A Housing Slump in India

Atul Loke for The New York Times

A construction site at a standstill in Mumbai, India, where the real estate market is crumbling as the economy slows.

MUMBAI, India â€" The Orbit Grand, a block-size complex designed to have at least 26 floors of elegant apartments, an extensive array of ground-floor stores and abundant parking for the chauffeured cars of residents and shoppers, was supposed to be a diadem of India’s real estate market.

With no construction jobs available, a migrant worker from Bihar works part time as an attendant at a common toilet near an idled building site.

Now it is turning into a symbol of the slumping fortunes of property developers and owners in a once-promising emerging economy. Construction of the Orbit Grand has almost completely stalled at the 10th floor, the tower crane at the site seldom moves and the builder has defaulted on its loan.

“There’s no real work going on right now. There’s just a minimum number of workers coming in to do small things,” said Alam Sheikh, an electrician who is one of just 14 builders left at the site.

The real estate market in cities across India is crumbling as the Indian economy slows. The rupee has dropped nearly 20 percent against the dollar since early May, scaring away foreign investors.

The Reserve Bank of India, the country’s central bank, raised a key short-term interest rate for commercial banks’ borrowing by two full percentage points in mid-July, to 10.25 percent, mainly to prevent further declines in the rupee. To put a brake on the flow of money leaving the country, the central bank followed up last month with a regulation banning Indians from transferring money overseas for real estate purchases.

Rising financing costs are all the more painful because India’s real estate developments take a long time to build because of a vast and often corrupt regulatory apparatus. Publicly traded real estate investment groups in India are heavily in debt, so they struggle to make interest payments and are not in a position to bankroll further projects.

That combination has produced almost unanimous bearishness about the short-term prospects for residential, commercial and industrial real estate prices in India. Sanjay Dutt, the executive managing director for South Asia at Cushman & Wakefield, the world’s largest privately held commercial real estate company, predicted that prices would fall 10 percent in big Indian cities and 15 percent on the outskirts of large cities, where many speculative projects have been built. He said, “Given the universal sentiment of the market, there could be a sharp correction between now and Gudi Padwa,” an annual festival next March that has long been considered in India an auspicious time to buy real estate.

What has sustained prices so far, and what might prevent more serious losses than those predicted by Mr. Dutt, has been the willingness of developers to hold growing inventories of unsold apartments, shops and offices without offering price discounts. The volume of real estate transactions has slumped in India as developers have refused to offer discounts for fear of starting a market rout.

“If they drop prices, investors will panic and it will be a self-fulfilling prophecy,” causing further declines in prices, said Siddharth Yog, a co-founder and managing partner of the Xander Group, a large international real estate investment firm started in 2005. That was the year India began allowing foreign institutional investors into its real estate market.

But with sellers refusing to cut prices, many potential buyers are losing interest. Devkinandan Agarwal, a Mumbai broker with three-quarters of his business in residential real estate and the rest in commercial real estate, said that until the last few months, he had at least three or four separate meetings each day with genuine, interested buyers; now he has only one a day.

“There are now only actual users in the market, there is hardly anyone buying real estate as an investment,” he said.

One longstanding complaint about business practices in India is that the country’s banks lend heavily to a wealthy elite who often put very little of their own money into deals. These developers rely on minority investors and bank loans for most of the financing. India’s debt tribunals, for companies unable to repay what they have borrowed, have tended to move slowly. They are reluctant to force founders of companies to incur large losses even in corporate reorganizations in which creditors and minority investors lose heavily.

A version of this article appears in print on September 11, 2013, on page B1 of the New York edition with the headline: A Housing Slump in India.