Speculators exiting real estate market

Speculators exiting real estate market

Stifled by high lending rates and falling, or at best stagnant real estate prices, speculators who ruled the market as recently as six months ago have virtually disappeared and that’s hurting business, say real estate developers.

Speculators are short-term investors who hold a property for a few months and cash out as soon as prices rise.

For some firms, such speculators accounted for almost half of the properties sold.

That’s changing now. For Parsvnath Developers Ltd, short-term investors now account for 10% of properties sold, down from as much as 40% a few months back.

“It has (short-term investors) certainly reduced to less than half of what it was six months back," said B.P. Dhaka, the spokesperson for Parsvnath. “We are not seeing the bumper sales that we saw earlier, where the entire property was booked on the first day of launch itself," he added.

Even six months ago, Gurgaon, Greater Noida and Indirapuram, all suburbs adjoining New Delhi, were speculator-driven markets. It wasn’t unusual for a flat in these areas to appreciate by 25% in value—in a month. Then the slowdown kicked in.

In the past few months, property prices have fallen by up to 20% in some cases, especially in Gurgaon and Noida where supply of apartments exceeds demand. In the past, only part of this demand was fuelled by people buying houses to live in on the back of a booming economy (and the consequent rise in salaries) and tax incentives that favoured homeownership. The rest came from a new class of buyers—speculators out to make a quick buck.

The demand made property prices rise by between 30% and 300% in metros and smaller cities over the past two years. Fearing a housing bubble, the central bank cautioned against indiscriminate lending to the real estate sector. That, and a series of increases in interest rates that pushed them to a five-year high, have helped arrest runaway prices and rein in speculative buying.

“There is a perception among short-term investors that there has been a price correction," said Dhaka. “Short-term investors are, therefore, shying away from the market."

Real estate developer Eros Group has seen the proportion of short-term investors fall from 45% of all buyers to 10-15%. “Investors wanted short-term gains," said Kaushik Sengupta, vice-president, Eros Group. “But now since they are not getting much price appreciation, investors are not buying property for quick gains."

The result is lower sales. Parsvnath and Eros have both seen sales decline by 5-10%.

Short-term investors are also important to real estate firms for another reason, according to Arvind Parikh, chief financial officer of Omaxe Ltd: they often act as financiers for these companies. “They would invest in property at the time of launch and sell it after the project was completed, when the prices increased," he said.

About 40-50% of Omaxe’s customers used to be short-term ones. The number has now reduced by 10-20 percentage points, Parikh said, adding, “It is difficult to put a number to it, but sales have been affected."

However, the exit of speculators will likely lead to a more stable market in the long run. “Today it is a users’ market. Investors are all gone," said Eros’ Sengupta. “We may not have short-term investors but in future we will see more demand from actual users."