In the last two quarters, Mumbai’s residential real estate market has been seeing a slowdown across various micro segments. Both registration data and home loan disbursal are indicating a distinct slowdown. Will this slow down result in the fulfilment of aspirations of lakhs of Mumbaikars? Or it is just a lull before Mumbai’s real estate story shows an exponentially upward curve on the graph. Mayura Shanbaug does a reality check…..
Is there a slowdown?
Many developers and analysts are now admitting that property sales have slowed down. “Gone are the days when large numbers of apartments were sold during the launch itself. The trend of short term-speculators booking apartments at pre-launch or launch prices and selling them a few months later at higher prices, as witnessed in early 2010 has reduced considerably. After surpassing peak valuations of 2008 by 20% in 2010, Mumbai’s residential property rates today are back on par with the 2008 benchmarks.” says Sanjay Dutt, CEO, Business, Jones Lang LaSalle India, a global real estate services firm.
The reality is that as of now, prices have dropped in areas such as Parel, Lower Parel, Mahalaxmi, Bandra East, Andheri East, Goregaon East, Mulund and Kurla. But “there are several other locations within Mumbai and Thane district that may not have seen a correction of more than 5-10%. The overall sentiments of the market and the consistent rate of new project launches in Mumbai projects give a very clear indication of an impending oversupply by 2012, and a lot of developers in the most severely affected locations are currently open to closing sales at lower rates,” he added.
Voicing a similar sentiment, Anand Gupta, Hon. General Treasurer, and Builders’ Association of India says “Sales volumes were down by 20-25% in the first quarter of 2011 compared to the same quarter last year. It is more noticeable in areas like Borivali, Palghar, Thane and Kalyan which have higher inventory…The trend is likely to continue over the next quarter and we may witness a further correction of 5-7%” he added.
What triggered it?
Many home buyers are playing the waiting game, anticipating a further price correction. The key reasons behind this slowdown are higher prices, higher interest rates impacting affordability, lack of liquidity, scams diluting investor sentiment and, to a lesser extent, excess supply in a few micro markets.
According to a report by JLLI on real estate pricing in Mumbai, by the 4th quarter of 2010, residential property developers who had returned to the safety of their home markets, from their earlier national forays were building large land inventories, spending close to Rs. 20,000 crore in Delhi, Mumbai and Bangalore. Significantly, Rs. 12000 crore were spent in Mumbai alone.
“This naturally resulted in extremely high land valuations, demanding higher average residential property sale prices based on the new appreciated capital values. These land acquisitions were predominantly funded by NBFCs at 15%+ interest rates in an already volatile real estate environment, where sales volumes had plummeted by close to 50%,”said Dutt.
Measures implemented by the RBI to curb inflation further aggravated the pain as interest rates went up. Clear directions issued by the large financial institutions and the Central Government led to a marked depletion of liquidity on the market and this put considerable pressure on the developers.
“The challenges of low volumes, the increased cost of debt and higher land valuations left them with no choice but to introduce ‘soft’ schemes (promotions and incentives) to woo buyers with. When this route did not yield the desired volumes, they began to solicit HNI-led investments at discounts of 10-15%, in addition to raising further capital at interest rates of between 21-25% from NBFCs,” he added.
So what does the future hold? Real estate buyers and sellers are conjecturing over how the Mumbai residential real estate market will fare over the next three quarters of 2011. As far as future of housing property prices in Mumbai is concerned, the house is divided. The developers are of the opinion that this is a temporary phase.
“Though there is a sentimental set back to the market, the real scenario is not as bad. It is necessary to note that new approvals are very few and for last 12 months or more no high rise proposals have been approved by the committee. In addition, the approval from BMC is minimal and hence no new stock is coming to market,” says Lalitkumar Jain, CMD, Kumar Urban Development Ltd and National President, Confederation of Real Estate Developers' Associations of India (CREDAI). “We foresee a situation of acute shortage of supply of units in market thereby rise in prices for these reasons,” he added.
But there is another view. “It is fairly certain that this correction phase will continue for the next 3 months and inevitably extend into the traditionally slower monsoon / vacation period,” said Sanjay Dutt. “But having said that, I believe “the market has already begun responding positively to this correction. Given the continued job confidence, high salary increments / bonuses, the steady growth of the economy and potentially a good monsoon, Mumbai’s residential property market will bounce back by August and surge past the 2010 peak”, he validates.
The truth is that Mumbai’s residential market is not immune to demand-supply dynamics. “Mumbai needs 1 lakh additional houses every year and only 55,000 houses are getting added each year for the past many years resulting in the huge demand-supply gap which at any given point of time will not let property prices dip beyond certain levels,” asserts Anand Gupta.
“However, a full-fledged recovery to Mumbai’s glory days will happen only if the Government introduces drastic changes in the state’s housing policy or puts more pressure on banks to lend money to the real estate and housing sector and interest rates on home loans drop,“ he added.
According to Ramesh Nair, MD-West India, JLLI, residential property demand will experience further pressure in 2011.”The market saw a period of unprecedented expansion in the first three quarters of 2010, and it is reasonable to expect that price appreciation will flatten or decline in many areas…Moreover, interest rates are likely to rise marginally again, further curbing the demand for homes in the short term,” he said.
“Given the current uncertainties surrounding regulatory aspects such as parking FSI, some prominent proposed high-rises will face delayed approvals, impacting sales,” he added.
But Pankaj Kapoor, Managing Director, Liases Foras, a premier real estate research company, firmly believes that there will not be turn around as far as the price index of the housing sector is concerned for the next two years.
” I see a further 25-35% correction in the next two years. With interest rates at around 12-15%, property prices already too high and beyond the reach of consumers and the lower segment consumer already cut out, the scenario is not conducive for property prices to go back to its previous high,” he said. “The only recovery I see in terms of volumes picking will be due to reduction in rates that too gradually, over the period of next 24 months,” he added.
So the signals are mixed. In such a situation the waiting game being played by home buyers will certainly benefit them. Or will it?
Most home buyers are playing the waiting game, anticipating a further price correction. The key reasons behind this slowdown are higher prices, higher interest rates impacting affordability, lack of liquidity, scams diluting investor sentiment and confidence and to a lesser extent, excess supply in a few micro segments.
Trends witnessed over the last six months:
• Developers are offering significantly lower rates to customers willing to cough up a 30-40% down payment
• Developers launching smaller-sized units
• Corporates rushing to divest their owned apartments that are non core to their business, anticipating a further correction in prices
• Developer and investor interest increasing in Mumbai’s northern micro-markets and BKC which are close to business districts
• Increase in end-user preference for older projects with lesser loading
• Properties with deficiencies in location or overly optimistic asking prices have been the slowest to move
• Rental yields from residential property in Mumbai remained steady at 3% to 3.5%.
Raw Material Woes
The important raw materials like cement and sand continue to woe builders and developers further. The continued price rise in cement and alleged cartelization by the cement companies has become the constant worry for developers and has resulted in an announcement by Builders Association of India (BAI) that they will start their own cement plants in near future to keep the prices of this important construction material in check. Our own cement plant will resolve the pricing issue and bring down the price of cement in the region of Rs 150 per bag as against Rs 250-300 per bag,” says Bhagwan J Deokar, Past President, BAI.
BAI plans to set three cement plants in the different parts of India with the capacity of 5 million tonne per year each with the cost of Rs 2,250 crore each.
On another front, the ban on sand mining in India gave heartaches to the developer community last year. The Bombay high court lifted its stay on sand mining in October 2010. However, the government has not framed a policy to auction sand mines as yet leaving further scope for worries and cost uncertainities.