Home Prices have seen a substantial hike of 30-70 per cent across India during 2012. However, after experiencing sustained momentum, residential real estate sales started sliding towards Q4 of last year, leading to inventory build-up.
A Knight Frank India study records 25 per cent drop in residential sales across India. In Mumbai market, home registrations are recorded at the lowest in two years. And developers have now been cautious about new launches in the wake of slowdown in sales in some markets. Knight Frank study predicts that home sales will remain damp even in the Q1cof 2013.
Rising prices, falling sales
It’s the diminishing affordability, rising interest rates, tightening of funds among developers, oversupply and increasing input costs that have been playing spoil sport.
As such, many home buyers have been waiting and watching for the impending correction before taking a plunge. Mumbai market has been the worst hit. This is clearly evident from record low sales. According to Liases Foras Real Estate Rating & Research, sales in Mumbai fell to 9.09 million square feet valued at Rs. 5747 crore in the first quarter of 2013, lowest since the first quarter of 2012. Liases Foras warns that Mumbai’s home market will stagnate over the next couple of years if the prices don’t correct in line with affordability, especially as the unsold stocks have piled up to 105 million square feet.
According to Cushman & Wakefield, despite strong demand, upcoming large supply may result in declining real estate price in many areas of Mumbai. Crisil report too signals fall in prices. It predict about 10 per cent decline in prices that had breached the 2011 peak values by over 25 per cent.
The situation in the other overheated market of Delhi-NCR is not as bad as Mumbai as affordability here is comparatively better. Crisil report notes that prices in the NCR are still about 20 per cent lower than the peak values though Liases Foras puts unsold stock in NCR at record 194 million square feet. Crisil report discounts any price correction and instead predicts marginal hike of 3-4 per cent.
In contrast to the high priced markets of Mumbai and NCR, Southern markets are expected to remain more stable as prices there are more affordable, demand is genuine and supply is decent. Similarly in the eastern region, property prices are unlikely to see any noticeable change as it has been a stable market that did not witness sharp increase in prices.
Road ahead for property prices
So, in this backdrop, where are the property prices headed in the coming months? Robert E Sulentic, Global President, CB Richard Ellis, believes that real estate being a cyclical business, future prices should reflect this, depending on supply-demand dynamics besides other factors like economic situation and infrastructure development.
Om Chaudhary, MD, Fire Capital Fund, however thinks that price corrections in India are not realistic and logical as builders have vested interest of not allowing prices to drop in order to keep their networth intact.
Anuj Puri, Chairman, Jones Lang Lasalle India endorses Chaudhary. “In the downturn during 2011-12, residential was the last segment to react and witness correction as developers continued to hold on to their prices. We still hold the opinion that residential property, especially the premium segment in NCR and Mumbai, is in a transition phase wherein developers are holding on to their prices. However, if sale velocities don’t improve in the next six months, there’s a definite correction on the cards, albeit a smaller one.”
Deepak Parekh, Chairman, HDFC, too thinks that prices cannot be maintained at the present level. “If the supply increases significantly, developers will have to reduce prices marginally; that is by 5-10 per cent if they want to sell their projects.”
Urvi Vora Jawala, VP (Residential), Narain Corp, says that 5-8 per cent correction (10-12 per cent in excess supply locations) is expected in next 4-6 months in Mumbai.
But Sunil Aggrawal of South Asian Real Estate (SARE) does not see any significant price reduction as interest cost and construction costs are bound to rise and tax burden will further increase.
Niranjan Hiranandani, MD, Hiranandani Group, foresees increase in volumes but no increase in prices and he discounts the possibility of oversupply. With hefty 37 per cent taxes and demand outstripping supply, he rules out price correction. Sanjeev Srivastva, MD, Assotech, expects prices to move up in the near future as he thinks that even if the supply of residential units is enhanced, increased demand on the back of improving economy and strengthening auto, banking, hospitality, manufacturing, IT/ITes sectors, will counter balance it.
Industry captains from the South are unanimous in their opinion that there will be no price correction.
Says JC Sharma, MD, Sobha Developers, “The current home prices are genuine. And with land prices remaining firm, input costs going up and demand outstripping supply, I don’t see any price correction.”
Prakash Challa, MD, SSPDL Group, says that Bengaluru and Chennai markets have been reporting good sales though Hyderabad is still a depressed market due to excess built up space and political uncertainty. “ And as the price correction in South has already ended, I don’t see any further correction.”
Chitty Babu, Chairman & CEO, Akshaya Homes too rules out price correction in view of demand outstripping supply.
The assessment of the current scenario barely suggests that except for marginal correction in few overheated markets, correction may not happen elsewhere, Prices may remain stable and we may not witness any spurt in prices either. But then, overheated markets like Mumbai and Gurgaon face the spectre of speculation.
Speculative pricing
Real estate analysts believe that the exceptionally high rise in property prices, especially in Mumbai & Delhi NCR, has a lot to do with spurt in speculative activity. It’s the speculators who have been responsible for creating artificial boom in sales, there by leading to unrealistically high upsurge in property prices.
There have been reports of developers joining hands with dealers in the north to artificially boost sales and jack up prices. They have been taking to pre-launch route to create this artificial boom. And most often, it’s these dealers/underwriters who have been picking up the property in the pre-launch phase only to make a neat profit at the time of the launch.
Vineet Singh, Business Head of 99 acres.com says that Mumbai and Delhi-NCR are the investor-driven markets and hence there has been speculators-led spurt in prices.
Sachin Sandhir, MD, RICS, adds that 30-60 per cent of speculative sales have been responsible for runaway increase in prices.
Sanjay Dutt, CEO, (Business), Jones Lang Lasalle India, avers that 65 per cent of total recent home purchases in Delhi and 35 per cent in Mumbai are done by speculators.
