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Real Estate 2016

Monday, December 28, 2015
By Ashwinder Raj Singh

The country’s overall economic scenario is improving, and all major fundamentals point towards a 2016 that looks a lot better than 2015 did in terms of economic performance. The indicators point to healthy growth and rise in sales as well as prices and profits by 2Q 2016, by which time our markets will be much more settled and gearing towards an upward trajectory. For Mumbai’s residential property buyers, there is a lot to look forward to...

It is always darkest before dawn, and this holds true for the Mumbai property market. 2015 started with a lot of hope, but the year did not play out as anticipated. The city’s residential realty market performed way below expectations, partly because of pricing.

As per records, the unsold inventory in the Mumbai Metropolitan Region (MMR) stands at a massive 77,000 apartments; it will take almost 11-14 quarters to clear off this inventory against a healthy expected cycle of 4-6 quarters. Only about 3.5% of this inventory is completed or ready for possession.

It is easy to put the entire blame on slowing demand, but the reality is that an astounding 70% of the unsold inventory is priced at Rs one  crore and above. If we compare this to the average annual household income of a Mumbaikar, which is only approx. Rs 7.5 lakh, we get a clearer perspective of the slowdown.

Affordability: A generally accepted yardstick of affordability says that the cost of a home should not exceed about five years of combined annual household income. Anything above that breaches the affordability barrier. Also, it is the affordable housing segment that is driving most of the demand in Mumbai, and such housing must necessarily be priced either under Rs 30 lakh or between Rs 30-65 lakh. However, there are no projects with units priced under Rs 30 lakh, and very few in the latter pricing segment. Mumbai’s builders are basically catering to a market segment which has no demand, so the obvious result is poor sales.

This situation cannot change overnight, as the developers started these pricier projects in response to a then thriving economy, foreseeing potentially robust demand. The economic slowdown over the past two years put paid to those projections; price-sensitive buyers have been playing the waiting game, waiting for prices to come down before they invest. However, builders cannot just reduce prices, since the cost of construction, interest rates and other financial liabilities have remained same or even risen in recent past.

The options are clear: either wait for the economy to grow and buyers to be more comfortable with paying high prices, or resort to discounts and innovative financial structuring to catalyse sales, recover investment and bring in liquidity for further projects. Most builders in Mumbai have chosen the first route, but those without deep pockets have resorted to the latter.

Given their urgency to recover costs and bring their financial books in orders, Mumbai’s builders have started offering attractive schemes to woo borrowers and at some places even reduced the prices. The result basically translates into marginally reduced prices. To illustrate – the average price of a 2BHK in Mumbai was around Rs 3 crore in 2014, and this has come down to around Rs 2.9 crore in 2015. If we consider MMR, then the figures stand at Rs 1.32 crore and Rs 1.31 crore.

In percentage terms, there has been a price reduction to the tune of approximately 0.95% in MMR and 3.25% in Mumbai. The average per-square-foot has reduced from Rs 13,020 to Rs 12, 896 in MMR, while in Mumbai it has dropped down to Rs 19,681 from Rs 20,125.

These reductions may not look spectacular or attractive enough for buyers to make a rush. However, things do seem to be working out in the long term:

Developers are keen to reduce their inventory level, and are offering discounts and better deals. This would definitely attract buyers and investors
Interest rates on home loans offered by banks are coming down; even if not to the expected magnitude, then still enough to give a definite advantage to home loan seekers.

Moreover, the country’s overall economic scenario is improving, and all major fundamentals point towards a 2016 that looks a lot better than 2015 did in terms of economic performance. The indicators point to healthy growth and rise in sales as well as prices and profits by 2Q 2016, by which time our markets will be much more settled and gearing towards an upward trajectory.

For Mumbai’s residential property buyers, there is a lot to look forward to.

(The Author is CEO – Residential Services, JLL India)

Realty Leaders Speak...
Many of the policy-level reforms which were anticipated in 2015 did not come into being, but may see implementation in 2016. These include the Real Estate Regulatory Bill and the Maharashtra Housing Regulatory Authority. The making of these policies into firm laws will do much to bring transparency and confidence into the sector. We are earnestly hoping for banks to drop their lending rates, as the bank lending rates still did not reflect the RBI's recent rate cuts. The lending rates of 10 major banks reduced by only 58 basis points so far. Nevertheless, housing demand has already begun to pick up in the major cities, and I expect this trend to continue in 2016.
—Kishor Pate, CMD,
Amit Enterprises Housing Ltd.

