The festive season may not give a much needed desired boost to the real estate sector this time, which is facing a slowdown for the last two years. The residential component of real estate, reeling under weak sales due to liquidity crunch, unaffordable prices, high interest rates and large scale delivery defaults, seems quite unlikely to see any worthwhile revival during the upcoming auspicious festival period spread over the Navratras, Durga Pooja, Diwali and then leading up to Christmas & New Year. In NRI Achievers this issue, Vinod Behl posits an analysis to support his reading of the sector …
During good times, the festive season is considered auspicious for home buying and offering bargains, and contributes to over 30 percent of annual realty sales. But this year, with the prevailing depressed market sentiment, the sector has been witnessing muted sales since the last festive season of 2014, when less than one lakh housing units were sold in the top 8 cities, recording 30-40 percent less sales compared to the healthier period of 2010-11. After a sluggish 2013, despite hopes of market sentiment improving following the installation of a new reform-oriented government, housing sales did not pick up during the festive season last year. So much so that the efforts of the developers to extend the festive season of 2014 into the new year, right up to the festive season of 2015 offering various incentives and promotional schemes to boost sales, has drawn a blank. What more, the upcoming festive season has more or less lost its novelty?
The cause of real concern this time is that even the luxury housing sector, so far considered recession-proof, and has been hit hard by the slowdown. The situation is further aggravated as even end-user driven markets like Bengaluru have been badly affected. It’s a double whammy – while end users have deserted the market due to unaffordable prices and lack of safety of their investments due to projects delays, investors too have withdrawn due to low price appreciation and exit hurdles.
High inventory levels are another big dampener for residential real estate, with one international property consultancy putting it at over 7 lakh units (NCR, Mumbai, and Bengaluru being worst hit) with three years of absorption period. The gravity of the situation can be gauged from industry statistics which put the value of unsold houses in the affordable and mid segment category in the top seven cities at about INR 400,000 Crore, with an additional 100,000 Crore value high-end homes lying unsold. Project delays of up to 3-4 years in many cases, especially in the absence of real estate regulation, is denting buying sentiment. Investor spirit is also languishing due to Land & GST bills stuck in Parliament, apart from the stock market turmoil and fears over the Black Money Bill. High interest rates are further depressing the realty sector, especially as even the 75 bps rate cut effected early this year has only been partially passed on to the consumers.
Home buyers, especially the end-users, are facing a pricing dilemma. While RBI has been prodding developers to go for price-cuts to push sales and clear high inventory, developers have been dragging their feet saying prices have already corrected and there’s no further scope of reduction due to tight margins. Some developers prefer to negotiate discount deals with real estate funds instead of offering price discounts to retail buyers who are missing out on attractively priced new project launches (experiencing a 50% drop) which are a major attraction in the run up to and during the festival season.
One major reason for not expecting any extraordinary response during this year’s festive season is that over the past one year, the real estate companies have exhausted all marketing tricks to woo home buyers. Besides offering standard freebies like parking and club facility, modular kitchen, air conditioners, furnishings, car, foreign trip, gift vouchers, they have even tried flexible payment plans with subvention schemes without much success. For the first time ever, developers are taking just 5-10 percent of house price as booking amount and that too in instalments, with balance payment on possession. Also, it is for the first time that developers of luxury homes have been resorting to possession-linked subvention schemes, besides giving offers like 3 bedroom apartments at the cost of a 2 bedroom apartment.
But then, all is not lost – there is an upside to this as well. Ready-to-move-in properties have shown good response as these do not carry the risk of delivery defaults. Many of these properties are being offered even at discounted rates. NRIs are also showing interest due to rupee depreciation turning homes cheaper and developers are reaching out to them with overseas exhibitions. Real estate companies have also devised a marketing strategy to reduce average apartment sizes to make the ticket size more affordable and attractive, besides offering wider choice to home buyers in terms of sizes and price points.
Real estate developers have also got a shot in the arm with RBI’s latest policy review bringing in a reasonably good interest rate cut as announced on September 29. This is likely to boost the festive sentiment and push home sales. They, together with bankers, are also pleading with RBI to revive teaser home loan rates to give a fillip to home sales. They believe that prospective home buyers will take the plunge during this festive season as residential real estate is at the bottom of the market cycle and this is actually the right time to buy homes. But then real estate analysts and market experts are of the opinion that unless there is a trigger in the form of price cuts, the festive season may not bring much cheer to real estate companies by way of substantial pick up in home sales.