Price Reduction Need of the Hour

By GovernanceToday
In Issue 2
November 4, 2014
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Despite its growth at the rate of 20 per cent per annum, the real estate sector has been on a roller coaster ride since 2005. The sector has been under a cold wave for the last couple of years. It is not getting the buyers; the number of unsold inventories is continuously increasing, especially in NCR region. The sector was very hopeful from the festive season but this also couldn’t provide the required boost

infraTHE SECTOR WHICH HAS A MULTIPLIER effect on the economy and stimulates the demand in over 250ancillary industries such as cement, steel, paint, brick, building materials, consumer durables and so on is under the huge pressure of unsold inventories and liquidity crunch. Since 2005 the real estate sector has been on high and low tides. In 2005, the UPA government permitted 100 per cent foreign direct investment (FDI), under the ‘automatic route’ in townships, housing, built-up infrastructure and construction development projects. The FDI was permitted with the vision to bridge the shortage of housing in the country and to attract new technologies in the housing sector. Thanks to it, the number of foreign firms owning real estate projects in India has also increased. The construction development sector garnered FDI worth US$ 23,587.25 million in the period April 2000-June 2014.

The sector also witnessed a rise in investment and developmental activities. There was not only the arrival of many new domestic players but numerous foreign real estate investment companies, including private equity funds, pension funds and development companies, also stepped in. There was growth in demand, substantial development and increased foreign investments in 2007 and early 2008. However, by mid-2008 the effects of the global economic slowdown were evident here too, and the industry took a ‘U’ turn. FDI inflow into real estate dropped significantly and what had emerged as one of the most promising markets for foreign investments looked like bugling out.

CURRENT SCENARIO
The real estate sector is not only fighting the liquidity crunch but it is also facing buyer’s crunch. The developers were hoping for revival as the new government took charge in May but, to their dismay, things have not yet gone in favour. Though the Narendra Modi government also took
initiatives to spur the real estate sector, it allocated Rs 7,060 crore for the development of 100 smart cities, a reduction in the size of projects eligible for FDI from 50,000 sq m to 20,000 sq m, and having the minimum investment limit for FDI to US$ 5 million but this couldn’t bring in the reform needed for the sector.

Commenting on the current scenario, Deepak Kapoor, director, Gulshan Homz, says, “The real estate sector in India is currently on a recovery phase with the festive season providing a much needed boost. Till last year, most customers were insecure about investing or buying a property as the economic and political condition was not stable. Post poll this year, the recovery started with a lot of new policy changes, reduction in home loan rates, etc. This has created an environment where now customers are gearing up to resume their investments. With a lot of  developers launching new projects, emergence of tier 2/3 cities, infrastructural development across the country and offerings of discounts/schemes/offers, the realty has finally got back on track.

Though the developers are of the opine that the market sentiments has been good during the festive season and they were hoping for a positive
response from the market, but unlike past few years, this festive season was also not able to provide the much needed push. Despite lots of lucrative offers from the developers, buyers didn’t show interest in buying the flats. Investors also kept themselves away from making any investment According to the real estate rating and research agency, Liases Foras, the third quarter of FY2012-13 saw the residential realty sector slipping into a respite once again. The market did not seem to be charmed by the festive spirit.

As per the report, “Weakness in India’s macroeconomic scenario continued as the Index of Industrial Production (IIP) growth for November fell to a four-month low and current account deficit as a percentage of GDP stood at an unsustainable level of 5.4 per cent for the second quarter of FY13. The residential real estate market also mirrored the negative sentiment and witnessed a lacklustre performance in the December quarter of FY13. The old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector in the third quarter.”

The agency cited the price as the major reason behind this slowdown. It said in its report that the price of existing supply remains at an elevated level across most of the six major cities, the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bengaluru, Chennai, Hyderabad and Pune on an annual as well as sequential basis. This had a cascading effect on the demand and inventory pile-up. Sales in terms of volume and value slipped in most of the cities due to which time required to clear the stock at the existing absorption pace showed a significant rise.

NCR witnessed an uptrend in prices with Faridabad and North Delhi showing 23% and 21% sequential gain. However, the pace of price increase
slowed in Q3 2012-13 as against the previous quarter. Bengaluru saw a 10% surge in prices on account of mushrooming IT companies and availability of superior range of dwelling units. Moreover, execution of projects at a faster pace has also impacted the upward movement of prices, the report said.

Apparently, MMR is inching towards normalcy as prices have moved southward after three long quarters. Even as the remaining suburbs recorded a 2-3 per cent quarterly price rise, it is likely that the long due correction could see the light of the day, as the 3 per cent sequential price drop in the Island City could have a ripple effect on the prices across other locations. However, effects of a sudden rise in Ready Reckoner rates in Mumbai, since 1 January 2013, cannot be completely ruled out.

The research firm also said in its report that there were about 7.6 lakh unsold apartments across India at the end of June. Only 27 new projects were launched this September across the top 15 cities against 279 in the same month last year, according to PropEquity. “There is too much existing inventory waiting to be sold,” says Samir Jasuja, managing director  at PropEquity.

But with the job growth data for the quarter to September reflecting a twoyear high, some builders see a revival in the real estate market by the end of March. “The sentiments have started changing, but it will take time for sales to come back,” says R.K. Arora of Supertech.

Sanjeev Srivastava, managing director of Assotech Developers, said this is just the beginning and sales may pick up over the next few months. “Sales might not be up to the mark now, but things are improving fast,” he says.

