Slowdown in real estate forces builders to cut prices
Developers are now willing to take a haircut on their margins
Sep 03, 2013
Source : The Economic Times


DELHI: There are no takers for close to 6 lakh homes in the country, forcing builders to cut prices and dole out freebies, which many hope will herald the much-awaited correction in the home market ahead of the festival season.

With the rupee caught in a whirlwind and the job scene deteriorating by the day, buyers are shying away from the realty market, leaving builders to grapple with an inventory of over 700 million sq ft. By end of June 2013, cumulative nationwide unsold inventory was 670 million sq ft, up 54 million sq ft in just one quarter, says property research firm Liases Foras.

According to the National Housing Bank’s (NHB) residential housing index, Residex, 22 of the 26 cities it tracks have seen a decline in home prices in the April to June quarter. Prices are expected to fall further, says NHB Chairman RV Verma. “Developers are now willing to take a haircut on their margins,” he says.

There are signs the bubble will finally burst. A 1,100 sq ft apartment in Noida Extension that cost around Rs 42 lakh a few months ago can today be bought for around Rs 37 lakh, as the builder is agreeing to a 10% discount.

Across town near Gurgaon’s Dwarka Manesar Expressway, a 1,200 sq ft apartment can be had for Rs 77 lakh as compared to a86 lakh six months ago. For a first-time home buyer, this is the right time to buy as developers are under pressure and are willing to reduce prices and also waive off charges for benefits like club membership and preferential location, h says Samarjit Singh, managing director of IndiaHomes, a venture capital backed realtor.

In the ten years that I have been around, I haven’t seen prices falling like this before, h says Rajni Naggar, a real estate agent in Noida, who is advising her clients to hold their investment plans until Diwali.

There is growing hope that new launches during Diwali will happen at lower than current market prices. Builders are already offering made-to-measure payment plans. Among the big cities, property prices have softened the most in Hyderabad (4.55%) followed by Kolkata (4.06%) and Chennai (2.26%). While property prices in the National Capital Region (Delhi and adjoining areas) fell 1.49% in the quarter, Bangalore saw a decline of 0.92%, Pune 0.90% and Mumbai 0.45%.

The situation is very grim. The industry is in the ICU, and without corrective action it could very well slip into a coma, says Sunil Rohokale, managing director of Ask group, which manages a PE fund that invests in residential housing projects across the country. The corrective action Rohokale suggests is deep discounts, of around 20% for the mid-segment and 30% in luxury housing, if developers want at least some of the buyers to return. Builders are adopting new strategies to woo customers in this sluggish market.

Mumbai-based Lodha Developers recently launched its new project in Lower Parel with an advertising blitzkrieg featuring Bollywood star Aishwarya Rai. A developer selling high-end properties in Gurgaon is pampering potential buyers by ferrying them in Audi Q7s and Mercs and treating them to five-star lunches.

Another developer in suburban Mumbai is trying to entice buyers by offering an expensive international holiday. For the first time, DLF, whose name was enough to sell a project in the past, has now been forced to launch a project with a subvention scheme, where buyers pay 20% upfront, take a home loan for the rest and start paying EMIs to the bank only after possession of the apartment.

It has become a buyers f market, says Lalit Kumar Jain, chairman of Confederation of Real Estate Developers Association of India, the builders ‘ association.

Agents say this is a good time to negotiate hard for better deals. The builder today is willing to throw in a 10% discount. Push him a little more and you could get 5-6% worth of freebies as well, says Sunil Kapur of KK Real Estate in Delhi, who sells apartments for builders in Gurgaon and Noida. These freebies could include air conditioners, customised kitchens, top-notch flooring, free furniture, free parking and the likes. h Though nothing seems to be working now, he says the buyer will emerge king once the economy stabilises around Diwali, h he says.

Builders agree that the pace of sales has slowed considerably. Most of them were used to the idea that a project will be sold overnight. Now it fs taking them longer to sell and for developers who are facing a liquidity issue, the only option will be to reduce prices.

There is demand for housing but the issue among buyers is the erosion of confidence in the economy and uncertainty, h says Niranjan Hiranandani, one of Mumbai fs biggest builders. With prices of properties not rising as fast as they did in the peak years, investors and speculators had gone out of the market.

Now with the rupee fs slide, higher inflation, job cuts, increasing interest rates and an environment of uncertainty all around, financial planning has gone awry and even end users are choosing to stay away. With the growth of India’s gross domestic product ( GDP) slowing down to a decade low of around 5% this fiscal year from a peak of 9.6% in 2006-07, new hiring by companies has dropped dramatically over the years and so have increments — at all levels.

The manufacturing sector saw a negative growth of 1.2% in the quarter. Most real estate hotspots have mushroomed around manufacturing or service industry hubs like Gurgaon, Bangalore, Rajarhat in Kolkata, Chennai and Pune, and a contraction in manufacturing has had its negative effect on the market.

Increments across sectors like IT, telecom, auto, finance, banking, and many others have been sub-par this year, remaining on an average between 5% and 8%. Add to this the high cost of home loans. We will be cautious in pricing our new products, probably give options for simpler specifications to buyers to bring down price given that there are challenges in the economy, says Ajay Chandra, managing director of Unitech. In the April-June quarter, DLF reported a 38% fall in its net profit compared to last year.

Parsvnath’s net profit dropped 25%. HDIL fs net profit was down 85% in the quarter.

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