Two years ago, India's residential property market provided a lucrative investment opportunity amid a shortage of 26 million housing units across the country. Developers minted profits from top-end condominiums and shiny high-rises that were in big demand as the economy grew rapidly.
The shortage still persists, but several new headwinds - rising construction costs, falling demand for high-priced properties, labour scarcity and tightening liquidity - have knocked this once-booming industry back on its heels.
According to the Mumbai property research company Liases Foras,across six major cities - New Delhi, Mumbai, Hyderabad, Bangalore, Chennai and Pune - 471 million square feet of property space, or more than 406,000 housing units, remain unsold. In Mumbai alone, buyers have not been found for 107 million sq ft of residential property space - about 92,300 housing units that have been constructed or are nearing completion.
"Abnormally high" property prices - that have not dropped despite a precipitous slowdown in sales - could spell doom for developers, says Pankaj Kapoor, the founder and managing director of Liases Foras.
The average price of a flat in Mumbai rose from 7.5 million rupees (Dh619,516) in October 2006 to 21.8 million rupees this March. At the current price level and sluggish pace of sales, Liases Foras estimates that clearing the backlog of unsold inventory will take about 35 months.
The signs of debacle in this once-prosperous industry are everywhere: rows and rows of empty apartments, unmanned cranes and quiet machines at stalled construction sites.
For property developers, losses are mounting and debts are piling up - outstanding bank loans to property companies shot up by 33 per cent in the past two years to more than 1 trillion rupees, according to the global financial services group Credit Suisse.
PropEquity Research, a property data and analytics company based in New Delhi, says that the delivery of 480,000 of the 930,000 residential units already sold but currently under construction could be delayed by up to 18 months because of a shortage of funds. Construction delays are rapidly eroding investor confidence, analysts say.
PropEquity's research covered more than 10,000 residential property projects being executed in 11 cities by about 1,500 developers.
The Bombay Stock Exchange real estate index - a measure of 15 property stocks - has fallen by more than 50 per cent since November, while the broader market has fallen by about 14 per cent.
Between January 2008 and last month, stocks of the top 10 listed property companies have destroyed investor wealth by up to 2.67tn rupees, according to research by the media web portal FirstPost. DLF, India's largest property company, leads the pack with its investors losing 1.45tn rupees.
The shortage and rising costs of labour are adding to the problems of developers.
The World Bank says the construction industry faces a labour shortfall of between 18 per cent and 28 per cent, even though daily wages have shot up to 325 rupees per day from 250 rupees two years ago. The shortage is attributed primarily to the national rural employment guarantee programme - a landmark anti-poverty scheme launched in 2005, which promises 100 days of employment per year to one member of every rural family. "Taking into account price increases of the four key construction components - steel, cement, labour and bricks - there is an 18 per cent gross rise in construction cost over the last two years," PropEquity recently reported.
These four components generally constitute almost 75 per cent of the overall cost of an apartment.
"This escalation will corrode the profit margins significantly," the research report said.