Property prices continue to defy economic logic

Property prices continue to defy economic logic

New Delhi: Is property the new gold in India? Despite high interest rates, tight liquidity and weakening economy, residential real estate prices refuses to come down. Except in some of parts of Mumbai, prices in major real estate markets such as the National Capital Region, Chennai, Bangalore and Pune are either holding up or steadily inching up.

Sandipan Pal of Motilal Oswal said in a note after visiting a property exhibition in Mumbai:

The prices of most new launches showed no sign of moderation and are at only 10-15% natural discount to comparable projects in advanced stages of construction.

Even though volumes are falling most property developers are jacking up prices and subsequently giving discounts on them to woo the customers. So, on a net basis, current market rates are either equal to or higher than prices six months ago.

Hansraj Singh of IDBI Capital said in a note after visiting, presumably, the same property exhibition as Pal:

Most developers continue to raise prices despite lower volumes. Quoted rates are up by around 10% in the last six months and by around 20% in the last one year. The price hikes are part of developers’ well thought out strategy to protect margins in a falling market. Sensing that a slowdown was imminent, most developers started increasing their quoted prices from Jan-2011 onwards. The idea was to offer discounts on a higher base, so that the profit eventually remained the same.

One plausible reason property developers cite for firm prices are spiraling costs. With construction materials (cement, fixtures) and labor costs still ruling at peaks, it is becoming difficult for property developers to cut prices. Adi Godrej, chairman of the Godrej Group, in an interview to Business Standard, says the same.

Param Desai of Nirmal Bang said in a note:

Transaction volumes in 1QFY12 declined across cities on sequential basis whereas cities like Mumbai, Gurgaon, Hyderabad and Kolkata reported negative growth YoY, mainly due to subdued project launches, the lowest since March 2010……………..We believe that as of now the structural demand exists at lower price points and mortgage rates, but developers’ reluctance to cut prices can prolong the recovery.

Nevertheless, investors are choosing to disregard that possibility for the moment. Firm prices are helping real estate stocks. For now. Since the beginning of October, the BSE Realty index rose by 6.3%. While Sensex in the same period rose by 3.4%, stocks such as DLF, Sunteck Realty, DB Realty and Parsvnath Developers gained over 7.4% each.