Impact of Bengaluru’s unsold inventory on property prices
Bengaluru’s real estate market has been witnessing persistent problems such as oversupply and unsold inventory since the last few years. The backlog of unsold apartments in the Bengaluru residential market has registered an all-time high since 2008, with more than 1.01 lakh unsold units lying around. The stockpile of unsold apartments collectively amount to about Rs.85, 000 crore in revenue, and it is easy to see why the market is stagnant and why the developers are worried.
Reasons for oversupply
There are many reasons for oversupply – for one, it reflects saturation and excess in the larger market. Secondly, it is due to very high rates in the mid-income housing segment. India has been seeing a huge demand for affordable housing projects and the subsequent failure of developers to meet this need has caused many home buyers to reject high prices and wait for better prices. An explosion of launches at a time when sales are slow can worsen the situation and inventory control is the need of the hour. The resulting effect on the price of houses is that there will be an automatic correction and prices will come down significantly.
In Bengaluru, 85% of the oversupply is seen in the market for apartments, and surprisingly, the backlog is from both top-rung and middle-rung builders. The excessive supply and the fear of the developers to hold unsold stock is causing them to close sales at lower rates and prices of apartments in Bengaluru are poised to come down.
Impact of oversupply on the pricing
Bengaluru’s real estate markets are compartmentalized to a large extent. When it comes to premium real estate and the luxury segment, prices will be unaffected by the oversupply problem. It is surprising to note that while there is a huge demand for affordable houses, there is also a strong demand for premium and luxury houses. This is seen by the recently concluded pre-sale valuation of a premium residential project in Sadashiv Nagar, which is one of the most up-market areas in the city. The project is estimated to cost a whopping Rs.30,000 per square foot and is being constructed by JLL. A premium real estate project costs between Rs.20,000 and Rs.30,000 per square foot. Pre-launch sales have been stupendous and it is curious to see a strong demand for luxury housing existing side-by-side with a need for cheap housing.
Lower prices and subsequent stagnation of projects
While the pricing on non-premium residential land and property is expected to fall, there is no doubt that the market will stagnate if the developers scale back on the number of projects announced or launched. The economy is struggling to get back on track and the Budget that was announced this year was largely a remedial one.
Most home buyers are nervous to invest in property, as they are hesitant about the market stability. With a huge backlog of unsold inventory, developers will revise the prices of their projects and will even introduce attractive subvention and EMI-free schemes to attract buyers.
A ‘buyer’s market’ likely very soon
Premium villa and high-end luxury properties are known for their stellar location and their quality and outside of this, oversupply always pushes prices down, due to a plethora of houses for buyers to choose from. This leads to what is typically called a ‘buyer’s market’, wherein buyers enjoy many choices and can even negotiate for lower prices. Buyers dictate the price in a buyer’s market and while the real estate market in Bengaluru is more complex than a simple buyer’s market, there is no doubt that a fundamental oversupply can push prices down, even in the rental market.
Credit rating agencies like ICRA maintain that despite the poor absorption rate and oversupply, the prices are expected to remain fairly stable and even increase by 8 to 10% in the short term. This is due to the increase in service tax and the cost of construction. ICRA also opines that turnkey infrastructure in the form of Namma Metro and the elevated highways and corridors can help steady the prices, despite the huge inventory pile up. However, development and infrastructure are not as time-bound as unutilized stock, which loses some amount of money and credibility even as it lies unsold.
Despite the marked oversupply, such a market has traditionally never deterred new developers from launching or entering the market. For instance, when there were huge inventory pile-ups in 2010, Reliance Communications and Microtek Infrastructure entered the real estate industry.
