India’s seventh largest city, Ahmedabad—also known as the trading hub of the country—may be in for a rocky ride in terms of its real estate market.
In a sign that real estate prices may have shot up too far, too soon, the market buzz is that land deals are running into trouble. According to estimates by some real estate dealers and builders, deals worth Rs600 crore or more have been either cancelled or put on the back burner in the last three months.
“There have been more than 100 deals that have got cancelled in the last three months. The developers feel that the prices have skyrocketed artificially and it would be unviable commercially to proceed with their projects,” says N.K. Patel, president of the Federation of Residential and Engineers and Developers Association of Gujarat.
Real estate prices in many parts of India have swelled as much as 300%, especially in the top cities as a roaring stock market, buoyant economy and higher pay motivated people to buy homes or invest in second ones. Still, a rapidly declining stock market, higher rates for home loans and near unaffordable housing is slowing down buying.
Residential projects have taken a bigger hit than commercial and retail projects, especially in the peripheral areas of the city
In Ahmedabad, real estate prices have risen three times in three years, but at varying levels in different parts of the city.
The real estate players broadly divide the business in Ahmedabad into five tiers. Tier 1 comprises core land bank in commercial hot spots within city limits, such as on CG Road and Ashram Road. Emerging areas such as Satellite, SG Road, Prahladnagar, opposite the Gujarat high court, and Science City on the outer parts of the city come under tier 2. Most of the residential apartments are coming up in these areas.
Tier 3 comprises the area between Sarkhej Gandhinagar Highway and the new 76km 200ft Sardar Patel Ring Road that encircles the city. Tier 4 can be classified as the areas within 2-3km of this Ring Road and villages such as Ghuma, Shilaj and Bopal. Tier 5 comprises land available in areas up to 12-15km from the new Ring Road.
While the city’s hot spots will always be in demand, it’s the peripheral areas that are now taking a hit.
There are some 40 villages in tier 3 and tier 5 of the city’s real estate landscape. This had attracted the interest of many builders and the land prices here ranged between Rs1,500 and Rs3,500 per sq. ft.
But problems, real estate players say, have started showing up with deals in these villages as most of the projects that came up here were either high-end bungalows or land deals that happened between high networth individuals and big builders.
“The supply of bungalows in tier 3 is much higher than demand and most of the land deals were merely speculative,” Patel claims.
Construction companies involved with commercial, retail and residential properties in the city say the softening in prices happened because the land being sold was at much higher prices than it was worth as land prices in Ahmedabad witnessed a sudden spurt rather than a gradual rise.
A senior vice-president with one of the leading infrastructure companies in the city, who did not wish to be identified because it’s a sensitive issue, says many big players are now waiting for prices to fall before they get into land deals and the decline may be at least 25% in the next three-six months.
If the builders are finding it difficult, Shrenik Shah, chief executive (commercial) of Space Management Ltd, a leading real estate consultant in the city, maintains that with limited resources, the situation is tenuous for most of the middle-class Indians.
“As per investment management firm Fidelity, over 95% of the Indian middle class has an income of less than Rs5 lakh per annum. If such a large chunk of people have such less purchasing power, how can you sustain the boom in the long run,” he asks.
He says the first signs of decline in the residential projects in the city came from discounts and freebies that are starting to find their way into builder offers.
A section of real estate players, however, say the commercial market is still somewhat insulated from the decline thanks to the rush for commercial space with brands such as Subhiksha, Reliance Fresh, Trumart, Vishal Megamart, Big Bazaar and Pyramids coming to the city.
“Land prices for commercial retail have not been showing any signs of fatigue but the only thing is that the number of deals may have gone down,” says Shrenik Shah.
The view reflected in the number of deals that are getting registered with the registrar of properties in the city. There are seven registrars and on an average 50 property deals used to be registered with them every month till about three months back. Today, that figure has come down to just about a dozen, say sources. “The golden period is over and we are into the silver age as far as the real estate market in Ahmedabad is concerned. If this trend continues, the bronze age is not far in the future,” says Patel.