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Property prices heading north on pre-sales to investors

Property prices heading north on pre-sales to investors
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First Published: Fri, May 21 2010. 12 47 AM IST

Rising capital value: An artist’s impression of Oberoi Realty’s high-end project.
Rising capital value: An artist’s impression of Oberoi Realty’s high-end project.
Updated: Fri, May 21 2010. 12 47 AM IST
Bangalore: Unitech Ltd’s intense pre-sales pitch in October to investors for a part of its residential project in upscale Worli, Mumbai, is paying off in more ways than one—the company has been able to collect a tidy sum while the price benchmark has been pushed higher.
Rising capital value: An artist’s impression of Oberoi Realty’s high-end project.
Investors have bought at least 80% of the project, fetching Unitech around Rs315 crore that it can use for construction and other needs. Around one-fifth of them have already resold their purchases at a profit, pushing up prices from Rs12,000-12,500 a sq. ft during the pre-sales to Rs19,000-20,000 a sq ft., the likely price tag for actual home buyers when Unitech opens the rest of the project for them later this year.
A similarly brisk rally is pushing up prices in several other projects in Mumbai and Delhi—a trend last seen in 2005-07, just before the bubble burst as liquidity dried up amid the financial crisis.
Oberoi Realty Ltd has collected around Rs500 crore through pre-sales for its high-end project Oberoi Exquisite in suburban Mumbai, it said in a release. The project will be officially launched on Friday with prices 20% higher.
While this makes buying homes tougher for actual buyers, who remain cautious, for developers, pre-sales offer a cushion of liquidity. At the peak of the realty boom, at least 70% of property deals were transactions with investors.
Unitech didn’t respond to an email sent on Wednesday.
“What is pushing prices is that investor advances are generating liquidity for developers, after which they are demanding a certain premium from buyers and aren’t willing to negotiate,” said Amit Goenka, national director, capital transaction, Knight Frank India, a property advisory. “Investors can also make a neat 20-30% margin when they are exiting because the market is on an upswing.”
A 2010 Global Market Perspective report by property advisory Jones Lang LaSalle Meghraj says buoyant investor sentiment and ample liquidity in Asian markets have sparked more transactional activity, leading to rising capital values.
“With enough cash flow in hand from investors, developers can say to buyers ‘this is my price, take it or leave it’,” said K.G. Krishnamurthy, managing director and chief executive, HDFC Property Fund.
In a Rs650 crore project at Nana Chowk, Mumbai, the developer recently collected Rs250 crore from investors in five days by issuing them non- convertible debentures (NCDs) at a coupon rate of 18%. Prices at the project have escalated from Rs17,000-18,000 a sq. ft during the pre-sales six-seven months ago to Rs25,000 a sq. ft, a top executive at the company said, asking not to be named.
Investor exits will be quicker in projects entered into earlier in 2009, when property prices were 25-30% lower, said Goenka.
Being over-dependent on investors is not without pitfalls, say analysts.
“Besides leading to a price bubble, a property often keeps changing hands from one investor to another creating a false sense of appreciation,” said a senior analyst at a Mumbai brokerage, who didn’t want to be identified. “If investor advances get staggered or delayed, construction of the project may actually get affected because it is dependent on that cash flow.”
In April, Usha Breco Realty Ltd sold only 50 apartments to investors at its Boisar project near Mumbai, where the homes were priced at Rs14-17 lakh. The company inserted an 18-month lock-in period to discourage quick exits by investors, said chief executive Uday Dharmadhikari.
Still, Usha Breco will raise prices by 7% when it launches the project to actual home buyers in June.
madhurima.n@livemint.com
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First Published: Fri, May 21 2010. 12 47 AM IST