The opportunity in Mumbai’s inventory overhang
May 31, 2014
Source : The Times of India


MUMBAI: The uncertainty in the real estate market has existed for some time now. With the market having been in a wait and watch mode and the growth figures of the Indian economy not looking so bright currently, the developers in Mumbai have found it tricky to offload their inventory. New property launches have definitely reduced in the market. This situation has led to a price reduction and handsome discounts or attractive freebies have been around for some time.

Knight Frank India’s Mumbai Traction report, released in the third quarter of FY 2013-14, clearly suggests that the rise in interest costs for the realty sector and decline in net profits during 2013, compared to the previous period, will compel the developers to lighten inventory load and de-leverage their balance sheets. However, demand is likely to remain subdued over the initial part of 2014, as the market continues to bottom out against the backdrop of a slow economy. Hence, a more pronounced price correction from current levels is likely in the medium-term. It is believed that the market sentiment will begin to improve in the second half of 2014, as the country’s economic fundamentals ease with the backdrop of a stable government.

Inventory overhang in Mumbai’s real estate market

Rajesh Vardhan, MD, Vardhman Group, says, “Primarily, the inventory gap has been created due to the difference between the demand and the stock. The stock has increased over a period of time and so have the prices. Adding to this, a high interest home loan scenario and slowdown in the economy, are creating this gap.“

Many projects have entered the market simultaneously. Hence, there are too many options for investors as well as end-users. Also, investors are not so keen on real estate investments as compared to the end users due to an economic slowdown and hence, the reduction in sales. Experts believe that due to the global economic recession of 2008-2013, investors and end users were holding back from real estate deals. Just as the economic crisis subsided, demand for properties went up as the market regained its lost ground. However, due to low salary growth, the desire to own a home could not be culminated into purchases and hence, the slump.

Conditions expected to improve in 2014

The situation had been created by a number of factors and cannot be solved overnight and immediately. Long-term measures and overall revival of the economy, will lead to the generation of demand. If one was to look for a short-term solution, it could come by the way of reduction of interest and decrease in the price of residential units. Experts maintain that the situation is likely to prevail for the next 3-4 months. However, with the realty market holding its ground and with the expected stability in other sectors over the next two years, this situation is most likely to get resolved as soon as the key economic indicators improve and political risk settles down.

Property prices in Mumbai have not corrected much in the recent past. The property prices in Mumbai have not dropped drastically but a correction has taken place, to some extent. The interest burden is added to the cost, making the buyers consider taking a buy call. Mukesh Kumar, VP, Infiniti Malls, explains how “Traditionally, Mumbai’s realty markets are bullish, in terms of investors as well as end-consumers. Due to the economic slowdown, investors have opted out of realty markets for a while. However, end-consumers have always been purchasing properties on a regular basis and hence, Mumbai has not witnessed a price slump in the realty market.“

Inventory outlook in 2014 and impact on property prices

With the slowdown in new construction and number of new project launches getting reduced, the inventory will get reduced. Since there already is a demand for fresh purchase but due to higher interest costs and an expectation of a price fall, buyers are waiting to make a purchase.

Also, repo rate increases by the RBI will negatively impact the real estate market, especially in the residential segment because it is highly sentiment driven, across the country. It is not necessary that the banks would increase the rate immediately after the RBI’s move. Endorsing this view, Dr Samantak Das, chief economist and director Research, Knight Frank India, shares that “The economy is not looking in great shape at present, therefore, people would like to wait and watch in this situation. Some positive events such as policy announcements, improvements in economic numbers, etc., can attract customers back. In the RBI’s policy review, there is a section wherein, housing has now been taken out of the commercial real estate sector. Now, it is called commercial real estate residential housing. For housing loans, the risk provisioning has been reduced. Therefore, if the risk rate and asset provisioning has been lowered by the RBI, that means banks will have some elbow room in holding the current interest rate, and chances of a rate hike are very less. In case, banks start increasing the rates, the sentiment will be hampered.“

Dr Das further opines that “People should wait for political and economic risks to settle down. Mumbai has a very high inventory pile-up and our estimate says that sale has gone from 6 to 9 quarters, now. In 2014, I expect clarity in political and economic risk. In the 3rd and last quarter, there is an expectation of traction in the residential market. The developers are also aware of this situation and therefore, there would be very few launches and existing ones would be phased out. The supply side has taken cognisance of the slowdown in the economy and therefore, chances of inventory pressure due to a rate hike, are less.“

RBI’s tough stance and its impact on the realty sector

“The repo rate hike by the RBI on January 28, 2014, will not immediately result in solving the inventory overhang problems in Mumbai. The overall construction work has already slowed down and fewer projects are launched, and hence, it will not impact much in the near future. The market will see more of its bottom in terms of sales and cash-flows. The hike would again generate an increase in the interest rate (EMIs) and also increase the borrowing rates for the developers,“ suggests Vardhan. The availability of inventory being relatively high is not completely affected by repo rates. While the cost of lending rates is presumed to increase due to this decision, these rates will not necessarily create a direct impact over the realty sector.

What should a property buyer do?

Experts suggest that an investment period in real estate has been always a situation when the buyer gets good deals. As prices have stabilised and sentiments have improved in light of the election mandate, it is the right time to finalise deals. End-users purchasing property for personal use, renting, etc., are likely to continue with the same drive due to lower risk.

“A house purchase is a long-term phenomenon. I think this is a good time to take a buying position. Since the volume has fallen and developers have stepped into price negotiation, it is a good time to crack a good deal in terms of prices. Interest rate fluctuation is always in a variable state, therefore, in 15-20 years time span, the average rate would become almost the same. I would suggest that if the consumer gets a good price deal, then it is the best time to get in. Ready properties normally come with a premium, therefore, the customers should check the price as well as the payment system. The risk in under-construction property is high, especially in a slowdown situation but at the same time, the return prospect is also better. The consumer should make a risk assessment and also check the requirements and thereafter, make a final decision. Buyers have different categories and one should target a property as per its category, for example, an end-user with paying capability, should look for ready property and an investor would like to focus more on under construction property for a better return,“ concludes Dr Das.

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