Real Estate prices decline due to sluggish economy
The emerging price cut trend in Delhi-NCR is transforming the real estate market into a buyers’ market. A price correction is being witnessed in the past few months with highest impact on mid-range segment and the trend is likely to continue.
The National Housing Bank’s residential housing index or Residex shows that, 22 of the 26 Indian cities, including Chennai and Coimbatore, have observed a fall in home prices in the April to June quarter.
According to property consultant CBRE, the housing prices in Delhi have dropped by up to 12 percent in the first half of 2013 compared with that in the second half of 2012 owing to lower demand and high prevailing rate. In terms of leased assets, areas like South Extension and Greater Kailash I and II observed about 12-13 percent drop in rental values during the first half of 2013, while micro markets such as Panchsheel Park, West End and Vasant Vihar observed about 9-11 percent fall in rentals.
Market analysts opine that the real estate sector is witnessing a downward trend in various segments across the tier 1, tier 2 and tier 3 cities. Except a few south Indian cities such as Bangalore, most of the markets have been seeing major drop in sales.
South Delhi properties have witnessed a price correction of 5 to 10 percent while the properties in Gurgaon have witnessed around 2 to 5 percent fall in prices. According to real estate analysts, this could be the beginning of a price correction trend that will continue till the rupee gets stronger. Until then, it seems that, the developers are left with no other option than to cut down the property prices.
There are various factors that have been affecting the real estate transactions-
1. Depreciating rupee value
The falling rupee has hit the economy in numerous ways. Many NRIs holding premium properties in India are being afraid of the future consequences and have decided to sell them off. Since early May, the rupee has declined by nearly 20 percent against the dollar which is scaring away foreign investors. They are opting for safer investments in nations like London and Singapore.
However, the weakening rupee is also expected to attract NRIs to invest in real estate in India. In the days to come, it is likely that more and more inquiries will be flowing in from the NRIs, which would bring in more deals.
2. Economy slowdown
Real estate developers say they haven’t seen such a slump since 2008. The sluggishness in the market has prevailed from quite a long time. The fall in rupee has even made the situation worse.
3. Rise in Construction costs
The fall in rupee directly impact the costs to rise. The construction costs are skyrocketing with the rise in cost of construction materials. Many materials are being imported, particularly in case of luxury projects. The cost of steel expected to increase by about Rs 1500 per tone, which will further rise the construction costs. But the sale price is not rising which is cutting down the profits.
4. RBI’s ban on subvention schemes
The Reserve Bank of India recently put a ban on innovative home loan schemes, which are popularly known as 80:20 or 75:25 schemes. This is expected to affect the builder-investor nexus that has accounted for nearly 50 percent of the real estate deals in the past one year. Many buyers, availing home loans on such schemes, are unaware and are ignorant about the additional costs they have to shell out by opting such subvention schemes.
5. Liquidity crunch
The cash crunch situation has been forcing the developers and investors to decrease the prices of their properties. In order to attract end-users the developers are offering great schemes and price discounts. Usually, developing real estate projects take a long time in India due to tedious approval procedures and often corrupt regulatory apparatus. Many developers are heavily in debt, struggling to pay the interests, and hence they push hard to sell their projects.
As an effect of this trend, it offers good opportunity for new investors with spare capital to buy properties at lesser rates, which can be sold later at high margins.
6. Declining sales
The real estate sales have drastically come down in the last few months. Many developers are quitting the idea of launching new projects, as there are no takers. Adding to this, the RBI move may also hurt the market sentiments and buyer interests which would affect the sales. In many suburban areas of the major cities, there is often an oversupply of projects(units), which is also curbing the sales.
A huge inventory of unsold apartments has been piling up besides which, the NRIs and investors are also pushing their burden on it. In the Mumbai Metropolitan Region (MMR) alone, there are around 1.35 lakh flats lying unsold, states a recent report by Liases Foras.
