New Delhi / Bangalore: When a unit of German conglomerate Siemens AG put an apartment in Walkeshwar, a tony south Mumbai neighbourhood, for auction in June, it expected the usual big crowd of buyers that such sales attract. And, in line with the past, it expected a huge premium from the base price of Rs4 crore, or roughly $1 million.
Siemens had to shelve the sale when just three bidders turned up, two of whom bid Rs3.75 crore each, lower than the base price.
Ground reality: An aerial view of Nariman Point and Cuffe Parade in Mumbai. Photograph by Madhu Kapparath / Mint
The aborted auction reflects the tough times that investors are experiencing as the realty market cools. Investors who bought properties in New Delhi, its suburbs of Noida, Gurgaon and Greater Noida, Mumbai and Bangalore, anticipating sales at hefty premiums, are finding it difficult to make a profitable exit at current price levels.
Falling demand—some estimates put the decline at up to 30%—in the realty resale market has led to a drop in prices by 15-30% in the otherwise hot residential resale markets of Greater Noida, Noida, Gurgaon and Mumbai. Prices have declined by 15% even in south Mumbai, says S.G. Maheshwari, a realty expert and former president of Estate Agents Association of India, of the normally price-inelastic area—one of the most expensive in the world.
Investors, different from those who buy apartments and property for their own use, who constitute a large portion of all residential transactions, are bearing the brunt of the decline. For instance, in Delhi and its suburbs, according to a survey by real estate consultant DTZ, nearly two of three residential transactions are resales.
Investors, until about a year ago, accounted for nearly 50% of property and apartment deals, according to estimates by some realtors. They were attracted to the real estate as an asset class given the 100-200% appreciation in some three years. Generally, investors would try to sell the properties within a year of purchase and book profits.
Not any more.
Such investors are shying away from new realty projects, making it tougher for developers to get financing for their projects. Residential projects are usually self-financing in nature, meaning that developers use the money they get from customer advances to fund the development.
Investors have temporarily put buying plans on hold, says B.P. Dhaka, chief operating officer at Parsvnath Developers Ltd. “This is adding to the liquidity crunch of developers,” says Dhaka.
Adds G.P. Savlani, resident director of the Confederation of Real Estate Developers’ Association of India, “Investors are not buying new properties and those that have bought” are retaining them.
Coupled with the decline in demand is the surge in prices of raw materials such as steel and cement and the dwindling availability of financing from banks and other financial institutions, Savlani says that developers are mainly trying to complete existing projects, not add new ones.
Most investors are deferring sale plans and waiting for prices to rise, according to Rajat Mahajan, national vice-president for leasing and business development at Century 21, a real estate brokerage firm.
One investor has a property in Greater Noida, which he “bought as an investment three years back” from the Stellar Group. “But I plan to hold on to it for some time as the resale market is stagnant,” he says, asking not to be named. Other investors are not so patient. In Jolly Maker Apartment I and II, residential towers in Cuffe Parade, south Mumbai, a flat of 1,700 sq. ft carpet area was selling at Rs18 crore as recently as the beginning of the year. Sellers have now discounted them to Rs13-14 crore, says Maheshwari. Even after the price cut, there are few buyers.
In Delhi, brokers’ advertisements offering discounts on resale properties have become common. Realty agent Manoj Jain, for instance, is offering a 4% discount on 1,775 sq. ft apartments at Parsvnath City in Dharuhera near Delhi.
He has five such flats to sell at the development that investors bought in 2006, he says. The price on offer of Rs1,728 (versus Parsvnath’s selling price of Rs1,800) may still not be enough to lure buyers.
In Bangalore, property consultants said resale transactions have slowed considerably despite price correction to the tune of 15-20%, particularly in areas such as Whitefield and Indira Nagar where there is considerable supply yet few takers.
An entrepreneur in the city who did not want to be named had bought a two-bedroom flat three years ago in Malleshwaram, north-west of Bangalore, for Rs29 lakh. He is trying to sell his property. “I am getting about Rs34 lakh for it now, but it’s almost 20% less than the rate even six months back. I want to sell it and invest in a bigger apartment but am waiting for prices to increase,” he says.
Such investors may have to hold onto their properties for a longer period as prices will continue their slide in the coming months, experts say. Resale prices are likely to fall by another 15%, according to Pankaj Renjhen, managing director at Jones Lang La Salle Meghraj, property consultancy and brokerage firm.
Propmart Technologies, a Bangalore-based real estate services provider, is organizing a resale property fair where about 120 such properties will be up for grabs. “We hope to facilitate resale transactions in a market which has otherwise been dull for some time now,” said R. Balaji, chief executive, Propmart Technologies.