Is that a sign of things to follow?

Has an aberration become the norm in the real estate industry?

Can this industry sustain a drop in demand coupled with a forced increase in the prices?

Would my investment be safe with these developers?

Would I rather not invest and retain my liquidity in safer instruments?


There are a lot of allied thoughts which needs to surface. I would encourage every concerned reader to connect with me and debate these thoughts out.


I would welcome your thoughts and viewpoints on this page or on



  • Andrei, San Francisco

    It depends on inflation and core interest rates. I.e, if inflation is 50% a year, borrowing at 36% might be a very good idea (happened in ex-Soviet Union in 1991-1998). If inflation is within a norm (2-8%), borrowing at 36% against illiquid asset and paying monthly (which is 43% compounded interest) is suicidal indeed.

  • Actually the answer is pretty much the same. If the developer is a speculator and can BUILD & sell his property at prices that work it’s not suicidal – just risky beyond reason. Of course it’s not sustainable in the long run so you can’t build a ‘development’ business that way.
    But you might make zillions of Rupees profit.
    I know I sound facetious but I’m serious. You need to know what business you’re in. You need only look at where I live in UAE to see that a property bubble can last quite a long time. People will get burned as they always do in a bubble. The skill/luck is in the timing.
    India is the same to me.

  • Amit Agarwal, Mumbai, India

    Ramesh- Not sure if suicidal, surely it is risky though.
    I am not a real estate expert….however would try to answer it from pure financial perpective..!
    I think for a real estate developer funds are a bloodstream and more critical than to any other industry. Unless he raises additional funds and finishes the project and realises it, he runs the risk of oringinal huge investment being eaten up by alarming 12-13% inflation which anyways is a direct loss.
    Therefore so long as the negative gap between his realisation and the original investment is not more than (or is around) the inflation, it is not financially suicidal…bankruptcy risk is higher though….nevertheless there are greater probabilities of saving the original investment..for which there is no escape but to wait for economy to come back and economics to become sane.

  • For all those who are dreaming to own a house despite the high home loan rates, there is some good news. The costs of residential properties across four major markets of the country have stabilized during the April-June period. According to the report by global realty consultant, Cushman & Wakefield on India’s residential sector, the availability of new supply, shrinking demand from investors and increasing rates have led to the stabilization of capital values in both high-end and mid-range residential segments across the National Capital Region (NCR), Bangalore, Mumbai and Pune in the second quarter of 2008.

  • Ramesh – this is tough time for the real estate sector indeed. With global illiquidity plaguing the sector, there is a severe funds crisis with all sorts of liquidity in the form of public money, bank debt etc drying up. In such a scenario, the developers are left with no other option but to look for either private equity or private debt, which in both cases has become too expensive unless one is a blue chip developer with steady cash flows. Even for the private equity players, the minimum IRR expectations have risen from 20-22% levels before this downturn to 25-28% levels now. Some aggressive investors are even quoting 30%. However borrowing atr an interest rate of 36% is indeed extremely risky and poses a complete pressure on the cash flows. But yes, this is how the real estate market works in India.

  • Vaibhav Sankla, Director Adroit

    Yes, it is suicidal………………. but for lenders.
    The point is that their businesses are down at the time they increased their capacities like never before. Further, no signs of residential and commercial demand picking up anytime soon. In fact, I feel that the demand is more likely to go south from the current levels which will further deteriorate their finances. I truly feel that this is just the beginning.

  • It depends on the stage at which his project is. its not sustainable for long periods, however if project would be executed within few quarters leading to sales & increased liquidity it could be considered as a last option. Selling for lower prices is a better option, though.

  • Rakesh SUd, CFO, India Ops

    Borrowing is always a basket. What is important is the average cost of borrowing and not the marginal cost.
    Borrowing at 24% essentially is throwing good money after bad money unless it is a temporary move with an exit strategy planned or is something which does not significantly impact the average cost of borrowing (ie volume is low).
    It seems unlikely that there will be a sudden spurt in real estate prices in India which are already at unviable levels and given this scenario the word suicidal may be quite appropriate

  • Ramesh – The answer, in my opinion, is no, the developers cannot sustain the growth and assure a healthy return to their investors. This sounds like a recipe for disaster. Real estate markets can turn fast. Believe, me, I know from personal experience firsthand.
    The Atlanta, Georgia, USA market was hotter than ever these past few years, and now many developers are facing bankruptcy. And the rates of interest being charged was well south of 10% – the highest being 9.25% (Prime plus 1%) when the Prime Rate hit 8.25% awhile ago. Rates have since reduced considerably and borrowers still are struggling.
    The scenario you explain appears to be a case of developers scraping for money from any source just to stay alive. Any developer borrowing at these rates is deluding themselves, or is on the brink of going out of business. Just my opinion.

  • I just landed on this question by chance but I believe there is no way a 24% cost of funding could land a profitable investment unless in a scenario of rampant inflation including asset prices. I don’t think this is the case in India , so unless the funding is to cover locked-in projects and the funding is only to bridge to complete developments as opposed to funding developments the scenario can be viable.
    However, I believe in the scenario of a stable real economy which i am bullish on and suitable adjustment of capital values in rental yields … real estate will over time perform as good or better than many other asset classes on a risk adjusted basis.

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