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Build, Build And Wait

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The resounding mandate for Narendra Modi and the NDA government has turned the negative sentiment in the real estate market, and the immediate perception is that home-buying will take off soon. The firm talk by the government in favour of pushing reforms and finance minister Arun Jaitley’s Budget giving importance to housing needs have further spurred sentiment. A recently released real estate ‘sentiment index’, developed by apex industry body, the Federation of Indian Chambers of Commerce and Industry (Ficci), and property consultant Knight Frank, shows a six- point rise in sentiment in the second quarter (Q2) of 2014 to 69, as against the previous quarter. The index is based on responses from realty stakeholders such as builders and financiers. The sentiment is high on expectations of speedy clearances and easier access to capital. The general belief is that home-buying will take off over the next six months, says the report.

“The fact that political stability has a perceptible effect on the real estate sector is quite apparent from the optimism displayed by stakeholders after the elections,” says Shishir Baijal, chairman and managing director, Knight Frank India.

But does the sentiment reflect in the actual offtake of homes in the country? Or  is the stubborn recession in realty — a factor of unaffordable prices and excessive risk in delivery and finance sources — continuing despite the changes at the Centre?

Sagging Sales
Most surveys during the first half of the current calendar year indicate a slowdown in new project launches by builders as well as a drop in sales as consumers shy away from the market. According to online realty consultant proptiger.com, the property market in the National Capital Region (NCR) has deteriorated further in comparison to last year — launches have gone down by 50 per cent and sales volumes have declined by 22 per cent since 2013. The constant rise in costs, along with stagnation in income levels, has made the NCR unaffordable. More than 40 per cent of projects have been delayed, denting buyer confidence and subsequently dampening sales.

Realty major DLF reported a drop in bookings, to 380,000 sq. ft in the first quarter of FY2015, from 440,000 sq. ft in the same quarter last year. Its net profit for the quarter ended June 2014 too fell 30 per cent to Rs 127 crore.


Liases Foras Real Estate Rating and Research, a real estate research firm, reported a 9 per cent sequential decline in area sales across six major cities in the country. According to a report generated by the firm, NCR led the laggards with a 20 per cent decline, followed by Chennai and Hyderabad with 18 per cent and 13 per cent falls, respectively. The Mumbai metropolitan region was, however, almost stagnant with a 2 per cent drop in sales. The only market that bucked the trend to an extent was Bangalore. The city registered a 10 per cent growth in sales for the April-June 2014 quarter, claimed the report, while according to proptiger.com, the sales volume rose 6 per cent year on year. 

“Confidence is at a low. Some projects have just disappeared. For instance, 25 investor-driven projects were launched in Kanpur in 2007. They don’t exist anymore,” points out Pankaj Kapoor, managing director, Liases Foras.

And as sales continue to drop, inventories are at an all-time high. In NCR, the inventory overhang (months taken to liquidate stock) increased from 39 to 53, while Hyderabad saw a rise from 43 to 47 months.

The Pricing Puzzle

Realty prices have followed a peculiar trajectory. Despite a stagnant market and poor sales, residential prices have moved up for most of the recessionary period between 2007 and 2013. According to National Housing Bank’s Residex, a residential index tracking the six-year period, housing prices increased in 24 major cities. The highest rise was recorded in Chennai (230 per cent), followed by Pune (135 per cent), Bhopal (123 per cent) and Mumbai (122 per cent). Only two cities witnessed a fall in prices — Kochi (-15 per cent) and Hyderabad (- 7 per cent), with both seeing a surfeit of supply with a rash of new projects.

Mumbai-based developer Rustomjee opened its 127-acre township housing project Urbania in Thane in 2011 at Rs 6,800 a sq. ft. “It appreciated 20 per cent year on year, and we are now selling at Rs 10,500 a sq. ft,” confirmed Saurabh Naik, deputy general manager-sales, Rustomjee.

The Liases Foras quarterly review shows that the weighted average price for the first quarter was largely stagnant, except in the case of four cities where it moved up marginally. Chennai showed a 4 per cent increase, while there was a marginal fall in the case of NCR.  What is, however, interesting is that new launches across markets have been priced lower compared to last year.
 
“Investors clearly have no appetite for new purchases. Sales are low, and prices are not rising. There is nothing in it for them,” says Kapoor of Liases Foras. “However, cities that are showing some activity and sales — Bangalore, Chennai and Pune — are witnessing fairly intense private equity (PE) investment, most of which is going into land-buying,” he adds.
 
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There are several theories on why developers don’t slash prices to stoke fresh demand. Builders say that 60-80 per cent of a project’s cost is just the cost of the land. This makes flexible pricing difficult. Mumbai-based builder Paras Gundecha says the approval procedure for construction escalates costs by up to 20 per cent. While that is the builders’ side of the story, others believe they are never really under pressure as investors are willing to wait; and construction, in any case, is paid for by the periodic booking of flats.

“It is the government that discourages any downward movement of prices. Ready reckoner rates for property, based on which stamp duty is determined, continue to be pushed up whether or not it is justified by the market; and former finance minister P. Chidambaram’s policy was to treat the difference between reckoner rates and actual realisation as ‘income’ in the hands of the seller,” says Kapoor. 

Besides this, there is always an element of  risk in advance booking as policies can change and laws can be redefined at any time. The order to not issue construction certificates to  buildings falling within the 10-km radius of the Okhla Bird Sanctuary  has put projects by Jaypee Infrastructure and 40 other builders in NCR in limbo, while in north Mumbai, residents continue to live in  a state of uncertainty, as the dispute over their land, which is said to be ‘reserved forest’, continues.

Light At The End Of The Tunnel
Is the fairly bleak landscape likely to brighten up in the near future? The proptiger.com report predicts that the second half of calendar 2014 will witness a revival in the market. But except for a few peripheral markets, it is unlikely that there will be any price cuts in residential housing. Besides, the real estate market is not driven by sentiment. It is, therefore, a long haul, and the economy will have to see a revival in manufacturing and income, and a higher gross domestic product before there’s any substantial increase in home-buying.

Some analysts see commercial realty picking up first. Property brokers and consultants DTZ sees greater leasing activity from corporate groups leading to a turn in the fortunes of the office segment. NCR saw the demand for office space fall 18 per cent over the previous quarter, but it rose 11 per cent year on year. Mumbai held its own with 1.03 million sq. ft taken up in the second calendar quarter as compared to 1.05 million sq. ft in the first. “The uptake of office space in Bangalore grew sharply in Q2, with a number of large deals acround Outer Ring Road and Whitefield. The total office uptake in Q2 was 3 million sq. ft, representing a 32 per cent rise quarter on quarter,” says a DTZ report.

Baijal concedes that though sentiment has improved, and there have been “more calls”, it hasn’t translated as yet into transactions. For home-buying to take off, current economic indices will have to see major changes. “Interest rates will have to go down; for that, inflation will have to be bridled. More jobs and higher GDP growth are key ingredients. It is only then that the market will take off. It will be 12 to 14 months before we see a real pick-up,” says Baijal.  

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twitter: @gurbir110

(This story was published in BW | Businessworld Issue Dated 08-09-2014)
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