Investment scenario
But then how does the current real estate environment bode for the end-users and investors? Generally speaking, real estate as an asset class is quite attractive and in the last two decades it has given highest returns compared to any other asset class. And realty experts believe that this positive scenario will remain in the coming years as well. Most experts will bet on residential real estate especially as demand for housing will remain for many years to come. Also, it’s the safest asset class unlike commercial realty, which has different dynamics with greater risk for retail investors.
In the realm of residential real estate, investment at right time and right location with investment horizon of over five years can double. Otherwise too, residential property including apartments, houses, independent floors, etc.give an average IRR of 20 per cent during construction stage. And even if there is a short-term correction in markets like Mumbai and Delhi, capital value will only go up in the longer run. But while short-term investment may be risky, any investment with a 5-7 years window could well fetch a return in the range of 35-75 per cent.
As such notwithstanding the anticipated correction in some select markets, property experts would suggest to go for residential real estate investment now. Says Niranjan Hiranandani, “I can’t say about investors but as far as genuine home buyers are concerned, they should take a plunge now as I don’t see any price correction happening in near future. And as for home loan rates, they keep changing every now and then and we can’t rely on them for investment decisions.”
Adds Anuj Puri, “For genuine buyers, current prices offer good opportunity since they are buying a house for a long term, which would rationalise the costs they are incurring today. On the other hand, investors are typically looking for a shorter term and hence are more sensitive to the near term cycles.” He suggests that buyers in the affordable segment can choose to decide on a property which is at initial phases of implementation, and thus at lower rate, if an early possession is not the critical issue.
Urvi Vora Jawala, endorses the views of both Puri and Hiranandani. She suggests that it is the right time to invest for the actual users. However she cautions investors to wait for the next six months.
So, which are the hot investment destinations? Growth corridors and satellite/suburban towns of prime cities are being tipped to be high potential zones. Southern markets, according to investment advisors, are attractive as prices are low and market is driven by genuine end-users.
According to a recent survey by 99 acres.com, Mumbai and Gurgaon will be hot investors’ markets, offering about 30 per cent return.
As far as high potential corridors are concerned, besides Greater Noida and Noida Extension, Golf Course Road Extension, Dwarka-Gurgaon Road, and Sohna Road in Gurgaon are the best bets, In Bengaluru, Hosur Corridor leading to Electronics City and Bellary Road Corridor, leading to International Airport have been rated as the best peripheral locations. In Chennai, OMR and Great Southern Trunk Road, and in Pune, Aundh, Hadspar, Kondhwa and Wakad are the preferred suburban destinations for profitable investments.
So, you can make most of the investment opportunity even if you are on the horns of price dilemma.
Investment Hot Spots - Mapping price appreciation trends Pan India
• Investors are sitting on a return of 128 per cent on their investments within a single year time frame at Golf Course Road, Gurgaon. Average psf rates have moved from Rs. 3757 in the first quarter of 2010 to Rs. 8576 by Q4 of 2011. Since the rate of increase appears to be plateauing this last quarter, if you want to maximize your returns, it is best to exit at this point. A three-digit return is something that this area might not be able to sustain over a longer time period, but that depends on the holding capacity of the investor. If a return of 128 per cent is good enough, it is time, for pure investors to cash out.
• Juhu in Mumbai was the next most attractive destination for investors, giving a 90 per cent return within the last one year despite already being the seventh most expensive locality in the country. We’re talking a base price of almost Rs. 12,100 psf going up to almost Rs. 23,000 by the end of the year. Even Panvel, in Navi Mumbai, which has come up as an alternative to the very expensive maintown Mumbai, could give a return of 52 per cent in this past one year despite the fact that there is more aggressive investor activity around Navi Mumbai as compared to more rental and resident activity in SW Mumbai.
• On the whole, the top ten movers in terms of real estate gain in India were split between Gurgaon and Navi/South West Mumbai with the exception of Pune hogging the third place. Koregaon Park appreciated by 74 per cent, just after Golf Course Road, Gurgaon and Juhu, in Mumbai.
• The largest quarter on quarter price appreciation when we compare 2011-Q1 data with 2010-Q4 data, took place in North Delhi-in Rohini—where investors made a killing at 28 per cent return within a single quarter. This was more than what investors in Rohini made over the entire year, which was just 25 per cent return. In 2010-Q4 psf rates were around 6380 and in 2011-Q1, the rate was pegged at 8165.
• The localities across the country that have seen maximum gain over the last two quarters is Rohini (Delhi), Chembur (Mumbai), Panvel (Navi Mumbai), HSR Layout (South Bengaluru), in this order.
• NCR: Gurgaon strode ahead of all other regions as the choicest destination for residents and investors. Despite all the noise, Noida appeared totally low key in the final analysis with an average of 10-11 per cent return in the past one year. What is even more noteworthy is that Faridabad and Ghaziabad appeared to have lost out completely with a loss in capital value of 48 per cent and 12 per cent respectively. This could therefore be a good time to purchase property in these areas for end users.
• Mumbai, Palm Beach in Navi Mumbai saw a drop in rates of almost 12 per cent in the last one year. All other localities in Mumbai rose on the whole with the star performers being Mumbai South & South West. Gains made across the year appeared to slow down with some localities already dropping value such as Powai and Khar in the last quarter.
• Bengaluru investor hotspots such as Whitefield and Bannerghatta saw a withdrawal of sorts with capital values dropping in double digits in last one quarter itself. Whitefield’s, psf rates fell by 13 per cent and Bannerghatta’s, by 14 per cent. Hebbal, another hot destination for real estate investors traditionally, saw a downtrend of almost 6 per cent over the past one year. Bengaluru, on the whole saw a lot of volatility with some areas gaining value in double digits and others losing these in double digits.
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