Trends. A forgettable year for real estate

That 2015 was going to be a forgettable year for the real estate sector was expected. The only question was if it turned out to be a regrettable one.

After the initial enthusiasm of the election faded, buyers and developers looked to rate cuts towards the end of 2014. But the 125 bps reduction in interest rates in 2015 failed to kindle home buyer interest. Data from FICCI-Knight Frank India Real Estate Sentiment index for September 2015 shows that stakeholder sentiments have been going downhill since December 2014. Sentiments turned sour in the June quarter only to dip further in September.

Developers reduced new launches drastically in response to the muted demand. New project launches in Mumbai, for instance, were down 26.5 per cent in 2015 compared to 2014, according to data from JLL. In NCR, launches in the first half of 2015 fell a whopping 68 per cent year-on-year, according to a report by Knight Frank.

Still, due to slow sales, property developers are likely to take many quarters to clear their existing inventory of homes. In Mumbai, for instance, unsold homes could take over three years to clear at the current rate of demand, data from JLL show.

Unsold stock rose 18 per cent Y-o-Y in the September quarter, with all eight cities witnessing rising inventory, according to a report by Liases Foras. Even Bengaluru and Pune, which held their strength in 2014, recorded steep 28 and 27 per cent inventory rise, respectively.

But in spite of lacklustre sales, prices did not drop in many cities and price action was diverse. In investor-driven markets, such as Gurgaon, home prices fell 10-20 per cent in the first half of 2015 from their peak values, according to a Cushman & Wakefield report. Cities, such as Mumbai and Kolkata, witnessed flat home prices in premium and mid-end homes. This can be construed as a fall, when adjusted for inflation.

That said, home sales in Mumbai jumped 28 per cent in the last four quarters, compared to a year ago, indicating that prices may not fall further. Also, end-user-driven markets, such as Chennai, continued to witness stable prices.

Robust demand and new launches continued in IT hubs in South Chennai. Top markets in the city saw price appreciation of 8-20 per cent, mainly in the mid-income segment homes. Pune also noted price rise in certain locations because of healthy home buyer demand.

Property buyers found themselves at the strong end of the bargaining table, for a change. With many builders interested in clearing inventories, buyers could negotiate deals. Also, with ample picks of completed homes, builders had to focus on handing over the project to gain credibility, besides releasing a large arsenal of new-age marketing to gain attention.

However, the year was certainly forgettable in other ways. Anticipated launches of new Real Estate Investment Trusts (REITs) did not materialise, even after a year of formulating rules.

The Real Estate Regulatory Bill, stuck for the last three years, received Cabinet approval. But given the slow progress of policy changes, it may take a while to see ground-level changes. Foreign direct investment (FDI) in the real estate sector was made further investor-friendly in 2015, after the changes made in 2014, to increase investor interest.

One bright spot in an otherwise downcast year was the office property market. Data from real estate consultancy CBRE shows that office space rentals increased 20 per cent Y-o-Y in the third quarter of 2015 compared to the same period last year.

Demand was also strong, clocking 20 per cent Y-o-Y growth.

Property market sentiments in large cities, such as Mumbai, are showing signs of a turnaround. But infrastructure development has to pick up pace in major cities to justify prices that continue to be unaffordable for home buyers. Also, a large share of the unsold homes is in the higher price range and even a price drop may not help mid-income home-buyer interest.

Land investments continue to attract investors, but tighter rules on black money may start to impact the nature, price and volume of transactions.

Property segment is in a down cycle and like all bear markets, there still are winners to bet on. Basics, such as location with good infrastructure, connectivity and job growth prospects, will be sought after.

Quality and completion track record of the developer along with the features offered in the project must be checked before making a decision.