Whereas Kushagr Ansal, director, Ansal Housing, says that this year’s festive season has received a mixed response from the public with a lot of
developers claiming a good show and a few observing below average performance. He says, “There have been two major reasons behind this year’s festive result pendulum; one being that the market is on the revival period with customers gaining trust on the government and the sector, therefore not all have started to invest again, thus lesser demand than usual. Another reason, by which at least a decent show was possible, was due to the kind of unique offers and discounts presented by the developers this season. This has resulted in a good enough showdown in the sector and looking at the way the demand is shaping up. Few months down the line, we’ll overcome the recovery stage.”

HIGH PRICES
Developers might not agree to the fact that the sky-high price is a majorfactor behind the sluggish sale. The buyers are not interested in the new  payment schemes or getting a freebie with a booking. They are looking for prices to come down. Pankaj Kapoor, MD of Liases Foras, says, “The price supply situation in NCR clearly implies that home prices are being kept high artificially. The price depreciation is only being witnessed in the secondary market while builders are refusing to bring down prices in the primary market.”

With a weighted average cost of Rs 75 lakh for a 1,200 sq ft apartment in NCR, prices are still being kept high because investors are holding on to properties while end-users are still staying away. This also creates barriers for new launches/construction at lower prices in these areas. Developers are not willing to bring down the prices as they cite the reason that the price of everything used for construction has been increased.
But someone should bring to their knowledge that the government has taken few initiatives to bring down the prices. The government has  reduced the excise duty on cement and steel and interest subsidy on loans has also been expanded.

A.K. Tulsiani, CMD, Tulsiani Constructions and Developers, says that the construction cost is increasing each passing day and there is a cut-throat competition in the sector. Builders are already on the edge, hence price cannot be reduced as they are offering reasonable price averagely.

Somewhere or the other Chaman Panwar, MD of The Visava Group also agrees to Tulsiani Constructions and Developers. Panwar says that downfall of prices is not quite possible in the emerging and highly demanding real estate market. “It is also a good sign for the economy of our country that capital appreciation occurs continuously. In a case where the demand becomes static or falls in worst cases, still the property prices are frozen for some time; but as soon as the market stabilises, the prices move north. Rather than prices going down for property, it is more important that norms become flexible for developers so that projects are commenced and delivered on time, and land prices should fall. These factors will directly help in reducing the cost of a unit which then will not require prices to fall,” he adds.

HOW TO OVERCOME ?
The realty sector is very much desperate to overcome this gloomy situation. They need to sell off the piledup unsold inventories. The real estate still continues to be a favoured sector for investments from international as well as private investors. In the coming years, the residential as well as commercial segments of the real estate industry is set for major growth, aided in no small part by the government’s plans and initiatives to boost this sector.

Ashok Gupta, CMD, Ajnara India, says, “The sector is presently running on a recovery phase with a lot of actions taken by the government lately
and enough in pipeline. Also, the festive season has helped the sector bigtime to overcome the demand crisis  which was faced by this sector recently. The government is also pretty active in terms of helping the housing sector and its customers with its plan for ‘housing for all’. These reasons will be a major demand booster in near future and in the next 2-3 years, we’ll have a completely different real estate scenario all together.” While Tulsiani says, “A minimum time of March, 2016 will be required for realty sector to revive, as by then the supply will reduce and demand will increase and the second budget of the new dispensation will boost the Infrastructure.”

If we go by the performance of the real estate stocks, it seems that the sector would revive somewhere around 2016 but the developers need to  understand the sentiments of the buyers. They need to focus on the end users as they are the one whom the developers have to cater. They need to reduce the interference of the channel partners or investors so as to stabilise the prices.

If the sentiments of the buyers are correctly taken by the developer then they need to understand that bringing down the price is the need of the hour.

Pricing is a Function of Supply and Demand

With the not so encouraging festive season, the real estate sector is still looking positive. Anuj Puri, Chairman and Country Head, JLL India, a professional services and investment management firm offering specialised real estate services to clients seeking increased value by owning, occupying and investing in real estate, spoke to Rahul Trivedi, Correspondent, Governance Today.
Anuj-puri

Anuj Puri, Chairman and Country Head, JLL India

What is current scenario in the realty sector ?
The market is looking upbeat again on the heels of positive sentiments after the general elections andthe recent Union budget. There is renewed interest in home ownership, and MNCs are once again viewing India with increased interest for entry and expansion of the operations. This is good news for commercial real estate, especially IT/ITeS. The finalisation of REITs promises to bring a fresh infusion of funds into the sector.

The festive season was also not able to attract the buyers. What reason do you see behind this ?
The festive season was not able to fully harness the benefits of market recovery as the events that have catalyzed this recovery – namely the new government at the Centre and the proactive Union Budget – will need more time to bring their benefits to bear on the market. Meanwhile, the RBI has held on to current interest rates in favour of safeguarding against further inflationary trends. It will take several more months for the market to get into convincing forward momentum again, so the festive season did not bring the kind of momentum that was hoped for.

Do you think that reducing the price has become the need of the hour ?
Pricing is a function of supply and demand. While demand exists, it is still held in abeyance by various economic factors. While reduced pricing
could potentially induce some further sales momentum in certain pockets, it is not likely to happen as developers are not keen on signaling a correction, especially when demand is waiting in the wings. New projects are in any case being announced at lower rates.

The number of unsold inventories is a big issue. How should developers address this ?
They have been addressing it by offering selective discounts and incentives, the success of which has varied across cities and locations. Those with greater holding power continue for the market to pick up so that sales velocity will accelerate.lower rates.

By what time do you think the real estate sector overcome this slowdown ?
It is already in recovery mode in the sense that it is no longer in regression mode, but it will take time to pick up forward momentum. We are currently at the cusp of growth, and the visible results will not be spectacular for a while to come. The old dictum of ‘only that which cooks slowly cooks well’ is very pertinent in the current scenario.