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Indian realty sector experiences slowdown

india Updated: Apr 20, 2007 17:29 IST

The country's realty sector is experiencing a change of guard. The high-speed realty train seems to have slowed down. Volumes are sagging, especially in the residential segment, and the developer needs to quickly think of innovations to sustain his customer base.

Hesitant to admit that the emerging trend may adversely impact business, the developer is working on some new tricks. The realty Santa is all set to dole out freebies to woo his valuable customers so that the price drop is really disguised. These range from offering an all-paid stamp duty to a subsidy in electricity bills. It would seem that the customer is king again.

"The next two months are crucial for the real estate market. The volumes have almost dried up in recent times. Mid-April to mid-June is traditionally a period for real estate purchases and all developers are anxiously waiting for the buying to begin this season.

"If it does not happen, prices will start falling but they may not fall directly. Developers may give freebies such as free parking space, paying stamp duties on behalf of purchasers, an interest rate subsidy that allows customers to pay say a nine per cent interest rate, a 25 per cent subsidy on the customer's electricity bills for X number of years to even paying a part of the EMI," says Pranay Vakil, Chairman Knight Frank. The basic idea is to not let a potential customer go, come what may.

According to Pankaj Renjhen, Regional Director, Trammell Crow Meghraj, the year ahead is crucial. Thanks to the tightening of the revenue noose, following the Reserve Bank of India’s rulings and rising home loan interest rates, developers are starved of funds.

There is a huge drop in the number of transactions and only serious buyers are buying houses this season.
"Therefore a developer may dole out sops like free car parking, give a buyer two free tickets to Switzerland etc. It is also important to note that the first and the second developer may benefit by passing such freebies on to their customers but when everyone joins the bandwagon, the novelty of the concept will fizzle out," adds Renjhen.

The index price is a constant and will never change, explains a real estate analyst. In the coming months, developers will be forced to redesign their product offering, reconstruct packages to make houses affordable. But, as is expected, the developer will go all out to minimise the impact of a price drop on his profit margins. The most expected are free property insurance, free legal counselling through a separate legal section of developers, a part of the interior offered on a complementary basis.

The developer may cut down on specifications to make houses more affordable. The first thing he may do is to reduce the size, the price package remaining the same. He may decide not to offer bathroom accessories or vitrified tiles. He may offer a park-facing house without a preferential location charge or may share part of the EMI, says Renjhen. The next two to three months would therefore find the real estate market restructuring itself for sustenance.

Recent developments such as the prediction of a fall in prices due to rising interest rates will coerce speculators to stay away from the market for the moment, which effectively means prices should fall, says a NAREDCO official, pointing out that at the same time, infrastructure development in, for example Delhi/NCR, is creating further demand and in turn an increase in prices.

Gaurav Bhalla, Director, Vatika Group, for one, categorically says that his company is not in favour of sops and refuses to accept that demand is witnessing a slowdown. "We are witnessing the same demand as last year and the recent churning has not made much of a difference to us. It is only a temporary phenomenon. The investor today is more cautious but those who want a house will still be in the market to buy. Prices are moving at a slower rate and will certainly rise."

Finally, who has the last laugh – the developer or the buyer – only time will tell.