20/09/2015
Your dreams of owning a house could come true if the nightmare of the real estate sector continues for a few more quarters. The realty industry is facing a terrible slowdown, with sales down drastically and the inventory of unsold flats piling up. Even investors in property are facing the heat: property prices in most metros have risen at a tardy pace in the past one year while the cost of capital remains high. The Magic Bricks National Property Index, which is the weighted average of supply of real estate and property prices across 11 cities, has registered annualised growth of a mere 1.7% since January 2013.
Experts feel there is more pain in store for the real estate sector, especially the residential segment. Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital, foresees a deeper correction in residential prices (see interview). "While stated prices remain elevated, transaction prices have already fallen by 10-15%. Discounts have increased significantly in the secondary market and distress sales are becoming increasingly common," says a recent Ambit Capital report on the sector.
Will prices fall?
However, a correction does not mean that real estate prices will come down by 30-40%. "A 30-40% crash can happen only when the economy goes into a recession. Our economy is doing well now, the GDP is growing at a good pace, inflation is down and foreigners are investing in both manufacturing and e-com businesses," says Sanjay Dutt, EMD-South Asia, Cushman & Wakefield.
But even a slow rise is actually a correction in real terms. In major markets like the National Capital Region, property prices have risen 1% in the past one year. Due to the oversupply, the prices are expected to remain flat or register a marginal growth in the next 12 months.
"Apartments that are unaffordable right now might witness demand when the disposable incomes increase in the next 2-3 years. Till then, the residential real estate segment will continue to see time correction," says Sharad Mittal, Director & Head-Real Estate Investment, Motilal Oswal Real Estate.
The paltry returns generated in recent years and the grim prospects of real estate have dampened investor sentiment. Real estate has lost its charm as an asset class among investors. "Not all real estate investors are wealthy individuals with deep pockets. There are ordinary people who bought a second house because they thought real estate would do well. That is one of the biggest reasons why transaction volumes have dropped," says Gulam Zia, Executive Director, Knight Frank India. Though long-term investors are holding on, hoping for better days ahead, short-term investors are getting nervous and have started selling below the brochure rates offered by the builders. What has spooked the short-term investors is the drop in transaction volumes.
"Short-term investors prefer to book profit in their existing investments before putting in more money," says Dhruv Agarwala, CEO and Co-Founder, PropTiger.com.
Cash-strapped developers are offering bigger discounts, throwing in freebies and coming up with innovative financing schemes to attract buyers. However, very few have bitten the bait because property prices are still very high. Last week, RBI Governor Raghuram Rajan said that the industry must bring prices down to attract buyers. "If real estate developers bring down prices, it will be a big help to the sector. Once there is a sense that the prices have stabilised more people will be willing to buy," he said at a function in Mumbai.
Discounts in disguise
There's a good reason why developers are shying from cutting the brochure rates of their projects. They have already sold a significant inventory of those projects. "If they cut prices now, they will lose credibility," says Amit Oberoi, National Director Valuation & Advisory and Research, Colliers International (India). Others argue that the innovative financing schemes are actually discounts in disguise. "Buyers save interest till they get possession in the 80-20 scheme without a home loan. This is effectively a 10-15% discount," says Dutt of Cushman & Wakefield.
One key reason for the slowdown in real estate is the government's crackdown on black money. Real estate has traditionally been a convenient place to deploy unaccounted money and almost 10-30% of the transaction value is done in cash. However, the Narendra Modi government's efforts to uncover black money has reduced the generation of black money in the system.
The impact of this change will become more pronounced in the coming months. "With the new Black Money Bill (which was passed by the Parliament on May 26) and with the Cabinet approving the Benami Transactions Bill in May this year, the crackdown on black money will continue further," says the report by Ambit Capital.
Besides, the hike in circle rates in many cities across the country has reduced the role of black money in real estate transactions. Since the circle rates are now closer to the market rates, the buyer does not have to pay a larger proportion in cash.
Waiting and watching
Investors and end users are also in a wait and watch mode following news reports of a massive unsold inventory in the system. Buyers are postponing their decisions, leading to a huge supply overhang. Though the industry used to put up a brave face earlier, the situation has become precarious now. "Something has to give in, it can't continue like this," says Agarwala of PropTiger.com. "The real estate industry has started taking corrective steps but things will get worse before they get better," says Dutt. He says it may take two more years to stabilise, with the green shoots becoming visible after a year.
What buyers should do
As mentioned earlier, the price correction has already happened in pockets like the NCR. Since the trend is clearly down, there is no need for investors to jump in right now. However, experts advise end-users to utilise this opportunity to buy their dream house. "Softening in prices is an excellent opportunity for end-users to purchase a property," says Mittal of Motilal Oswal Real Estate. It is a buyers' market and they can dictate their terms to get the kind of house they want and at the right price. Only thing they should be ready to put up a hard bargain with the developers and sellers.
