Business Desk
Nearly 25% fall in demand of purchase of properties in most of Tier II and Tier III cities has been noticed in the last 7 months, beginning February to July 2008 due to higher cost of borrowings for real estate developers as also buyers of properties, particularly those of dwelling units.

The above assessment has been arrived at ASSOCHAM in its latest exercise about as to what happening in purchase of properties in Tier II and Tier III cities in which the properties purchases had registered a growth of approx. 22-23% between February to July 2007.

Releasing the ASSOCHAM assessment, its Secretary General, Mr. D S Rawat said that approx. 1.5 crore people in about 30-40 Tier II and Tier III cities are the claimant for buying of dwelling units who are unable to make purchases as higher borrowing cost have compelled most of real estate developers to defer their projects.

The buyers of dwelling units have also not been able to make payments as higher interest rates as also still higher inflation have come on their ways to partly dampen their enthusiasm and eroded their budget, said Mr. Rawat.

The analysis of ASSOCHAM is based from the feedback that it received from its well known affiliates real estate members that are developing real estate projects in number of tier II and tier III cities which include Meerut, Bulandsahahr, Muradabad, Bhiwadi, Dehradun, Rudarpur, Chandigarh, Sonepat, Panipat, Manesar, Pune, Nasik, Bhopal, Indore and many other such cities and towns in Southern and other parts of the country. The developers who gave the feedback to ASSOCHAM include Parsavnath, Omaxe, DLF, Unitech, BPTP etc.

The assessment further reveals that not only the cost factor has compelled, the promoters of properties makers to indefinitely defer their real estate projects but non-availability of inputs such as briks, cement, steel and availability of quality power and delays in obtaining water connections etc. have caused inordinate delays for developers to stick to their schedules as promised in their pre-launch campaigns.

The Chamber, therefore has mooted a proposal to the government to introduce Real Estate Investment Trusts (REITs) to bring the much needed class of institutional investors to strongly support transparency and reign the discipline of domestic commercial real estate market,

The Chamber holds that REITs can also help develop Commercial Mortgage Backed Securities (CMBS) market and create a source of cheaper debt for commercial real estate.

It further holds that since purchase and sale of real estate assets would form part of the activity of REITs, the presence of a large number of REITs can enhance liquidity in the secondary market for commercial real estate. The increase in liquidity would make the sale of assets – if necessitated in CMBS structure easier, thereby improving the attractiveness of CMBS.

The Chamber has further pointed out that principal repayments to CMBS investors are made through refinance or sale of property; hence the enhanced liquidity in commercial real estate will make CMBS more viable, in terms of availability of refinance and quicker sale of property.

However, in the case of CMBS originated by a REIT, the REIT would own the property. As a financial investor, the REIT would be more inclined to let the CMBS trust enforce the mortgage and sell the property. The REIT’s franchise with its unit holdrs would improve if cuts its losses from a property that did not provide adequate returns. CRISIL expects the legal risks associated with taking possession of and selling mortgaged properties to reduce considerably in the case of properties owned by REITs.

REITs typically own a variety of real estate properties, often even across geographies. They thus offer a pool of well-diversified properties of CMBS. This, results in a better spread of risks as compared to a regional developer who offers mortgages on a few similar properties often located in the same market space. Diversification will rescue the investors’ overall market. This will therefore improve the investment characteristics of CMBS and provide REITs with easier access to lower-cost debt funds.