vice-President (Marketing) Kunal Banerjee told PTI.

Distress sale of projects is already happening, he said, adding the industry would witness more of it in days to come.

Seeking to check excessive capital inflows in real estate sector, the government last month decided to bar developers from raising money abroad to develop integrated townships.

Though tightening of External Commercial Borrowing (ECB) norms was related to only integrated townships, the spill-over effect is felt across the sector.

Besides, RBI has raised risk weights on housing loans, followed by interest rate hikes to curb demand in the sector.

Edelweiss Capital Senior Vice-President George Mathew pointed out that RBI has been squeezing all sources of funds gradually to rein in inflation and a possible correction in this sector could be in the offing.

"Higher funding cost is expected to reduce attractiveness of real estate projects, reduce the land banking run and bring prices down," he said, adding debt financing is not available for land acquisition.

As banks and financial institutions are hard-pressed with funds owing to stricter measures by RBI and the government, small developers are unable to get financing from these institutions.

"More than rising cost of borrowing, lack of availability of funds from financial institutions would lead to consolidation in real estate sector," Parsvnath Developers Chairman Pradeep Jain said.

He said small developers would have no other option but to join hands with big players to fulfil their commitment to the end user.

Over the past six months, cost of borrowing has gone up over six per cent due to successive measures taken by RBI and the government to check surging property prices.

Life is getting tougher for those companies floated to cash on the booming demand and spiralling real estate prices.

New players who joined the business in the last 2-3 years may have to sell their projects, said Zoom Developers CEO Rumneek Bawa.

Much to the chagrin of real estate developers, Finance Minister P Chidambaram had recently said: "Intention is to constraint demand in those sectors where there are signs of what you call overheating and example of that could be real estate and housing. I think in these sectors there is reduction in demand."