Rising interest rates, tighter lending norms, poor sales--they all add up to an imminent slump in property prices
Property prices in major Indian cities, including Mumbai and New Delhi, are set to slump by as much as 30% in the next three-six months as rising interest rates and tighter lending norms have led to a sharp drop in demand for homes. "Softening in prices would begin in a month or two if sales continue to be low," said Adhidev Chattopadhyay, an analyst at Mumbai-based Edelweiss Securities Ltd. A Credit Suisse note on 19 January forecast that property sales in India may decline unless prices are cut 10-30%.
The Reserve Bank of India (RBI) has signalled borrowing costs will rise further after increasing interest rates seven times in the past year to curb price rise. It has also tightened lending norms for the purchase of property to rein in surging prices. Even as the supply of residences outstrips demand, property developers, who need to repay an estimated Rs14,000 crore to banks by the end of the financial year, are facing the spectre of loan defaults as dropping stock prices make it difficult for them to access equity markets, and banks tighten lending.
"A consensus is emerging that we are seeing the tip of a slowdown or a semblance of a bubble and the nervousness is evident on a pan-India level," said Amit Goenka, national director, capital transactions, Knight Frank India.
The Bombay Stock Exchange realty index, a measure of 15 property stocks, has dropped 26% in the last year, compared with a 17% rise in the benchmark Sen. The realty index has plunged 25% this year.
In November, RBI asked lenders not to loan more than 80% of the value of a property priced at more than Rs50 lakh. It also asked banks to increase the risk weightage of property loans of more than Rs75 lakh to 125%, making it more expensive to lend. Risk weightage assigns the minimum amount of capital that lenders have to maintain, as a percentage, depending on how risky a loan is.
"This was an additional factor along with the price rise which directly impacted investor sales in the higher end of the residential market," said Chattopadhyay.
"The loan-to-value ratio being capped at 80% effectively reduces the purchasing power of a homebuyer," analysts Aashiesh Agarwaal and Chattopaday wrote in a note to clients. "With a homebuyer having to cough up additional 5-10% equity for buying a house, he may have to delay his purchase decision, leading to a fall in incremental sale volumes."
The drop in residence sales has led to an increase of inventory in several cities. Mumbai has been the worst hit with about 88,000 unsold flats in the metropolitan region. About 25,000 of them are within the city limits of India's commercial capital, according to a survey of 2,400 housing projects in Mumbai, conducted by property researcher Liases Foras.
Recent home sales data suggest it may take as many as 22 months for the inventory to be cleared in cities such as Mumbai, Delhi-NCR (National Capital Region), Chennai and Hyderabad, said Pankaj Kapoor, chief executive of Liases Foras.
Residential sales tumbled 15% in Gurgaon, 20-25% in Greater Noida and Ghaziabad and almost 40% in Faridabad during the last two months of the past year, according to PropEquity Research.
Data from across India shows that only 15% of the home deals struck between April and September were at prices less than Rs2,500 per sq. ft, suggesting it is now difficult to buy even a 1,000 sq. ft house for less than Rs25 lakh in most cities. As a result, volumes have begun to slow and new bookings reported by major developers have been lower than expected, Credit Suisse said in their report.
"Builders have started negotiating across the table and are willing to cut prices by 10-15%, but prices need to fall further to become affordable," said Kapoor.
Some prospective buyers have now decided to delay their purchases until prices fall.
Vishal Jain, 35, has taken a break after six months of house-hunting every weekend. Jain, who runs his own optical lens business, wants to shift from his one-bedroom apartment in Ghatkopar, a Mumbai suburb, to a two-bedroom home in the Malad-Kandivali area, another suburban destination. He has a budget of Rs45-50 lakh.
"Even if I stretch my budget by another Rs10 lakh, there is nothing available other than properties in 25-year-old housing societies," Jain said. "So I can either move further north, towards Dahisar, or wait for another six months."
Indiabulls Real Estate Ltd, which is developing the "Bleu" project in central Mumbai at prices that are 15-20% lower than its earlier luxury projects, has also laid out simpler terms for its buyers to ensure sales.
A price correction will help propel volumes, said developers. Analysts predict a 15-20% correction in prices in NCR and rest of India, while "overheated" markets such as Mumbai and Ahmedabad would see a fall of 20% and above.
