IN FOCUS. Why home prices aren’t falling despite weak demand

The real estate sector across India is witnessing a curious paradox. Builders and promoters are facing a pile-up of inventory and are under pressure to lower prices – most recently from RBI Governor Raghuram Rajan. But they find themselves unable to lower prices even to incentivise sales because of high construction costs arising from liquidity issues, and delays in obtaining approvals.

Vineet Relia, Managing Director, SARE Homes, said, “Most developers are running high debt, and servicing that is eating into their wafer-thin margins. I don’t think there is any room to cut prices further.”

Rajan’s call to developers to lower prices came in the context of a decline in housing demand in recent months. A Knight Frank survey for July-December 2015 put the unsold inventory across India at about seven lakh housing units. The survey covered Mumbai, NCR, Pune, Bengaluru, Chennai, Hyderabad, Kolkata, and Ahmedabad.

Mudassir Zaidi, National Director, Residential Agency, Knight Frank India, said, “The market is a fraction of what it was in the best of times. In the residential segment, launches and absorption failed to impress, although there has been a marginal increase in transactions.”

In cities across northern India, real estate prices have since 2013 grown at their slowest pace, according to an analysis by real estate data and analytics platform PropEquity. The South, on the other hand, has done well largely on account of end-user demand, especially in IT-driven growth clusters.

According to the PropEquity data, in recent months, prices quoted by developers have remained stagnant, and are only marginal higher than in 2013.

“The North saw had the lowest price increase since 2013, led by a price decline of 1.4 per cent in Gurugram in 2015 over 2013. For all other cities, price increase has been subdued, in the 2-3 per cent range. NCR’s poor performance is largely attributed to poor project fundamentals and infrastructure issues,” Samir Jasuja, Founder and Managing Director, PropEquity, said. Southern cities have done relatively better, particularly Whitefield, Electronic City, Sarjapur Road in Bengaluru and Gachibowli, Hi-Tech City, Manikonda, Kondapur in Hyderabad, Jasuja said. Hyderabad, he noted, also benefited from political stability and attractive entry prices. Cities in India’s western region have been largely stable with a negative bias.

There is, however, a significant difference between the prices quoted by developers and the actual prices arrived at after negotiations. “Actual prices today can be 5-15 per cent lower than quoted prices across markets,” Jasuja added.

Developers have also been offering freebies such as attractive finance schemes, gift vouchers, foreign trips and free parking space to entice buyers.

Alok Kumar, President of Federation of Apartment Owners Association, Ghaziabad, said, “Builders are not cutting rates, but are offering free club memberships or parking. Builders say that selling existing inventory at lower prices will result in trust deficit with buyers who have already bought a property.”

“If we start cutting prices down, we are sending word out that the net asset value is going down,” Relia said.

The sector awaits the establishment of real estate regulatory authorities (RERA) under the Real Estate Bill, which is expected to infuse confidence among prospective buyers.

“There is still a lot of uncertainty about the recently announced reforms by the government, be it REITs or RERA. We believe market sentiment will get a boost if reforms by government and regulatory bodies are implemented,” Zaidi added.

Real estate activist Chandrashekhar Prabhu said the housing market in Mumbai and other cities has to correct itself because there are no buyers. However, the sustaining power of builders, who continue to hold on to their housing stock, has checked a price fall, he said.

Prabhu claimed that developers are keen to attract FDI in their companies, and firms were carrying on internal trading to show ‘paper transactions’ at elevated cost.

Residential real estate prices have been increasing in Bengaluru for the past three years. “Builders cite the increasing cost of materials and cost to increase prices every quarter,” said A Thirumurugan, Proprietor, M/s Mayan & Associates, Property Consultant & Advisory.

Prices are up 10-30 per cent over the last three years depending on the areas, he claimed. South and Central Bangalore are stable, while the North is witnessing a rapid appreciation because of higher demand.

The city has a demand for 50,000 to 60,000 units a year, not counting the demand from migrant population.

