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A correction on the cards?

Developers find themselves trapped. Ambitions to expand are thwarted by slow sales, hardening interest rates and weak cash flows

realestate Updated: Sep 20, 2013 17:52 IST

Thanks to the approaching festive season of Navratras and Diwali, considered auspicious for buying and selling of property, many prospective buyers are planning to invest in homes of their own. What they, however, need to know is if the market is ripe for a correction and if they should wait for a while before making a decision to buy, given the state of the economy.

Real estate experts confirm that there is pain in the residential real estate market which is there to stay at least till the festive season next year and that a correction in the range of 12% to 18% is expected, depending on housing projects and the holding power of developers. Freebies and discounts are likely to rule, too, as developers will be under pressure to generate liquidity from sales.

The Reserve Bank of India’s recent directive to banks to not lend money to builders under the 80:20 and 75:25 schemes has created ripples in the market as this has come close to the festive season when tractions are generally high as builders float these schemes to increase sales. This is likely to impact the holding power of developers who then may be forced to reduce prices considering the high levels of inventory they are currently saddled with.

Real time appreciation in property prices, adjusted for inflation in tier-1 cities during the last few years, has not exceeded 4% to 5%. This could dissuade developers from reducing property prices, and force developers, especially those with holding power, to keep their prices at current levels.

A marginal correction in prices could, however, be in the offing for certain projects aimed at the mid segment. “If a correction happens, it would be within the range of 12% to 18%, depending on the project and the holding power of the developer. A correction in prices beyond this level will impact developers’ profitability to a non-acceptable extent,” says Ashutosh Limaye, head, research and REIS, Jones Lang La Salle.

Anshuman Magazine, CMD, CBRE, South Asia Pvt Ltd, says that India’s economic growth prospects continued to face strong challenges from a depreciating currency, weak industrial output and a stagnating policy environment, thereby hurting investor sentiment in the real estate sector. RBI’s latest ruling on disbursement of loans on special schemes will further impact the residential market across most micro markets. “I expect the market to remain sluggish in the short to medium term,” he adds.

According to the National Housing Bank residential housing index, Residex, 22 of the 26 cities it tracked have seen a decline in home prices in the April to June quarter. Mumbai has seen a 0.5% drop, Delhi a 1.5% fall in property prices and Hyderabad a 4.6% cut in prices.

Shobhit Aggarwal of Protivity says that investor-driven markets will be largely impacted. Sahel P, vice chairman, Lotus Greens, however, has a different view. The current economic slowdown has been playing spoilsport for the real estate sector, too. Customers have been cautious about their decision to buy new houses. High inflation and increasing cost of raw material, however, has left little scope for any price correction. Projects with good location, construction quality and amenities will continue to attract buyers, he says.

Unsold inventories

A report by Liases Foras, a real estate rating and research firm, puts the unsold stock figure across the country at 700 million sq ft. The unsold inventory in Delhi NCR was 277.31 million sq ft, MMR was 146.10 million sq ft and Bengaluru was 88.68 million sq ft.

Data made available by Liases Foras also points out that sales in Mumbai, Pune, Chennai, Hyderabad and Delhi NCR declined in the April-June quarter from the January-March quarter. In the April-June quarter sales of residential units declined by 13% in Delhi NCR, 12% in Mumbai and 7% in Chennai.

Inventories in the Delhi NCR market are also at an all-time high. Delhi is sitting on an inventory of 21 months, Bengaluru of 25 months and Mumbai of 48. The comfortable inventory level is 14 to 15 months of unsold supply; offloading this huge stock that has piled up is a difficult task.

Supply-demand mismatch

According to a recent report by Knight Frank, launches and absorption of residential projects in the country’s top seven cities plummeted by 37% and 23%, respectively, during the last two years (2011-2013) thereby aggravating the structural problems in the sector. Real estate developers have been caught in a trap of ambitious expansion, decelerating sales, hardening interest rates and weakening cash flows.

Unlike earlier occasions, the sector has no bailout package, and alternative funding options have also dried up. Banks are shying away from lending as they are troubled in their own backyard with increased non-performing assets, tightened monetary policy, currency depreciation and volatile debt markets.

Private equity funds have also been seen exiting the Indian markets. The aftermath of the dried-up fund scenario is also apparent in the market, as some real estate companies have defaulted on their debt repayments. Run-up to the elections is generally characterised by a period of policy paralysis and the upcoming elections as well as the general elections in 2014 are expected to have the same impact. Realty firms are now in deep trouble, and the sector is likely to witness more pain in the foreseeable future, the report states.