Billionaire Uday Kotak's property fund is predicting a prolonged slump in India's residential markets as home prices near record levels have crimped affordability, driving sales down.
Residential markets across cities have slowed down, with the National Capital Region, comprising Delhi and its surrounding areas, being most hurt, according to Vikas Chimakurthy, senior executive director of the Kotak Realty Fund, which manages $1.47 billion in property assets. Those areas, including Gurgaon in Haryana and Noida in Uttar Pradesh, will be the last to recover, he said.
"Across most of the major tier-1 cities, sales volumes have fallen and the market has shrunk," Chimakurthy said in an interview in Mumbai. "We believe that recovery will take time, that the slump may be prolonged. Ultimately the economy has to do well, people's confidence has to return."
India's property market has been sluggish, driving new project launches down by 9 percent to 107,120 units in the first half of the year, the lowest in three years, compared with the same period in 2015, according to data from Knight Frank LLP. The National Capital Region posted the sharpest decline in new launches, sliding 41 percent from a year ago.
Kotak's property fund is actively evaluating deals while being very cautious in deploying capital because of dismal sales and no immediate signs of a recovery in demand, Chimakurthy said.
The tycoon, who set up Kotak Capital Management Finance using 3 million rupees ($44,830) he borrowed from friends and family members who ran a cotton-trading business, has a net worth of about $7.6 billion, according to the Bloomberg Billionaires Index. Kotak formed a partnership with Goldman Sachs Group Inc. in 1995, and in 2006, paid 3.3 billion rupees to buy out the 25 percent stake that the New York-based firm held in the investment banking and securities businesses.
India passed a real estate bill earlier this year that enabled the establishment of a regulatory authority that will help settle disputes between homebuyers and developers. The bill seeks to increase transparency by asking developers to disclose all development plan details and compensate buyers for delays in delivering the apartments. The goal is to help restore buyer confidence and ultimately boost sales by plugging loopholes in an industry that has been plagued by inadequate disclosures, false representations and delays in delivery of apartments.
The new bill is a good initiative and one that was required in the real estate sector, Chikamurthy said. Still, there are aspects that makes the bill excessively biased towards consumers, even when the developer is not at fault, he said. Initiatives such as setting aside 70 percent of collections in a project for construction and not being allowed to start work until all government approvals have been received, need to be more balanced to ensure the interests of both consumers and developers are taken care of, he said.
One bright spot in India is the office market, where transaction volumes have increased 12 percent across the top six cities of India in the first six months, Knight Frank's data showed. Office leasing activity is strong and rentals have increased in Bangalore, Chennai, Hyderabad and Gurgaon, Chimakurthy said. In addition, supply has fallen as construction of new offices had slowed over the last three to four years.
"We are now seeing strong developers pouring concrete in commercial and believe that over the next three to four years, new commercial space will come up and the supply-demand mismatch may get addressed," Chimakurthy said.