Mumbai, Delhi real estate prices to correct 10-15%

Mumbai, Delhi real estate prices to correct 10-15%

Mumbai, Delhi real estate prices to correct 10-15%
Ranju Sarkar / New Delhi February 4, 2011, 0:11 IST
Rising interest rates may see customers postpone purchases.

Real estate prices in parts of Delhi and Mumbai are likely to correct 10-15 per cent in the next few months, as rising interest rates could see customers defer their buying decisions, say builders and real estate experts in these cities.

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Rajesh Goyal, chairman, RG Group, a Noida-based builder, expects home prices in Delhi to correct 15-20 per cent in the next few months. Prices have gone up 40-50 per cent in the last 7-8 months. ‘‘When prices increase, people start deferring,” he said. Goyal says that though land prices have doubled in many areas in Delhi from Rs 1-1.5 lakh a metre to Rs 2.5-3 lakh a metre, there are hardly any transactions at these prices. In Mumbai, where primary sales have dried up, the situation is more acute, say experts.
“Sales have gone down. There are virtually no sales on Thursday,” said Pankaj Kapoor, CEO, Liases Foras, a non-brokerage real estate research firm. ‘‘In the last 3-4 quarters, builders indulged in artificial sales by transferring the ownership of 300-400 flats to investors, brokers or underwriters. We flag such projects,” he said.

A field study by Liases Foras has found the proportion of such projects ha s gone up from 12 per cent in the quarter ended September, 2009, to 43 per cent in the quarter ended September, 2010. Sales have fallen from 17,000 units in September, 2009 to 10,000 units in September, 2010. In the December quarter, sales fell by an additional 15 per cent. The firm studied 2,500 projects across the Mumbai Metropolitan Region and found that 30-40 projects account for 43 per cent of sales. This shows that the market is very narrow. With prices soaring, buyers are struggling to bring in their contributions. Banks now lend only 80 per cent of the cost of a flat, compared with the earlier 85-90 per cent.

‘‘In most markets, builders are seeking 15-20 per cent in cash, as they see a correction. They have also increased the super built-up (saleable) area. In 2006, if the loading (the difference between what you pay for and the carpet area of your flat) was 40 per cent, on Thursday it has gone up to 70 per cent, or even 100 per cent in some cases,’’ Kapoor said.

Property buyers are facing a double whammy. Not only have property prices increased three-fold since 2005, saleable areas have also increased, and this has resulted in a rise in the prices of flats.

Kapoor expects prices in Mumbai to correct 15-20 per cent gradually, and then not rise for the next two years. However, builders, after selling to investors at higher prices, would try to hold on to the prices. ‘‘They have other means. On Thursday, the negotiations are not just on prices but also on flat sizes; they negotiate for less saleable area,” according to an expert.

The National Capital Region saw an addition of 147,000 homes in 2010, or almost half of what Mumbai, Pune, Hyderabad, Chennai and Bangalore added together in the period. Kapoor estimates that Gurgaon prices will correct 20-25 per cent, while prices in Noida-Greater Noida, Sonepat and Faridabad may correct 10-15 per cent—the higher the price, the higher will be the correction.

So, in a market like Noida, where the cost of land is relatively low and apartment prices are Rs 2,500-3,000 per sq ft, the scope for correction is less. Mumbai could see a correction of 25-30 per cent, especially in areas in Central Mumbai like Parel. This is not the case in areas like Kalyan-Dombivili, say experts.

Sanjay Dutt, CEO (operations), real estate consultant Jones Lang Lesalle, expects a major correction in Mumbai and Delhi and stagnation across markets. “Many builders borrowed money to buy land in home markets, but the sales have dropped. There’s a mismatch between the flow of capital and the need for capital. Some have opened their doors, while some are holding their breath and borrowing at 17-18 per cent,’’ he said.

Shobhit Agarwal, CEO, Protiviti Consulting, feels that any increase in the cost of funds will dampen demand. “Speculative demand thins out as interest rates rise. Once demand slows down, prices soften, as people defer buying...We are in the early stage of what we saw in 2008-09,” said Agarwal, who advises realty firms on M&As, risks and audit.
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  • The type of correction in real estate

    1- Land Prices - Most of the speculative interests unwinds and that leads to sharper correction in land - Mostly the buyers from unwound speculative interests are the end users who were waiting for such correction to get in.

    2 - Luxury Homes / Apartments - Two kind of buyers here - one the HNI who are looking for another home and
    Speculative interests - The second category of people would stop paying the installments and then builders would stop further progress.
    In this kind of projects builders are smart enough to understand the strong end user hands and speculative interests so they normally allot the flats in that manner only - so the towers where money is coming in regularly would continue to see progress however the other towers may get stalled.
    The prices decline to the extent of the leverage by the speculative interests and the length of the correction.

    Mid Segment - Read above 30 but below 1 crore - this is worst hit segment mostly smalltime speculators get into it which means when correction sets in they stop paying the installments and try to get out in panic creating a dominos effect on end users as well.
    Here the correction is very sharp and actually a very sharp rebound also seen in this segment when markets turns around.

    Affordable Housing - Most of the builders ensure that the speculative interest is out of this kind of housing projects because they have to get govt incentives as well. So houses below the basic price of 20 lakhs actual cost upto 30 lakhs all inclusive - have least impact of the correction - here the prices may not appreciate however it may not go down as well.

    Rohit
    CommentQuote
  • Originally Posted by rohit_warren
    The type of correction in real estate


    2 - Luxury Homes / Apartments - Two kind of buyers here - one the HNI who are looking for another home and
    Speculative interests - The second category of people would stop paying the installments and then builders would stop further progress.
    In this kind of projects builders are smart enough to understand the strong end user hands and speculative interests so they normally allot the flats in that manner only - so the towers where money is coming in regularly would continue to see progress however the other towers may get stalled.
    The prices decline to the extent of the leverage by the speculative interests and the length of the correction.

    Mid Segment - Read above 30 but below 1 crore - this is worst hit segment mostly smalltime speculators get into it which means when correction sets in they stop paying the installments and try to get out in panic creating a dominos effect on end users as well.
    Here the correction is very sharp and actually a very sharp rebound also seen in this segment when markets turns around.


    Rohit


    Great analysis - do you have actual knowledge of this behaviour in builders?
    CommentQuote