RBI may take a cautious approach in terms of liquidity in the segment

Panic gripped global markets on Wednesday when the Dubai Government said it would ask creditors for a standstill on debt worth billions of dollars of two of its flagship firms - Dubai World, which runs 49 ports around the world, and real estate developer Nakheel. This had its repercussions in India with some nervousness among Indian realty players.

A statement from leading real estate consultancy, Jones Lang LaSalle Meghraj’s Chairman and country head, Anuj Puri, said, “There are two real estate markets to consider in this situation - the one in India and the one in Dubai. There are four factors involved in the Indian real estate market - demand, supply, finance and sentiment. At this stage, sentiment, due to the collapse of real estate in Dubai, is the most vulnerable and may get hit, while demand, supply and finance in India will remain untouched.

“What is happening in Dubai is a corporate default situation. However, the Sovereign has not defaulted, so the condition is now restricted only to real estate. This would not have a major direct impact on India’s real estate market, which is largely locally driven. Nevertheless, it is conceivable that the Reserve Bank of India (RBI) may take a cautious approach in terms of liquidity in the real estate sector, which would not be good news in the light of the fact that foreign direct investment (FDI) norms for Indian real estate are on the verge of being relaxed.”

It was evident that Dubai’s real estate market was not long-term sustainable, since it was not driven by end-user demand, said Mr. Puri, adding, “For a long time now, a multitude of apartments there have been standing unsold, held largely by speculators/investors who had bought them to sell them at higher prices that never happened. The big question now is how many of these investors have the ability to service their mortgages.”

Mr. Puri, however, said that there would be real danger on a global scale if the Sovereign defaults, in which case everyone, India included, would face issues. “However, any kind of specific predictions would be premature at this time. The next few weeks will reveal whether the Dubai situation will stay at the corporate default level, or whether it will escalate into Sovereign default.”

Indian corporates have limited exposure to the Dubai market and declined to comment. Ravi Kant, Vice Chairman, Tata Motors, said, his company had no significant sales in the Dubai market and the Middle East region accounts for less than one per cent of Tata Motors’ revenues. “So developments there will not have much impact on us but there would be repercussions on other Middle Eastern markets. Things in that market were improving for the last few months.”

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