The residential real estate market has a direct co-relation with commercial real estate. “The city is witnessing robust demand from companies to expand their presence, which in turn attracts migrants who stoke demand for residential units,” said Thirumurugan.

In the past three years, builders and developers have begun to move away from the city centre to where the demand exists. The city is seeing a push towards rural areas for affordable housing on Doddaballapur road, Kengari and Magadi road.

Farook Mahmood, CMD, Silverline Realty, and President of FIABCI-India, said: “Development is heading north of the city towards the airport and Devanahalli. The growth at the city centre is stagnant, and the outskirts are witnessing growth.”

According to Thirumurugan, “Despite slow sales, luxury housing still sells. Areas around Hebbal, Whitefield and Sarjapur are seeing mid-luxury offtake. Sale of super luxury units still revolve around Whitefield, where villas and plots are getting sold at ₹5-10 crore.”

Thirumurugan further said, “Apartments that were selling at around ₹3,500- 4,000 per square feet three years ago are now selling at ₹4,500- 6,000 per square feet due to good demand from the migrant population.”

Farook Mahmood said prices varied across locations. Overall, capital values had appreciated at an annualised rate of between 10 per cent and 30 per cent, he added.

The Chennai residential market is stabilising as home sales have improved slightly in tandem with a slowdown in new launches. Prices have remained stagnant over the past year and a half.

So, has there been a correction in the market? No, say builders. With prices holding for close to a couple of years now, where is the option to slash prices, they ask. Even with built-up, unsold stocks on hand, builders are not cutting prices; at best, they are offering flexible payment options.

Inventory estimates in Chennai and its suburbs range from 45,000 to 60,000 units. Typically, for a down payment of 10-20 per cent of the house cost, builders take on pre-EMI payments so that the buyer does not shell out money from his pocket before taking delivery.

Land prices have been high, and the cost of construction is going up, with increasing labour costs and other inputs, even though steel and cement have been relatively stable during this period, say builders.

Ajit Kumar Chordia of Khivraj Group, a leading residential and commercial space developer in Chennai, says inventory levels in the city have started to come down to about eight quarters’ sales. This has to drop to about 4-5 quarters’ stock before new launches get under way.

Chordia, who is also president of the Chennai chapter of Confederation of Real Estate Developers Association of India, says it is a buyer’s market for now. Yet, developers do not have much room to slash prices. “Whatever can be done has been done,” he feels.

Guideline values are continuously increasing, and VAT and new elements of service tax are all adding to the cost, as does inflation at 4-5 per cent a year.

Ravi Appaswamy of Appaswamy Real Estates, a premium builder with projects in the heart of the city, says that only those developers with land purchased at high costs are feeling the pressure of a slow market. Projects in a good location, with viable pricing, are in demand.

Appaswamy Real Estates does not have large unsold inventories, he claimed; “may be about 2-3 per cent of completed houses.”

Housing stocks in the city had increased because developers had been optimistic about projected growth, he felt.

Another Chennai-based developer with projects in the southern suburbs on the Old Mahabalipuram Road said apartments in Siruseri and Navalur, which had sold at ₹4,100/sft a couple of years ago are now being sold at about ₹3,800/sft. And these are apartments that are to be handed over in a couple of months. Under normal market conditions completed apartments should fetch a premium over apartments booked at launch. So the price correction is not just ₹300, but more than twice that.

Srinivas Acharya, Managing Director, Sundaram BNP Paribas Home Finance, says private equity funding has helped buyers to hold on to stocks. Also, such funds demand a high rate of return, so there is some resistance to lowering prices. The high price that builders have paid for land limits their options.

According to international property consultants Jones Lang LaSalle, the capital value ranges around ₹12,000-15,000 a sq ft in T Nagar and Nungambakkam in the heart of the city; around ₹6,500-9,000 in Guindy, in the periphery; and ₹4,500-6,000 in Sholinganallur, further to the south.

(With inputs from Navadha Pandey, Bindu Menon, Rahul Wadke, Anil Urs, and R Balaji)