If you are planning to buy a house, it's a good idea to start saving aggressively for it right away. Put away as much as you can into a short-term debt fund every month. This will not only help you build a larger amount for the downpayment but will also make you get used to the monthly outgo of the EMI. On the other hand, it will also tell you whether you can actually afford a house. If you find it difficult to put away that amount every month, maybe you need to defer your home buying plans till prices come down further or your income goes up substantially.
Your dreams of owning a house could come true if the nightmare of the real estate sector continues for a few more quarters. The realty industry is facing a terrible slowdown, with sales down drastically and the inventory of unsold flats piling up. Even investors in property are facing the heat: property prices in most metros have risen at a tardy pace in the past one year while the cost of capital remains high. The Magic Bricks National Property Index, which is the weighted average of supply of real estate and property prices across 11 cities, has registered annualised growth of a mere 1.7% since January 2013 (see graphic).
Experts feel there is more pain in store for the real estate sector, especially the residential segment. Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital, foresees a deeper correction in residential prices (see interview). "While stated prices remain elevated, transaction prices have already fallen by 10-15%. Discounts have increased significantly in the secondary market and distress sales are becoming increasingly common," says a recent Ambit Capital report on the sector.
Will prices fall?
However, a correction does not mean that real estate prices will come down by 30-40%. "A 30-40% crash can happen only when the economy goes into a recession. Our economy is doing well now, the GDP is growing at a good pace, inflation is down and foreigners are investing in both manufacturing and e-com businesses," says Sanjay Dutt, EMD-South Asia, Cushman & Wakefield.
But even a slow rise is actually a correction in real terms. In major markets like the National Capital Region, property prices have risen 1% in the past one year. Due to the oversupply, the prices are expected to remain flat or register a marginal growth in the next 12 months.
"Apartments that are unaffordable right now might witness demand when the disposable incomes increase in the next 2-3 years. Till then, the residential real estate segment will continue to see time correction," says Sharad Mittal, Director & Head-Real Estate Investment, Motilal Oswal Real Estate.
The paltry returns generated in recent years and the grim prospects of real estate have dampened investor sentiment. Real estate has lost its charm as an asset class among investors. "Not all real estate investors are wealthy individuals with deep pockets. There are ordinary people who bought a second house because they thought real estate would do well. That is one of the biggest reasons why transaction volumes have dropped," says Gulam Zia, Executive Director, Knight Frank India. Though long-term investors are holding on, hoping for better days ahead, short-term investors are getting nervous and have started selling below the brochure rates offered by the builders. What has spooked the short-term investors is the drop in transaction volumes.
"Short-term investors prefer to book profit in their existing investments before putting in more money," says Dhruv Agarwala, CEO and Co-Founder, PropTiger.com.
Cash-strapped developers are offering bigger discounts, throwing in freebies and coming up with innovative financing schemes to attract buyers. However, very few have bitten the bait because property prices are still very high. Last week, RBI Governor Raghuram Rajan said that the industry must bring prices down to attract buyers. "If real estate developers bring down prices, it will be a big help to the sector. Once there is a sense that the prices have stabilised more people will be willing to buy," he said at a function in Mumbai.
Discounts in disguise
There's a good reason why developers are shying from cutting the brochure rates of their projects. They have already sold a significant inventory of those projects. "If they cut prices now, they will lose credibility," says Amit Oberoi, National Director Valuation & Advisory and Research, Colliers International (India). Others argue that the innovative financing schemes are actually discounts in disguise. "Buyers save interest till they get possession in the 80-20 scheme without a home loan. This is effectively a 10-15% discount," says Dutt of Cushman & Wakefield.
One key reason for the slowdown in real estate is the government's crackdown on black money. Real estate has traditionally been a convenient place to deploy unaccounted money and almost 10-30% of the transaction value is done in cash. However, the Narendra Modi government's efforts to uncover black money has reduced the generation of black money in the system.
The impact of this change will become more pronounced in the coming months. "With the new Black Money Bill (which was passed by the Parliament on May 26) and with the Cabinet approving the Benami Transactions Bill in May this year, the crackdown on black money will continue further," says the report by Ambit Capital.
Besides, the hike in circle rates in many cities across the country has reduced the role of black money in real estate transactions. Since the circle rates are now closer to the market rates, the buyer does not have to pay a larger proportion in cash.
Waiting and watching
Investors and end users are also in a wait and watch mode following news reports of a massive unsold inventory in the system. Buyers are postponing their decisions, leading to a huge supply overhang. Though the industry used to put up a brave face earlier, the situation has become precarious now. "Something has to give in, it can't continue like this," says Agarwala of PropTiger.com. "The real estate industry has started taking corrective steps but things will get worse before they get better," says Dutt. He says it may take two more years to stabilise, with the green shoots becoming visible after a year.
