Rough patch for realty

Property developers in all major cities are battling with significant drop in sales of residential properties due to the economic slowdown and delay in approvals

Real estate industry seems to be entering another trough. Property developers in all major cities are battling significant drop in sales of residential properties due to the economic slowdown and delay in approvals. Mumbai and Delhi, which already witnessed a substantial dip in sales of commercial properties in the past couple of years due to excess supply, are now hit by a slump in sales of residential properties.

According to industry officials, the impact on residential sales till December 2011 was marginal, and developers were betting big on projects to ride out the economic slowdown. However, a sudden fall in sales during the January-March quarter has shattered hopes of an early recovery.

While commercial property sales were affected due to oversupply, the residential segment has been hit mainly due to slow approvals as sales are proportionate to new launches, apart from the inevitable impact of a general slowdown and drop in sentiments.

Lalit Kumar Jain, chairman of Kumar Urban Development, told FC Build sales have dropped in cities, especially Mumbai and Delhi. “In the past 18 months, there were very few approvals for new projects in these cities. Since sales are directly proportionate to new launches, we have witnessed a significant dip in absorption of residential properties.”

Jain says the demand is stable in cities like Pune, Bangalore and Chennai since these markets are mostly driven by end users.

Rajeev Talwar, managing director, DLF, agrees, “Sales are down because of slow approvals mainly in Mumbai. In the past 18 months, there has been no supply coming in due to delays in project approvals.”

Real estate experts feel the problem is due to unreasonable increase in property prices along with uncertain economic conditions. Pankaj Kapoor, chief executive officer of Liases Foras, said that in April-June 2009, Mumbai witnessed sales of 21 million sq ft, the highest in past four years, that has now declined to barely 8 million sq ft in the January-March quarter.

“Sales increased in June 2009 as real estate prices corrected during the economic slowdown. However, prices went up steeply after 2009, and now developers are witnessing lower sales due to these unreasonable prices,” said Kapoor.

“The high cost of land is creating another hassle for developers in big cities. They are shelling out huge amounts for acquiring land, that has resulted in price increase of properties,” Kapoor said, adding, “The balance sheets of developers are already stressed, and declining sales would reduce their profitability further.”

PropEquity, a data analytics and research firm, said in a recent report that residential unit absorption numbers in January-March in the national capital region (NCR) and Mumbai metropolitan region (MMR) plunged over 50 per cent due to the economic slowdown enveloping the country.

Surprisingly, Bangalore, the IT-capital of India, has escaped relatively unhurt, and witnessed a drop in absorption by just 18 per cent.

Jackbastian Nazerth, chief executive officer, Puravankara Projects, said, “In the southern markets, the drop in sales is lower than cities like Mumbai and Delhi as the prices are still affordable. In the past one year, property prices have increased by around 15-18 per cent in Bangalore, whereas, in Mumbai and Delhi, price increase is around 30-40 per cent, mainly driven by speculative buying by investors.”

Nazreth said while the Bangalore market is driven by end users, the city requires more houses as 60 per cent of the population still stays in rented houses.

“We are worried that speculative buying should not start in southern region, leading to situations like what Delhi and Mumbai is facing. We don’t sell more than two apartments to individuals, and most of the other developers in the southern region are also following the same so that speculative buying remains under control,” Nazreth added.

Paras Gundhecha, president of Confederation of Real Estate Developers Association of India (Credai), said the main reason for the slowdown in sales are because of unaffordable prices in Mumbai and Delhi, and also a slowdown in economy.

“For developers, the total cost of developing the project has increased significantly in the past two years in these two cities as developers are paying higher interests due to delay in approvals, and also due to very high cost of land. Interest costs have gone up by 30 to 40 per cent for developers due to approval delays. Further, developers are paying very high prices for land acquisition since it is scarce in cities like Delhi and Mumbai,” says Gundhecha.

However, in cities like Bangalore, Pune and Chennai, developers are not paying higher interests as approvals more or less come on time, and land is available at reasonable price. Moreover, these markets are driven by end users and not by investors. Generally, investor-driven markets would see downside risks than end user driven markets, said the report by PropEquity.

According to PropEquity, the total absorption fell just 18 per cent in Bangalore, to 7,704 units in the first quarter, from 9,410 units in the previous year. Mumbai metropolitan region in January-March period saw absorbed of 11,473 units, compared with 27,676 units a year ago. The total supply in this region in the first quarter of the calendar year 2012 was 89,461 units. In Navi Mumbai, 2,709 units were absorbed in the same period, compared with 7,903 units a year ago, whereas, Mumbai witnessed sales of 4,642, compared with 10,915 units a year ago. Thane witnessed sales of 4122 units, compared to 8,858 units a year ago.

In NCR, 15,104 units were absorbed during the first quarter of 2012, compared with 35,420 units during the corresponding period a year ago. Total residential supply in NCR in the same period was 107,731 units.

During the first quarter, Gurgaon witnessed sales of 5,547 units, against 9,242 units a year ago. Noida witnessed sales of 4,848 units, against 9,160 units a year ago. Greater Noida witnessed sales of around 1,050, against 12,163 units a year ago. Faridabad witnessed sales of 446, against 910 a year ago. Ghaziabad witnessed sales of 3,201 units, against 3,433 units a year ago. Delhi witnessed sales of just 12 units, against 512 units a year ago.

Samir Jasuja, founder and chief executive officer of PropEquity, said the take-up rates in key micro-markets have fallen significantly. “In the coming quarter, there would be strong pressure on many micro-markets, and we expect inventory overhang to increase and absorption could continue to slow down. Mumbai and Gurgaon have already seen one of the sharpest falls in absorptions, with Mumbai metropolitan region seeing a drop of 58 per cent, and NCR a drop of 57 per cent. If this trend continues, there could be ‘stage 1’ price correction in the range of 5 to 20 per cent, especially in micro-markets of NCR, Mumbai metropolitan region and Hyderabad. Some micro-markets where inventories have been managed well by developers would be able to overcome this phase,” says Jasuja.

So, the next few months would be crucial for the sector before taking a final choice – either a stabilisation phase, or a ‘stage 1’ price correction.

jharnamazumdar@mydigitalfc.com

Source: http://wrd.mydigitalfc.com/real-estate/rough-patch-realty-445

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