"If demand is low, we may correct prices," said Vikas Oberoi, managing director of Oberoi Realty Ltd. "We have corrected prices earlier and we will do it again."
In Hyderabad, the Telangana agitation has hurt both property prices and sales. In Bangalore, home to companies such as Sobha Developers Ltd and Prestige Estates Projects Ltd, sales have been stronger.
"You need to keep a price that will be accepted by the homebuyer," said J.C. Sharma, managing director at Sobha Developers. "India is growing and we know people can and are willing to spend now."
The decline in sales, however, has not slowed building activity. Construction in central Mumbai continues, with textile mills being torn down to make way for luxury housing and shopping projects.
An estimated $10 billion (Rs45,000 crore) of new housing projects are in the pipeline in the Lower Parel area of the city, with large developers such as Indiabulls, Peninsula Land Ltd, DLF Ltd and Lodha Developers Ltd in the fray to sell about 10 million sq. ft of luxury housing at an average price of Rs15,000-20,000 per sq. ft.
Knight Frank's Goenka said that despite sluggish sales of premium homes, residences that cost Rs20-40 lakh will find buyers.
Tightened bank lending, declining equity markets, private equity funds demanding steep returns and negligible property sales have compounded the trouble for property developers, said Pujit Aggarwal, managing director at real estate developer Orbit Corp. Ltd.
Indian real estate has always relied heavily on bank financing, with outstanding banking loans to the real estate sector having increased 33% in the past 21 months to over Rs1 trillion, according to Credit Suisse.
Analysts say the pressure is mounting on developers from all sides.
Hari Prakash Pandey, vice-president, finance and investor relations, Housing Development and Infrastructure Ltd, said that if the environment is hawkish--be it the government or financial authorities--decision-making is impacted, affecting business growth.
DLF, the nation's largest developer, said after its third-quarter earnings that it is banking on a series of new properties to generate cash flow and partly pare its Rs20,694 crore debt.
DLF may not meet its sales forecast of 12 million sq. ft by March, as about six of its new projects have been delayed, and due to price rises in recent months, said Angel Broking Ltd in a 1 February report.
To make problems worse, banks may further tighten lending to property developers after DB Realty Ltd and Unitech Ltd have been linked to ongoing investigations into the allocation of telecom spectrum. Lenders are turning down new loan proposals and may also take a close look at the proposed end use of loans that have already been sanctioned, but not yet disbursed to real estate companies.
"Investors want to know whether the money borrowed by developers for real estate purposes are being used for what it is actually meant or are being diverted elsewhere and they want to be doubly sure," said Rajiv Sahni, partner, real estate practice, Ernst and Young India.
arre bhai saare stock market ke punters real estate mai aa gaye hai. Real Estate India Bubble will burst!
enti jaldi prices neeche nahi jaayegi. Actually it would be high and mid end segment that would suffer most. The affordable segment would continue to see steady demand and thus steady price rise.
The areas with oversupply too will suffer most and there might be bloodbath / panic in those areas.
The stock markets are either too early or too late in reaction, tata steels was beaten to death because it acquired another company same with tata motors. Now reliance is not goining up because too much of cash in its books. Delta corp went up coz it is a hot story now again its beaten down coz of same story..
Stock markets are different beast where stocks like rnrl which had no business become heartthrobe of investors and soild business like ntpc has done nothing.
Look at the ground reality not at equity mkt for making real life decisions.
Prices have actually gone up beyond actual worth of the places in a lot of areas... and the worst hit would be high end condos in GGN area...
The affordable houses are also in over supply now and the overall impact of correction would be visible in this segment, however will not be as much as in higher segment. As Rohit says, there would still be demand in this segment and therefore sales may slow down for a short period but will again pick up due to demand.
Investors however should be really cautious now, since period of correction definitely delays all the projects....
An estimated 40% of luxury apartments coming up in India’s financial center are unsold, say analysts and brokers. These apartments cost anywhere from $1 million to $12 million, and range from 5,000 square feet to 13,000 square feet in size. Sales have slowed down in the last two to three months, thanks mainly to the steep prices. In December, the number of apartments registered in Mumbai – an indicator of sales – fell 50% from the same month the previous year, according to research from investment firm Prabhudas Liladhar Pvt. Ltd. While this data includes non-luxury apartments as well, real estate brokers and consultants say luxury home sales have been similarly affected.