What buyers should do
As mentioned earlier, the price correction has already happened in pockets like the NCR. Since the trend is clearly down, there is no need for investors to jump in right now. However, experts advise end-users to utilise this opportunity to buy their dream house. "Softening in prices is an excellent opportunity for end-users to purchase a property," says Mittal of Motilal Oswal Real Estate. It is a buyers' market and they can dictate their terms to get the kind of house they want and at the right price. Only thing they should be ready to put up a hard bargain with the developers and sellers.
If you are planning to buy a house, it's a good idea to start saving aggressively for it right away. Put away as much as you can into a short-term debt fund every month. This will not only help you build a larger amount for the downpayment but will also make you get used to the monthly outgo of the EMI. On the other hand, it will also tell you whether you can actually afford a house. If you find it difficult to put away that amount every month, maybe you need to defer your home buying plans till prices come down further or your income goes up substantially.
DELHI NCR: TOO FEW BUYERS
DELHI-NCR suffered due to inventory overhang. Lack of sales and stagnant prices kept investors away. Since there is already correction to the tune of 20% in pockets, prices are not expected to fall further in near future. However, launches from builders and secondary market transactions are still happening at rates below the brochure and asking price. Investors should stay away till stability returns.
MUMBAI: PRICING PRESSURE
The recent price rise has taken homes well above affordable levels, especially in the island city. Supply is expected to increase because of faster clearances by the state. That may be reason why extended suburbs like Thane are brimming with real estate activity. While the affordable segment of the residential market is expected to remain flat, the luxury segment is facing pricing pressure. "Anything priced above Rs 4-5 crore is finding few takers", says Gulam Zia, Executive Director, Knight Frank India. Investors should stay away because the situation may remain like this or may even worsen. Since we are already in a buyers' market, the end users should use the current opportunities to get maximum discount from the sellers.
CHENNAI: REVIVAL TIME
The real estate market in Chennai is heading for a revival due to the political stability there. Along with Bengaluru and Pune, Chennai is also a major beneficiary of the flooding e-commerce investments. Just like other cities, it is the affordable segment that is generating customer demand while the mid and luxury segments are getting only lukewarm response. Though the investors can stay away for the time being because the expected return is below the cost of funds, end users should not delay their home purchases.
KOLKATA: IN A BEAR HUG
Kolkata IS going through a bear market kind of situation and experts don't see chances of a recovery in the near future. Though there is some traction in the affordable segment, the high-end segment continues to reel Boon for end users and the overall sales volume has plummeted by around 60% in the last one year. Since no price appreciation is expected in the immediate future, investors should stay away for the time being. Traditionally, Kolkata has been an end user's market. There are very few investors in real estate. People who want to buy for their own use should use the current slowdown to get better bargains.
HYDERABAD: BACK IN FAVOUR
After falling out of the favour thanks to the Telangana movement related strife, Hyderabad realty is slowly coming back to the limelight again. "Cost of housing is very low in Hyderabad and it also has very good trained manpower. So business will be happy to move in so long as there is no disruption and power related issues," says Anil Kothuri, President and Head-Edelweiss Housing Finance & Credit. Entrance of e-commerce majors is another positive factor. Though the investors can stay away for the time being because the expected return is below the cost of funds, end users should not delay their home purchases.
BENGALURU: BOOM AHEAD
Bengaluru has emerged from the shadows of Mumbai and Delhi with the highest number of launches. "With 31% of overall India launches in April-June, Bengaluru has left NCR (25%) behind for the first time in recent history," says Anuj Puri, Chairman & Country Head, JLL India. It is favoured by developers owing to its affordability, availability of land and relatively fewer bureaucratic hurdles. With the e-commerce boom hitting India, things will only improve in coming years. Though it still doesn't make sense to buy as an investment as the expected return is below the cost of funds, end users should not delay their purchases.
AHMEDABAD: LOOKING BLEAK
Though the development of GIFT City and the Delhi- Mumbai industrial corridor have been positive for the city, it has not been able to maintain the momentum it witnessed a few years back. Despite efforts, it has not been able to attract companies from the IT, FMCG and finance sectors, necessary for driving up prices in a big way. The automobile sector, which was leaning towards Gujarat, has also begun deserting it for Pune in Maharashtra. With not much migration happening to the city, investment in homes here may not fetch good returns in the immediate future. End-home buyers, however, should use this opportunity to strike better bargains.
PUNE: GOING STRONG
Due to its proximity to Mumbai and also due to the lower cost of operations, most of Maharashtra's IT and ITeS growth is happening in Pune. Its status as an education hub has also helped the city. It is one of the few real estate markets that is still strong in India. "Pune is the only city that has shown double digit price appreciation in the last two years," says Ashutosh Limaye, Head of Research & Real Estate Intelligence Services, JLL India. Though the investors can stay away for the time being as the expected return is below the cost of funds, end users should not delay their home purchases.
