Pradeep Gaur/Mint
Pradeep Gaur/Mint

Project delays to continue in the real estate sector

If you are planning to buy an apartment, look at projects that are complete or will be so within 6-12 months maximum

If you are hoping that the worst is over for the real estate sector and that things will improve from now onwards, think again. According to a recent report by Moody’s Investors Service, “Cash flows will remain weak, sales will remain low, project launches will remain muted and prices will remain largely stagnant, in the next 12 months."

For the past few years, the number of property transactions has been reducing, which is affecting developers’ cash flows. Large inventory has piled up due to mismatch in demand and property prices. “The slow offtake amid subdued demand has led to a significant increase in unsold inventory across markets, which prevents developers from raising prices and results in lower sales volumes and cash flows," said the Moody’s report.

Other industry participants echo the thought. A recent study by Jones Lang LaSalle India stated that unsold inventory is continuing to rise, with National Capital Region (NCR) and Bengaluru leading the list. “Bengaluru has the second-highest unsold inventory among Indian cities, where the number of unsold housing units stood at around 84,000 in the second quarter of 2015. The city has surpassed Mumbai in the unsold inventory segment," it stated.

Such data shows the severity of the situation as Bengaluru has for long been seen as an end-user driven market, whereas NCR and Mumbai are traditionally seen as investor-driven markets. The garden city being at the top of the list of cities with high unsold inventory reflects that end-users are finding it difficult to buy.

The situation is similar throughout India. As per a quarterly report ending June 2015 from PropTiger, besides Mumbai, Bengaluru and Noida, which were the top three cities with unsold inventory, Pune had 72,464 unsold units followed by Chennai with 45,563 units.

The rationale

The main reason behind the situation is unaffordable prices. “Sales volumes will remain weak because housing prices are unaffordable for many consumers," said the Moody’s report.

In fact, in a recent interview with Mint, Shishir Baijal, chairman and managing director, Knight Frank India, had said that there is a mismatch between demand and supply and, therefore, homebuyers are finding it unaffordable. Theoretically, if prices come down, perhaps demand can increase. However, said Baijal, developers may not have room left to reduce prices.

“Instead of reducing prices to drive sales, developers will likely continue to modify their products and offer promotions," stated the Moody’s report.

“We have seen that average apartment sizes reduce by 25% to make the ticket size more affordable and attractive to match demand along with multiple payment schemes, freebies, extra space within the same cost and so on," said Arvind Kapoor, director, India operations-residential, Colliers India.

Another reason end-users as well as investors are not buying is because of project delays, which has now gone beyond three to four years in many cases. “Given companies’ stretched cash flow positions, we expect the execution delays to persist," said the Moody’s report.

Low sales and piling inventory will only put further pressure on project launches, which has already dropped by more than 50% in recent times. Experts said that developers are now focusing on clearing existing stock rather than launching new projects.

Regulatory issues are also keeping many home buyers away from the real estate market. With the Union cabinet approving the Real Estate (Regulation and Development) Bill, 2013, the way has been paved for a real estate regulator.

Many say this will bring in much needed transparency into the unregulated real estate market. “A regulator will make a big difference in the real estate sector. It will surely have a large impact on tier 1 markets initially, and then create a standardized framework for other regions to follow same suit," said Kapoor. However, while the real estate Bill is in favour of the end-user, its stipulations regarding stricter receipts and use of cash advances may affect developers’ cash flow.

Mint Money take

If you are planning to buy an apartment, look at projects that are complete or will be so within 6-12 months maximum. Though under-construction properties are relatively cheaper than ready-to-move-in ones, you should avoid them as project delays will eat up cost benefits.

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