New Delhi: A decision by DLF Ltd, the country’s biggest realty firm by market value, to reduce prices of its apartments in Chennai and Bangalore by between 10% and 30% could trigger a wider correction in what is still an overheated market, according to analysts and consultants.
The DLF move will force other realtors to cut apartment prices in not just new projects, but also at under-construction developments, they say.
Such price reductions could be by as much as 25-30% depending on the developer and the location of the project. Until now, apart from isolated instances of sharp price reductions in some projects, the correction has been limited to 10-15% in the real estate market. Securities firms such as Goldman Sachs have forecast a drop of as much as 30% in property values without specifying by when.
The 10-18% price cut in DLF’s Garden City project in Chennai was prompted not just by tepid sales of apartments in the development, but also by threats of around 600 buyers to exit the project if the developer did not reduce prices. The project has around 3,493 apartments.
In Bangalore, DLF has slashed prices by one-third to Rs1,850 per sq. ft for one of its new projects, Westend Heights. The 80-acre property will come up with 700 flats in two years.
In Hyderabad too, last month, DLF repriced a project, the Summit. The per sq. ft prices that were to open at Rs4,000 have been slashed to Rs1,850 for a 1,760 sq. ft flat and to Rs2,000 for a 1,185 sq. ft flat in the project.
“DLF is a good quality developer so it is not like they are reducing prices for poor quality houses,” said Unmesh Sharma, an analyst at Macquarie Research. “If DLF, the market leader, is reducing, developers in individual micro markets will have to reduce prices.” Sharma expects a 25% price reduction on average depending on the location.
Another developer, Parsvnath Developers Ltd, says it has already reduced prices on a project-to-project basis. “I can’t tell you the percentage reduction but we have reduced prices,” chairman Pradeep Jain said. “In the case of new projects we are coming out with affordable housing in the Rs15-30 lakh range, so that is a price reduction.”
Unitech Ltd, India’s second-largest developer by market value, said it did not want to comment on price reductions.
One expert said DLF’s decision to extend the price reduction to buyers who had signed in at a higher price would help boost consumer sentiment. “They are basically telling their buyers that if they buy from DLF, even if prices come down in the next six months, buyers will benefit,” said Anshul Jain, chief executive officer-India, DTZ International Property Advisers. In new projects, a 35% decline in prices is warranted, he added.
Jain expects the residential real estate market to bottom out by the middle of the year as demand revives with lower prices and easier financing.
Another industry consultant said there was scope for reduction in prices of in-construction projects where buyers had not signed an agreement, but only paid a booking amount that is typically 10% of the price of the apartment.
“A lot of buyers are talking of exiting from projects because they have only paid the booking amount and not signed any agreement with the developer,” said Aditi Vijayakar, executive director, residential, Cushman and Wakefield India. “Wherever registration of apartment has taken place it is not possible to reduce prices for existing buyers.”
The amount of reduction in prices will also depend on the stage of construction of the project, she said.
The reduction in prices will have an impact on profit margins, DTZ’s Jain said. “Developers will have to realign margin expectations...in the next three-five years margins will be normalized and we could see a standard margin of 15%,” he predicted.