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Look for discounts, but be wary of project delays

Look for discounts, but be wary of project delays
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First Published: Wed, Nov 30 2011. 11 05 PM IST

Photo: Mint
Photo: Mint
Updated: Wed, Nov 30 2011. 11 05 PM IST
Though the traditional festive season offering discounts has got over, there are still opportunities in the market for prospective homebuyers. Owing to execution challenges developers are facing, you may still manage to get a discount on the published price if you negotiate well. The Indian real estate industry is finding itself in the midst of problems. Here’s a list and what they mean for you.
Overcommitment
Photo: Mint
A project typically takes two to three years to complete. While earlier projects are still not complete, developers have announced more and it is unlikely that they would meet the delivery deadlines in this time span. The purpose of launching projects is gathering initial capital through pre-launch sales.
Says Samir Jasuja, founder and chief executive officer, PropEquity Analytics Pvt. Ltd, a Gurgaon-based property research firm, “Steep increase in commitments as compared with delivery in the past stands increased for the top 11 cities put together.” According to data provided by PropEquity, there is an increase of 88.6% in the residential space committed for delivery in 2011-2013 as compared with the space committed for the period between 2008 and 2010.
Rising inventory
The inventory, or the unsold stock, in the apartment space is piling up and is expected to go up further. A report from Nirmal Bang Institutional Equities says that inventory level is likely to go up.
Slowing sales: Due to inflationary pressure and rising interest rates, homebuyers are staying away, decelerating sales. “The environment is negative for developers. Going forward, the only solution is that developers start selling and there has to be some signal from developers for correction in prices,” says Gulam Zia, national director (research and advisory), Knight Frank India.
Sale of new under-construction properties has taken a hit. The total absorption of the units have declined 22% (lowest since December 2009) with Bangalore, Mumbai, Gurgaon and Noida registering declines of 7%, 24%, 27% and 27%, respectively, according to a report by Kotak Institutional Equities Research released in September.
Other factors
Huge debt: Most real estate companies have huge debt on their books. According to brokerage firm, Edelweiss Securities Ltd, the net debt burden of 11 real estate companies in India has risen 19%, to Rs40,300 crore in the last 12 months, as on 30 September.
Rising raw material costs: Other factors such as rising cost of construction and labour that affect the input cost of developers are adding to developers’ woes.
Funding sources shrinking: Moreover, with banks becoming more cautious in lending to the real estate sector, options of funding for construction have also become limited. As a result, developers are now looking at other means of fund raising such as private equity funding, qualified institutional placement of shares. These alternatives come at a cost higher as compared with bank loans.
“Most developers are cash strapped and are facing severe funding problems,” says Jasuja.
What it means for you?
Says Ashutosh Limaye, head (research and real estate intelligence service), Jones Lang LaSalle India, a property consultant firm, “It may be a good time to buy, as developers are ready to negotiate on the marked price. Also, inflationary pressure and challenges will keep a check on property prices in the coming months.”
If you are buying a flat in a new launch and under-construction project, chances are you will get significant discounts. “New launches and under-construction properties are coming with a discount of in the range of 25-30%,” says Zia. But watch out for possible project delays.
Ready properties or those nearing completion, which are usually up for resale, may also offer opportunities in case of piling inventory. Says Zia, “This category remains the flavour among prospective property buyers.” The risk of project delays gets reduced here but prices are usually high.
devesh@livemint.com
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First Published: Wed, Nov 30 2011. 11 05 PM IST
More Topics: Real Estate | Flats | Housing | Discount | Debt |