Photo: Indranil Bhoumik/Mint
Photo: Indranil Bhoumik/Mint

Is real estate sluggishness going away soon? Not really

While some real estate experts say market is reviving, others say not anytime soon. If you are looking to buy a house, this is your chance to buy a ready house at discounted prices

For some time now, the buzz has been that real estate prices have bottomed out and going forward they will start moving upwards. However, the buzz—created largely by supply-side stake holders such as real estate developers and brokers—has failed to attract homebuyers. Even the ongoing festive season discounts and offers have not been able to attract any significant number of buyers. Samantak Das, chief economist and national director - research, Knight Frank India said, “There is a significant fall in optimism due to lack of homebuyers in the market. Transactions are even lower than the number of deals that happened during previous year’s festive season, which were itself lower." According to Ficci-Naredco-Knight Frank India Sentiment Index (Q3 2017) released on 7 November, “the future sentiment score has reached its lowest point (55) in Q3 2017—the lowest over the 13 quarters, indicating a significant decline in optimism pertaining to the sector’s future performance."

The real estate sentiment index is based on a quarterly survey of key supply-side stakeholders, which include developers, private equity funds, banks and non-bank financial companies (NBFCs).

Over the last few years, not only high property prices, but long project delays and bad quality of delivered projects were few of the other reasons that resulted in a gradual decline in the number of transactions in the sector. Apart from that, demonetisation, implementation of the Real Estate (regulation and development) Act, 2016 (RERA) and Goods and Services Tax (GST) has further hit the market.

Given all these factors, coupled with the lukewarm demand and low sales volume, developers have almost stopped lunching new projects. According to a recent report released by PropEquity, a real estate data, research and analytics firm, “The new home launches dipped 83% across top 8 cities in the third quarter of 2017, from 24,900 units to 4,313 units." The situation is not expected to improve in the near future. According to research report published last month by Crisil Ltd—a global analytical company that provides ratings, research, and risk and policy advisory services—demand for residential property is unlikely to revive in the next 12-18 months as the fundamental problem of lack of end-use buyers is unlikely to change any sooner."

Let’s read more about the current slowdown in real estate market.

The reason

According to a Crisil report ‘Residential market unlikely to look up soon’ dated 10 October 2017, between 2011 to 2017 “initially, demand declined on account of slowdown in domestic economic growth and due to high interest rates; later, sector-specific issues (unaffordability and delayed possession) concerned end users." Some also say that lack of confidence in developers is what is keeping homebuyers as well as investors away. “The type of dent that the sector has received—because of non-compliance of rules, project delays and other by developers—will take long to fade away. Homebuyers are extremely cautious," said Das. Sales did not drop overnight but declined gradually. According to the Crisil report, “Real estate sector in India has been witnessing prolonged sluggishness over the last 6-7 years." The trend is common across India and is not specific to a particular city or location. “Absorption of new homes in the top 10 cities (Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR) and Pune) has slipped at a compound annual growth rate (CAGR) of 8% in the last 6 years. The sector has witnessed a decline in area booked and area launched over the last few years," said the Crisil report.

Apart from the above-mentioned issues, mismatch in demand and supply also had an impact on demand from homebuyers. “Developers have been majorly focusing on mid-category, luxury, and premium-housing projects. This has created a wide gap in demand-supply dynamics, resulting in pent-up demand for affordable housing units and a huge unsold inventory of unaffordable units across most micro markets," states the Crisil report.

In the present market, where there are few takers for the current inventory, developers are not in a position to launch new projects. “Most developers have experienced sluggish sales on their launched projects during the first half of the year. Hence, the focus will be on selling the unsold inventory," said Rushabh Vora, co-founder and director, Sila Group, an integrated property consulting firm.

Not only demand, RERA compliance for new project launches is another reason that is holding back project launches. “Post introduction of RERA, developers cannot launch projects without all the approvals in place," said Vora.

Despite trying their best to hold prices, developers are now resorting to price cuts either directly or by discounts and other offers. According to the Crisil report, “Pressure on residential real estate prices across top 10 cities was clearly visible during H1 2017. While several developers offered upfront per square feet discounts, a few large developers bundled financing schemes and reduced interest schemes to offer ‘all-inclusive house prices’. Homebuyers, in many cases, were also offered indirect benefits such as reduced floor charges or premium location charges. Taking into account these aspects, the effective price correction was 5-10%."

“While earlier, new projects were launched at lower price, now developers are bringing down prices even in already-launched projects," said Das. Vora agreed, “Some developers are already offering attractive discounts to make up for sluggish sales in the first half of the year." We can expect discounts but on unsold inventory of already launched projects, added Vora.

Given that the festive season this year too will continue through December and so would the offers and discounts being offered by the real estate developers, some experts believe that sales will improve. “Yes, we can expect an improvement in the market this festive season, especially after the turbulent but necessary regulatory overhaul. To the backdrop of a far more transparent and accountable real estate industry, a plethora of ready-to-move-in units, very attractive schemes from developers and competitive home loan rates, transactions are expected to pick up," said Anuj Puri, chairman, Anarock Property Consultants.

However, some also doubt whether developers would get any relief in the near future. “Respite is unlikely in the near future as investors are out of the market and end users continue to wait for the right opportunity," said the Crisil report. “No sign of recovery at least up to next 6 months or so," agreed Das.

If you are planning to buy a house, take your time to find a suitable property. Do your research well, and go only for completed projects or those listed with RERA.

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