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Wheels slowly turn in homebuyers’ favour

Lower home loan rates and high inventory gave buyers more power. Real estate bill could take this much ahead

Homebuyers stayed away from the real estate market in 2015. This is evident from the low number of property transactions, one of the reasons for which is prevailing high price points. Even Raghuram Rajan, governer, Reserve Bank of India, said at an event that if real estate developers lowered prices and cleared the unsold stock, it would help pick up demand.

Apart from high prices, long project delays and low quality of delivered projects led to homebuyers avoiding a buy decision.

There were, however, a number of factors—short-term and long-term—that worked in buyers’ favour.

Interest rate cut

In 2015, Reserve Bank of India (RBI) reduced the repo rate by a total of 125 basis points to 6.75%, bringing it to the lowest level in the past four years. One basis point is one-hundredth of a percentage point. The rate cuts by RBI led to lending institutions reducing home loan interest rates, which made borrowing more affordable for homebuyers. “Rate cuts by the RBI since the beginning of 2015 has been a promising move for the real estate sector," said Brotin Banerjee, managing director and chief executive officer, Tata Housing. Agrees J.C. Sharma, vice-chairman and managing director, Sobha Ltd.: “The few repo rate cuts certainly came as a boon this year for most buyers as interest rates came down. It helped perk up the sentiments."

But this, too, did not do much to improve property transactions. Many homebuyers continue to find property rates too high. “Despite the government announcing multiple rate cuts in the year, the consumer has not been in a rush to buy," said A.S. Sivaramakrishnan, head, residential services India, CBRE South Asia Pvt. Ltd.

Another issue was that while some banks reduced their home loan rates, it was not to the extent that RBI had done. Most banks reduced their base rates only between 40 and 70 basis points. For instance, State Bank of India offers an interest rate of 9.55% to salaried individuals on home loans compared with 10.15% during the same period last year.

Capital values stable

Poor sales, not just this year but also in previous years, led buyers to expect a drop in prices. However, that did not happen (except in a few pockets of certain cities) as developers held on to their unsold inventories and did not reduce prices in general. “Property prices remained stagnant due to heavy inventory and lukewarm demand," said R.K. Arora, chairman, Supertech Ltd.

However, the few projects that were launched during the year were priced more affordably.

Moreover, to make the ticket size of apartments more affordable, developers tried some innovative methods. “Developers have been decreasing apartment sizes to suit a buyer’s affordability," said Anuj Puri, chairman and country head, JLL India. According to an analysis by the real estate consultancy, in the past few years, developers have reduced the size of apartments by as much as 26.4% in Mumbai Metropolitan Region (MMR), and 23.7% in Bengaluru.

Apart from that, many flexible payment plans are offered in which initial payments were kept low, maybe 10-20% of the apartment’s cost, and the rest are spread over the construction phase. Many developers offer schemes in which a large portion of the payment has to be done at the time of possession.

The aim of all these steps is to woo buyers with affordable options of payment.

Fewer projects launched

Most developers tried to clear their existing inventory rather than launch new projects. Even during the festive season, very few projects were launched. “Like the previous two years, this festive season too did not see any improvement in sales and new launches," said Shishir Baijal, chairman and managing director, Knight Frank India. But some claim to have had successful launches. “Tata Housing launched 5-6 projects this fiscal, each of which received an overwhelming response," said Banerjee.

More focus on selling older inventory and few new launches helped some developers post sales in certain cities. Homebuyers, too, are being careful of what they buy. “They are now more concerned about the brand. Developers with credible reputation of delivery and quality are still able to sell their properties," said Vishal Gupta, managing director, Ashiana Group.

PE interest

While retail buyers shunned projects, there was renewed interest shown by private equity (PE) funds. According to a recent report by Cushman & Wakefield, a global real estate consultant, “PE investments in real estate reached $2.8 billion (183 billion) during the first nine months (January-September) of 2015, the highest since 2008."

Funds from PE investors, which had dried up after 2012, showed a significant increase during the year, based on future prospects. As per the report, “Post the formation of a stable, growth-oriented government in India, investor confidence has renewed and PE funds and financial institutions have started making investments at entity level."

Moreover, unlike the earlier trend when PE funds were more interested in commercial properties, this year the focus is on the residential segment. “Residential sector attracted majority (77%) of total PE investment volume between January and September 2015," stated the report.

In fact, both foreign and domestic funds invested in real estate this year. According to the report, “Foreign funds led the investment activity (107.4 billion or $1.7 billion) with nearly 59% share in the total investment volume year-till-date 2015, followed by domestic funds which had about 41% share (75.6 billion or $1.2 billion)."

This could mean good news for retail buyers because with money now available, at least to some developers, project execution time is expected to improve.

Real estate bill

The real estate bill, which has been pending since long, crossed a major hurdle in 2015. Several amendments to the Real Estate (Regulation and Development) Bill, 2015, suggested by the select committee of Rajya Sabha have now been accepted by the Cabinet. The bill will be applicable to both residential and commercial segments and to properties or projects that are more than 500 sq. mt in size or have eight ore more flats. The bill also includes mandatory registration of all real estate agents who intend to sell any plot, apartment or building, with the real estate regulatory authority. All projects that are under construction have to be compulsorily registered within three months of the regulator being set up. The builder will also need to maintain an escrow amount, where 70% of the construction cost has to be deposited, and which can be used only for the specific project. Money received from a homebuyer has to get deposited in this account within 15 days of receipt. There are many other such buyer-friendly provisions in the bill, which is pending in Rajya Sabha now.

Its passage will give a big boost to homebuyers’ confidence, which could trigger renewed interest in real estate.

Mint Money take

There is a lot of pent up demand for residential real estate, and most homebuyers are waiting for things to settle down. But concerns regarding timely and quality delivery of projects remains. If you plan to buy a house soon, choose a developer with a good track record and stay away from under-construction projects, especially those running way behind schedule.

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