Home >Opinion >Home costs reducing in some markets, but so are the sizes

End-user homebuyers have been waiting in the wings for home prices to cool off, while high net worth individuals (HNIs) have been capitalizing on the liquidity crunch that developers have been facing in the past few years by buying units at substantial discounts. However, even while end-users might be enthused to buy now as developers are reducing prices on a selective basis in some markets, apartment sizes are being cut to make offerings more affordable. In the more than 50,000 mid-segment units (1- and 2-bedroom-hall-kitchen units) launched in the top nine cities of India (Ahmedabad, Bangalore, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai, Noida and Pune) during the first quarter of 2014, an average 6% reduction in unit sizes was seen. Consequently, though the per sq. ft rates have increased by an average of 1% during the period, the overall price of the apartments or “ticket size" has also been driven downwards by an average of 6% within these cities.

In the past one year (2013-14), the average unit sizes have dropped by 16% in Noida, 12% in Mumbai, 9% in Hyderabad, 8% in Ahmedabad, 6% in Pune, and 3% each in Chennai and Gurgaon. This strategy ensures that the benchmark pricing of the area (per sq. ft price in the area of launch) is not disturbed as far as possible. This is a tried and tested formula that developers have used time and again to generate sales in a sluggish market. It must, however, be said that this tactic is not being employed on a large scale, or in an overarching manner. Rather, it is being employed for some projects in some cities; and more often in emerging and peripheral markets where buyers are more cost-sensitive.

The effort is always to not disturb the benchmark per sq. ft rates. However, in some cases, reduction of apartment sizes is accompanied by a downward revision of the per sq. ft rate as well. For instance, in Chennai and Hyderabad, the rate has reduced by 7%, and in Gurgaon by 30%.

At the same time, even as developers struggled with increased input costs resulting from inflation in cost of raw materials and higher capital costs, the per sq. ft rate in markets have seen only nominal appreciation despite the reduction in unit sizes; cases in point are markets such as Ahmedabad, where the per sq. ft rate has increased by 7%, Noida by 17%, Pune by 4% and in Mumbai by 3%.

Notwithstanding the impact on the per sq. ft rate, for consumers, trimming apartment sizes have been beneficial across markets as ticket prices have reduced and homes have become more affordable. For example, ticket prices have declined by 2% in Noida and in Pune, 3% in Ahmedabad, 9% in Mumbai, 10% in Chennai, 15% in Hyderabad, and a big 32% in Gurgaon.

However, Kolkata and Bangalore are exceptions to this trend. In these markets, unit sizes of apartments have increased nominally (by 3% in Kolkata and by 1% in Bangalore). The per sq. ft rate has also increased (by 14% and 5%, respectively). Correspondingly, the ticket prices have also increased by 18% in Kolkata and 7% in Bangalore. This is indicative of a strong end-user driven market that is catering to the large middle-class population in these cities.

It is clear that the residential sector is now banking on end-user driven demand and hence developers are tweaking products to make them more affordable. It also signals a degree of stress among developers, which is forcing them to launch such products to inject doses of robust sales numbers into their balance sheets. Affordability holds the key right now; end-user buyers have been shying away from making purchases for a long time owing to lacklustre economic conditions and resultant low confidence. They can take a leaf out of HNIs’ books; HNIs have been capitalizing on the cash crunch that has gripped the real estate sector. In a sluggish market, they have continued to buy apartments since it is expected that the real estate sector will start picking up from next year and developers will be less stressed.

Those buyers who have been sitting on the fence to make a purchase will find attractive opportunities. Developers hardly ever announce a rampant discount; it is to be found in mechanisms such as this. This is hardly a long-term strategy, but for the moment, trimming apartment size can work for both developers and consumers.

In the wake of the upcoming budget, the government’s policy measures to promote urbanization, its stance on interest rates, success or failure to contain inflation and provision of tax incentives will be the backbone of decreasing the large demand-supply housing gap in the affordable and mid-segments over the longer term.

Sanjay Dutt, executive managing director, Cushman & Wakefield, South Asia.

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