All signs point to a typical credit crisis. The perceived risk-reward equation for investing in the domestic realty market is turning awry and seems likely to keep foreign investors at bay, at least in the near future. Following the global cash crunch, one of the major causes of concern for established and emerging real estate firms is to organise financing for ongoing, as well as upcoming projects.

The bloodbath in the stock market has impacted the Indian real estate sector, as a majority of large developers are now finding it difficult to complete ongoing projects. Their shares have tumbled after the RBI's decision not to cut interest rates. Share prices of most listed real estate firms, for instance, fell by nearly 50% from their 52-week highs and are seeing a bearish trend; I fear a further downslide by the time this article goes to print.

The dismal situation in the real estate market is, in fact, reflected in the Asia-Pacific region as well. Indiabulls Real Estate is performing below expectations, while Unitech has had to put on hold its IPO plans for its real estate investment trust (REIT) in Singapore. With the current situation not likely to change very soon, DLF has also delayed its plans for a Singapore REIT listing.

On the domestic front, the Reserve Bank of India (RBI) has declared the real estate space a sensitive sector under its prudential norms. In tune with the rising cost of funds and the need for additional capital for risky assets, banks in India have increased their lending rates for real estate projects. The prime lending rate (PLR) of most public sector banks is in the 12.25-12.75% band, in comparison with last year's rate of 10%. Since banks have to set aside a comparatively higher amount of capital for real estate exposure, compared to other sectors, the sector attracts higher risk weightages and lending becomes closely monitored. Banks have also begun to ask for higher contributions from promoters and developers as a precautionary measure to safeguard themselves against loans. Given the inflationary squeeze that the current government is facing, it is likely that monetary policies will put more pressure on already-high interest rates. That, by no means, is good news.

According to the sectoral deployment data issued by the RBI in the first quarter, the banking sector lent Rs 53,897 crore to the real estate sector as of February 15, 2008. Year-on-year growth in credit deployment for the current period stood at 26.7% (Rs 17,361 crore) as against 79% (Rs 18,770 crore) a year earlier. Credit deployment in the housing sector too decelerated from 25.8% last year to 12% in the current period.