You may get a bargaining edge in tier II cities

You may get a bargaining edge in tier II cities

If you are looking to invest in a house, there is opportunity in tier II cities, especially cities surrounding the metros. Prices are stabilizing, according to data provided by research firms, and developers are sitting on huge inventory, with residential and commercial units available with real estate companies. This would give you a bargaining edge over the builder when striking a deal.

Here is why you can consider investing in smaller cities:

Stabilizing rates

According to data provided by Gurgaon-based property research firm PropEquity Analytics Pvt. Ltd, prices that were on the rise since last year are now stabilizing in the suburbs of large metros and tier I cities.

For the last six months, builder rates of apartments have remained in the range of Rs1,500-4,500 per sq. ft in Gurgaon, Noida, Navi Mumbai, Thane, Mangalore, Pune, Indore and other cities. And it is expected to remain so. Says Samir Jasuja, founder and CEO, PropEquity, “Prices in smaller cities will remain stable in the coming months. I do not see any further rise in property rates in tier II cities because of factors such as rising policy rates and significant drop in absorption (sale)."

Supply is exceeding demand

One of the reasons behind stabilizing of prices is the piling of inventory. Rapid urbanization in these cities is bringing in more and more developers in these cities, which have seen many launches in the recent past. For example, from the second quarter of 2010 till 30 June this year, Gurgaon and Navi Mumbai have seen the launch of 34,452 units and 31,568 units, respectively.

“Despite a high number of actual users that these cities have, demand has slowed because of the huge supply. Supply has outpaced demand," adds Jasuja. This has given you more options.

Discounts on new launches

In the past year, there were many new launches in tier II cities, but the trend is set to halt in the coming months. According to a study by property consultants Jones Lang LaSalle India (JLL), high interest rates, increase in vacancy and a demand slowdown will impact the earnings of developers. A natural consequence will be slowdown in construction activity, leading to fewer new launches.

Already, the activity has diminished. The few new launches that are in the pipeline are offering pre-launch discount of 10-15% discount over the pricing of other projects in the same area, JLL India’s study states. For instance, the recently announced pre-launch rate of Delhi-based real estate firm Chintels India Ltd’s project in Gurgaon was Rs3,950 per sq. ft, when the prevailing market rates in the area are in the range of Rs4,200-4,400 per sq. ft. Another developer, Imperia Structures, has launched residential apartments at Sector 37C, Gurgaon, at Rs3,500 per sq. ft. The company is offering an inaugural discount of Rs250 per sq. ft.

Therefore, look out for new launches and inaugural discounts. The builder may give a bigger discount over and above this announced rate if you bargain properly.

Watch out for

Delay in delivery: A slowdown in construction may also mean a delay in delivery of apartments. So, existing homebuyers may want to check out with their builders. Further, as the inventory increases, funding shortage may also affect delivery time lines.

Says Arjun Puri, director, Puri Construction Pvt. Ltd, a Delhi-based developer firm, “Rising cost of labour and construction is a major challenge for most developers already battling issues such as high debt and liquidity crunch."

Moreover, increasing construction costs are expected to hit the real estate sector, according to a recent study by PropEquity. The study estimated that the delivery of 480,000 residential units across affordable, mid and luxury housing segments, scheduled for completion during 2011-13, will be delayed in 11 cities. The cities mentioned in the study are Gurgaon, Noida, Greater Noida (north), Mumbai, Navi Mumbai, Thane, Pune (west), Bangalore, Chennai, Hyderabad (south) and Kolkata (east).

Correction round the corner? Over the next 24-48 months, most of the apartments under construction at present will be delivered. But with banks and institutional lenders becoming more cautious about lending to the real estate sector, along with prices being high, this is the time when highly investor-driven investment markets witness a correction.

While new launches may have reduced rates, existing residential stock may see a small correction in property rates within the next six months. Says Ashutosh Limaye, head-research and real estate intelligence service, JLL India, “Corrections are likely but margin of correction will be small."

What should you do?

Says Puri, “The period of high property rates is followed by a period of stable rates. From this point, either the market falls or rises, depending on factors such as interest rates, market scenario, and demand and supply." Invest now to gain from the capital appreciation in future.