Real Estate:cross country analysis of property cycles indicates a long down cycle

Volumes are closely linked with real returns on property and GDP growth

— Our analysis of global property cycles (across 15 countries) indicates that:

– Volumes are closely related to GDP (lag of ~1-2 years) and real returns on properties but share a weak relation with interest rates

Down cycles in real estate cycles tend to give up their entire gains (in real terms) of the preceding up move.

Implications for Indian real estate – an additional correction of 35%

Our cycle analysis is supported by significant reduction of growth in IT sector, job generation across sectors, and funds flow in the real estate sector

Meanwhile, liquidity issues for developers continue to mount

— While volumes have reduced sharply, banks’ outstanding to real estate has increased even as real estate debt has been successively downgraded

Impact on Indian developers:

— Negative real returns on property are likely to drive property investors to exit holdings, keeping prices under pressure, keeping large project launches by developers at bay

— Developer volumes and sales are likely to remain highly subdued over an extended period of time and debt servicing will get increasingly onerous for developers

Capitulation, though delayed, is likely to return to haunt the sector