Any big correction in real estate prices can be ruled out

Shishir Baijal, chairman and managing director, Knight Frank India, talks about demand-supply mismatch

Ashwini Kumar Sharma
First Published19 Aug 2015, 07:54 PM IST
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Knight Frank India, a real estate advisory, recently released the third edition of its half-yearly report on the real estate sector in India, in which it analysed the performance of residential and office markets in major cities in the first half of 2015. It also released its Real Estate Sentiment Index for the April-June quarter of 2015, along with Federation of Indian Chambers of Commerce and Industry. Both, the report and the index, indicate that there is a substantial decrease in demand and supply in the residential segment. Shishir Baijal, chairman and managing director of Knight Frank India shares his views on the prevailing conditions in the real estate market.

What is your take on the prevailing demand in the residential housing segment?

Residential real estate market is muted all over India. Compared with the first half of the previous year, the current year has been more drastic, both in terms of demand from homebuyers or project launches—both are substantially down. This is one of those times when perhaps supply has fallen faster than demand. However, this is also good news as it will bring down unsold inventory.

Why is the demand low?

There are two types of demand: investor demand, and end-user demand. If you look at investor demand, property is not their primary choice anymore. This is due to muted price appreciation, high level of unsold inventory, and the fact that there are other more lucrative financial instruments to choose from. Earlier, there weren’t any options as the equity market was not performing.

You are now left with only end-users in the market. The end-users consider two things when buying a property. One, it must be affordable, and two, they have to be confident that the product will get completed in time. So, at present, in some cases, people are finding it unaffordable—not only in terms of price points, but also interest rate and other aspects, which are too high to be in the range that they want.

People are also wary of developers, and are buying only from those developers that complete projects on time and deliver quality.

Does that indicate a demand-supply mismatch?

Absolutely. That is the reason why unsold inventory has reached such high levels. It is also why, for the first time in six months, demand has exceeded supply. This has two outcomes. One, of course, is the fact that unsold inventory will come down. Developers have held back their launches to get unsold inventory out—which is a good thing to do. However, in the future, for a healthy business, this cannot continue. You need to have more projects launched, and reduce the inventory through higher demand. Currently, supply has come down drastically and demand, instead of picking, has also come down, but not in the same proportion as supply. This is bringing down inventory. Though I do wish that demand and supply were going up instead.

There has been a slowdown in the sector for a while now and we have been hearing about falling demand and price corrections. However, real estate prices hardly ever fall. Why is that so?

Here, too, there is a mismatch because people are finding it unaffordable (to buy). Theoretically, if prices come down, perhaps the demand can increase. But I’m not sure if developers have any leeway left now for reducing prices. This is because input cost has increased quite a lot over the past few years— be it cost of labour, construction and material, or even the historical cost of land itself, which is very high. It does not look like there is any scope left for a serious correction in prices. The sector may continue to get some amount of sops, but any big correction can be ruled out.

Project delays are a serious cause of concern for home buyers. The average delay in handing over the project has gone beyond 2-3 years. What impact will this trend have on demand?

People are now reluctant to buy based on construction plans. This is because they don’t know if the project will take off; there is uncertainty regarding project completion. And even after completion, people are doubtful of getting occupancy certificates so that they can move in. This is why the price points and demand for projects from developers with good track records are increasing.

The real estate bill [Real Estate (Regulation and Development) Bill, 2013] will put a lot of onus on developers to ensure that they deliver what they promise. Because of the penal provision, if they fail to do so, the bill empowers buyers to take this (delay) into account.

What is your outlook for the real estate sector, especially residential, for the next decade?

We have seen some tough times over the past year or so, and this is likely to continue for some time. It’s a falling knife and you don’t know at what stage it will hit the bottom. However, in the long term, there will be a turnaround.

There is a substantial shortage of housing in the country. There is pent up demand, and the economy is growing strong. Over a period, hopefully with things getting sorted out at the Centre and once reforms actually start taking place, growth should touch double digits. India can then become the most favoured investment destination for foreign investors. The long-term story is positive; it’s a question of how we handle the short-term blips, and the problem of short-term blips has become quite severe. We will have to see how it gets resolved over the next year or two.

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First Published:19 Aug 2015, 07:54 PM IST
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