Looking forward to 2016 we hope that home buyers will realise the benefits of investing their money currently being paid towards rent for their equity in their home instead. There is talk of improving the approval processes across the country at all government levels. This will lead to an improvement in the overall supply there by keeping prices in check such that we do not anticipate any run away price increases as we have seen in the past. The real estate regulatory act will certainly lead to a fair amount of confusion and uncertainty as it is expected that initially there will not be clarity on how current projects, where sales have already taken place will be treated. On an over all basis we expect the market to be mildly positive to flat, but do not see much room for further price correction barring some pockets of some individually stressed developers
—Rohit Gera, Managing Director,
Gera Developments

With the new government policies that the real estate sector has witnessed in the last 6 months, there has been a significant hope for the growth in residential as well as commercial segments. FDI in real estate is expected to provide a significant boost to the sector in terms of greater foreign capital inflows. The Government’s ambitious projects like ‘Housing For All By 2022’ and ‘Construction of 100 Smart Cities’ will now get a boost by the substantial participation by the foreign investors. This is an extremely positive step taken by the government and we are happy that it meets most of the industry demands. We now look forward to seeing FDI flow into the sector, thus creating more job opportunities and revitalizing the growth of the realty sector.
—Chintan Sheth, Director,
Sheth Corporation

We are optimistic and hope the year 2016 heralds’ good tidings for the real estate sector. The proposed Development Plan 2034, State Regulatory bill, relaxed FDI rules, Smart Cities, GST and favourable budget are some key drivers which have the potential to improve the market sentiments and achieve the government’s aim of providing Housing for All 2022. The year 2016, may see a trend of developers majorly catering to the mid to lower housing segment as prices are expected to stabilize given the policies initiated by government in housing all Indians by 2022. But at the same time we believe that there will be increased demand for luxury housing, as income levels continue to rise coupled with high aspirations of home buyers. In a nutshell, yes we can definitely look at better days ahead for the sector as the government has made its intentions clear about the importance of kick starting the economy and real estate sector in particular.
—Manju Yagnik, Vice Chairperson,
Nahar Group

There are a lot of other factors which will substantially affect the scenario of real estate in 2016. Some of them include; the measures taken on increasing the GDP by ways of reforms in existing policies, new measures to push the infrastructure sector including announcement of REIT (Real Estate Investment Trust) that will not only help the infrastructure sector but will also create more jobs. Fresh allocation of USD2.25 billion to roads and USD1.6 billion to railways is also intended to improve liquidity in the system by pushing forward EPC, Cash Contract and Annuity models for awarding of projects in these sectors. This will mean inflow of more money in the market for productive use.  Developers are focusing on innovative means, bringing in new offers at the same time emphasizing on building affordable units. In addition to the above, there is cut in interest rates which will add a cushion to affordability. All these factors are going to bring positive results in 2016. Mumbai has already seen the impact with 28% increase in sales on Quarter to Quarter basis.
—Rahul Gugaliya, CEO, Suyojit Group.

The Indian real estate market has been in recovery path from over the past few years, and their is a great amount optimism among all stakeholders for 2016. In 2016, we expect the government to give industry status to the real estate which will attract huge foreign direct investments into the sector giving developers a major reprieve due to want of funding options available in the country. This will result in faster completion of projects thereby reducing the cost of the projects and resulting in property prices offered at reduced cost to home buyers. The government should remove or, at least reducing service tax substantially Income tax exemption for affordable homes built for EWS and LIG, borrowing for construction companies to be available at lower interest rates. At last we hope that government comes up with real estate friendly budget, which will bring cheer to home buyers as well developers
—Rajesh Prajapati, Managing Director,
 Prajapati Constructions Ltd

The easing of FDI norms will help attract much-needed funds into the sector. The industry will be better equipped for quicker project completion, resulting in lower cost, eventually lowering cost in the hands of the Consumers. It will also enable the speeding up of the investment process and repatriation, attracting larger investment into the India Real estate market. We are optimistic that the upcoming budget will address the issue of the much-needed realty reforms. At the same time, if RBI continues to bring in further rate cuts to facilitate the reduced rates of interest, this will not only boost buyer sentiment but also help the industry pick up, as it can look forward to a growing demand for housing in 2016 on the back of lower interest rates. All in all, the industry is upbeat and optimistic about 2016.
—Kishore Bhatija, Managing Director,
Real Estate Development K Raheja Corp

We are optimistic and look forward to the year 2016 which hopefully should be a good year for the realty sector. The focus for the year 2016 will definitely be on affordable housing which has potential to give the much needed thrust to the entire realty sector. With rising property prices there is a huge demand coming from the affordable to lower mid segment of housing. Senior citizen housing is also another segment that has huge potential to develop in our country.  We believe that the coming year 2016 will be the year of ‘Affordable housing in India’ and hopefully should fulfill the dreams of millions of home buyers across the country.  
—Shrikant Paranjape, Chairman
Paranjape Schemes (Construction) Ltd.

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