Mr.
Ashutosh Limaye, Jones Lang LaSalle India
Recently, the RBI
(Reserve Bank Of India) announced a measure that created ripples on the
residential real estate market - the monetary authority sent out a warning to
banks not to lend money to builders under the 80:20 or / 75:25 schemes. The
timing could not have been worse, coming as it did just before the festive
season. This is a period in which consumer spending is generally higher, and
developers often announce schemes that could help them sell high-priced
apartments. 80:20 was one of such scheme, wherein the buyer agrees to pay 20 %
of the flat cost upfront.
The remaining amount
is funded by the bank after signing a tripartite agreement between all three
(3) parties at stake here.
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| Ashutosh Limaye, Jones Lang LaSalle India |
The Impact..
Many viewpoints have been floated since the
RBI announced this ban, largely speculating on a fall in real estate prices as
a consequence. It has been opined that developers’ holding power will be
significantly reduce, forcing them to reduce prices. This analysis of the
situation is based on the currently high levels of inventory that developers
are saddled with, especially in larger cities such as Mumbai, Bangalore and
Delhi.
Indeed, inventory
levels in the leading 7 cities in India are much higher than the comfortable
industry levels seen about 8 to 10 months ago, which is between 14 to 15
months’ worth of unsold supply:
Big City Real Estate Dynamics..
Despite the RBI’s
edict, it is important to note that there are dynamics at play in some of these
larger cities which could result in developers resisting price cuts. In the
first place, the cost of land in these cities is already at astronomic levels.
Secondly, the recent
amendment to the Land Acquisition and R&R Bill will raise land owners’
expectations, which means that developers will have to negotiate harder for
available land. As a result, developers in these cities will now operate from
the standpoint that overall real estate prices will, in fact, rise going
forward.
Moreover, real-time
appreciation in property prices (adjusted for inflation) in tier-1 cities
during the last few years (1Q 12-current) have not more exceeded 4% to 5% - a
fact that could dissuade developers from reducing property prices
significantly. It is also pertinent to note that most projects within the municipal
limits of cities like Mumbai, Delhi and Bangalore these cities are targeted at
HNIs / or NRIs, who can afford to purchase these properties without availing of
bank funding.
Significantly, a
large number of projects that are completed or under-construction is in the
high-end segment, which in any case places them out of reach for mid-income
buyers. Therefore, a marginal price correction in these apartments would not
augment demand from the non-affluent class.
Short-Term Correction..?
While these are enough reasons for developer /
builder to hold their prices at the current levels, a marginal correction in
the prices of certain projects aimed at the mid-income segment is not entirely
out of the question. If it occurs, it would be within a range of 12% to 18%,
depending on specific projects and their builders’ holding capacity and
financial strength. A correction in prices beyond this level would affect
developers’ profitability to a non-acceptable extent.
Any discounts that we
see this festive season will be a function of developers’ need to sail through
the current difficult market conditions. With the slightest indication of a
recovery in economy, this window of opportunity will close, as has been amply
evidenced in the past.
Much of the uncertainty
surrounding the Indian economy currently revolves around the global market
conditions, and also the doldrums that most markets experience prior to general
elections. Depending on the new policies that invariably define the
post-election scenario in India, there could be a major change in the country’s
economic status quo, which will automatically reflect in market sentiments.
About the author..
Mr.
Ashutosh Limaye, Head – Research & REIS, Jones Lang LaSalle India
For Media Contact.
Mr. Arun Chitnis
Head – Corporate
Communications & Media Relations
Jones Lang LaSalle
India
Level 6, Amar Avinash
Corporate Plaza
Bund Garden Road,
Pune - 411 001.
Tel: 020 3093 0441
Fax: (020) 4019 6101
Mob: +91 96571 29999
Website:www.joneslanglasalle.co.in
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