“Sale volumes have dipped in pretty much every market in India,” says Gulam Zia, national director for research and advisory services at Knight Frank India Pvt. Ltd., a real estate consulting firm. Analysts say that if sales continue to remain slow, developers may have to cut prices or offer perks to lure buyers. In recent years, India has witnessed a boom in the construction of luxury apartments which resemble those in cities like New York and Singapore. These are meant to cater to India’s growing number of new wealthy as well as the traditionally rich who want to live in modern apartments.
Around 3,700 luxury apartments are currently under construction in Mumbai and its suburbs with a price tag of $1 million or more, according to Delhi-based research firm P.E. Analytics Pvt. Ltd. Of these, around 1,440 are unsold. In Delhi and its suburbs, one quarter of the 2,300 luxury apartments under construction are unsold, according to the firm. Residential apartments in India, including those in the luxury market, are typically sold before they are fully constructed. Analysts say that developers in India sometimes delay the construction of their project to ensure that they don’t have a large number of unsold units in their ready buildings. Some of the luxury apartments in Mumbai and Delhi have become 20% to 30% costlier than they were a year ago, thanks to growing wealth in India as well as general euphoria about the real estate market.
But now, “buyers are not happy with these high rates,” says Sanjeet D. Narain, managing director of Mumbai real estate consulting firm Narains Corp. At the same time, many buyers have a lot of money stuck in the Indian stock market which has fallen more than 10% so far this year. So, they want to “wait for some more time,” says Aditya Juneja, a real estate broker in Gurgaon, a suburb of Delhi. So far, developers have not budged from their asking prices. Many of them bought the land on which they are building properties at very low rates and are charging 10 times their cost of purchase for the apartment building. If only a small percentage of the apartments in a particular site are sold, they can recover their costs and thus afford to wait for the others to sell at high prices.
In land-scarce Mumbai, for instance, a large number of homes for the super-rich are coming up in the Lower Parel neighborhood, which is attractive for its proximity to the highly-coveted south Mumbai area. Private developers bought land in Lower Parel from cotton and textile mills at 3,000 rupees ($66) per square foot to 6,000 rupees ($132) rupees per square foot in the early part of this decade, says Samir Jasuja, founder of P.E. Analytics. Now, apartments in this neighborhood are priced between 15,000 rupees ($330) and 30,000 rupees ($660) per square foot. So builders can recover their costs by selling just a handful of such apartments. “Developers can even afford to hang on,” says Mr. Jasuja. However, developers who have a large inventory of properties may feel the crunch of financing as banks become increasingly cautious about lending to real estate developers. Also, India’s interest rates have risen over the last year making it more costly to borrow money.
“The pressure has started building,’ says Mr. Narain. Analysts expect developers to cut prices of luxury homes by 10% to 15% in the next few months. Alternatively, some developers might choose to offer freebies like free parking and a waiver of stamp duty to entice buyers, says Mr. Narain. Buyers should be negotiating discounts and deals even now, say analysts. They should also be prepared to see delays in the construction of these projects, says Mr. Jasuja.
The slowdown in sales of luxury properties has not stopped developers from launching new projects. The Donald Trump-backed building is expected to be officially launched in the next two months by Mumbai-based developer Rohan Lifescapes Ltd. The building will be on Hughes Road in south Mumbai and will have apartments which are 5,000 square feet and overlook the Arabian Sea, says Haresh Mehta, chairman of Rohan Lifescapes. For a fee, Mr. Trump will contribute his name and design among other things. Mr. Mehta expects the apartments to command a premium of as much as 40% compared to other luxury apartments in Mumbai because of the prime location and the branding. He didn’t specify the price they plan to charge. “There will be people wanting to buy Trump,” he says.
ppl have been expecting this burst/correction for last six months... prices since have moved 10 15% since then...
also most of us here are not looking at luxury segment.... so i wonder what advantage would one derive if the prices correct 10 after 20% increase and that also if it all happens in project of his liking....
the correction might come but i doubt it will give much benefit to non luxury buyer.... hope it does though... would be good for all
Originally Posted by richhaah
I am not very positive on prices coming down to 20 30 %, listening this since last one year... and being a prospective buyer , hopeful to get a house in GGN.
If this is a bubble, it should blast!!, so that we can get opportunities.