Real-estate developers could see their operating margins, fattened by a two-year housing boom, shrivel this year by half as property prices soften and consumers postpone buying decisions, according to a new report by multinational broking firm First Global.
It is expected that the housing prices will fall by about 15%, which is in line with what some other analysts say they are expecting. Developer margins, which jumped from about 13% two years ago to about 40%, could drop to about 22% this year largely because fewer people can afford homes. Salaries have not kept up with real-estate prices and interest rate hikes, and investors are pulling out of the market, further reducing the pool of buyers and adding to the number of sellers.

Residential units account for about 75% of the real-estate market and have a strong impact on developers’ profitability. Developers’ expansion plans could result in an oversupply of houses in some markets. Some 10 large Indian builders expect to construct about nine times as much as they built in the past by 2011. Residential prices since December have fallen by about 5-8% in major cities. Prices had been increasing by about 30% a year. It is predicted that the prices could drop by another 5% this year.

Locations where there is too much supply, where there are too many projects planned, will see a correction, such as Delhi’s Gurgaon suburb, Navi Mumbai and Mumbai’s central suburbs, and the Outer Ring Road in Bangalore. Real-estate prices have dropped by 10-15% in some pockets of Ghaziabad, Noida, Gurgaon and Bangalore.

The prices are softening in the suburbs where a large supply of homes is coming up. Small developers have already been hurt by the slowdown because they were expecting to finance projects by pre-selling houses. Larger developers have staying power and can more easily secure financing and stagger projects so they all don’t reach the market at once. It will impact everybody, but it should not be a major problem.

Arvind Parakh, CEO of Omaxe Ltd, which is planning an initial public offering, said he expects a 15-20% drop in prices, but doesn’t see a rapid reduction in developers’ margins. It will likely be a few quarters before the slowing market is reflected in developers’ financial results. Sales revenues includes money that was collected from buyers long before the market showed signs of weakening. Omaxe also plans to offer incentives, such as kitchen and floor upgrades and extended pay schedules, to keep buyers interested in slow markets. It is keeping prices stable for now.
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