Real estate sales are falling. There has been a 50 per cent rise in unsold housing inventory between June 2012 and December 2014. The top six markets - Bangalore, Chennai, Hyderabad, Mumbai Metropolitan Region (MMR), Delhi-National Capital Region (Delhi-NCR) and Pune - have nearly seven lakh unsold units, according to Liases Foras, a real estate research fi rm.
Is real estate losing its title as the most-preferred asset among Indians? The answer, looking at the data, is an unequivocal yes.
Between April 2014 and March 2015, sales fell 34 per cent in nine cities, as per data by PropTiger.com, a real estate portal. These cities are Ahmedabad, Bangalore, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai, Noida and Pune. Only 2.20 lakh units were sold in these cities in 2014/15, compared to 3.35 units in the corresponding period last year. Gurgaon saw the sharpest drop in sales, 57 per cent, while Pune fared better with a drop of 19 per cent.
The trend has surprised many observers. Real estate has always been the most sought-after asset class, given the kind of returns it has delivered in the past. Even after the fi nancial crisis of 2008, some residential markets saw fast growth. And, when equities bit the dust after 2008, people further increased their dependence on real estate and gold.
This rise in demand between 2009 and 2013 saw prices double in some markets. For example, Noida Extension, one of the key markets in the National Capital Region (NCR), prices almost doubled from Rs 1,830 per sq.ft. to Rs 3,476 per sq.ft. between March 2010 and March 2013, as per data by PropTiger.com. Prices in Panvel, Mumbai, rose from Rs 2,904 per sq.ft. to Rs 4,898 per sq.ft. Similarly, prices in Whitefi eld, Bengaluru, went up from Rs 2,400 per sq.ft. to Rs 4,134 per sq.ft. during the period.
But things have worsened after 2013. Since then, prices have stagnated or declined. The asset class turned out to be second-worst performer in 2014/15, when equities returned 25 per cent. Prices in micro markets like Dwarka Expressway, Noida Extension, Thane, Panvel, Whitefi eld, Shollinganalur and Dombivali rose just 1-4 per cent.
Even premium residential real estate markets were hit hard. As per a recent report by Jones Lang LaSalle, a real estate consultancy: "Areas in South and Central Delhi such as Vasant Vihar, Defence Colony, Jor Bagh and Golf Links have seen prices fall in the range of 15-20 per cent since 2013. Areas like Westend, Shantiniketan, Prithviraj Road, Aurangzeb Road and Amrita Shergill Marg have prices correct by 10-15 per cent."
Builders were expecting that a new government at the Centre and falling interest rates will help stimulate demand, but nothing of that sort has happened yet.
There were 2.33 lakh unsold units in NCR and 1.72 in MMR as on December 2014, a rise of 36 per cent and 47 per cent, respectively, from June 2012. However, it is Bengaluru that has seen the highest rise of 142 per cent in inventory since June 2012. The city has 1.01 lakh unsold units, as per Liases Foras.
WHY ARE PEOPLE NOT BUYING
Delays in project delivery: The biggest issue faced by buyers is the inability of builders to deliver on time. This problem is especially acute in Delhi-NCR and MMR. In NCR, only 20 per cent projects are running on time. The figure for MMR is 15 per cent.
"These days, one must take into account a delay of around two years," says Pankaj Kapoor, MD, Liases Foras . The inability of builders to deliver projects on time is making people restless.
People who invested with an aim of exiting with good gains in three four years are stuck. "In the past, we saw people invest at the pre-launch stage and exit with gains of Rs 300-400 per sq.ft. This is no longer happening as people are stuck with their earlier investments," says Surabhi Arora, Associate Director, research, Collier's International, a real estate services company. Poor returns and inability to exit have made people look for alternatives.
"People have realised that in a bad situation getting out of real estate can be very diffi cult. The lack of liquidity has made people look for other liquid assets like equities and debt mutual funds," says Jitender Solanki, a SEBI-registered investment adviser.
How these work: The other issue is affordability. "Prices went up despite the economy not doing as well as in the past. This has led to a mismatch between prices and affordability," says Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield.
"Affordability is down significantly as prices in various markets are still very high. The Delhi-NCR, which includes Gurgaon, is no longer affordable. Noida is on the verge of becoming unaffordable. In Bengaluru, too, capital values have been rising consistently," says Surabhi Arora of Collier's International.
Going by the latest per capita income mentioned in the white paper of state finances of Haryana, it will take at least 22 years for a person to buy a 1,000 sq.ft. house in Gurgaon in the mid-segment. This is because while the per capita income of a person in Gurgaon is Rs 4.46 lakh (2011/12 at current prices), prices are in the range of Rs 8,000-10,000 per sq.ft., as per Cushman and Wakefield.
High interest costs: Builders say high interest cost is one reason for poor sales. "Buyers are waiting for a cut in home loan rates," says Getamber Anand, President, Confederation of Real Estate Developers' Associations of India (CREDAI), an industry body.
However, if this was the case, one would have seen a decline in demand for home loans. But according to Reserve Bank of India data, gross bank credit to the housing sector rose 17.4 per cent in the one year to 20 per cent in February 2015.
"Our home loans have been growing steadily at 18-20 per cent CAGR over the past few years. We are not impacted by the slowdown in real estate as there is still a lot of demand for housing from end- users," says Renu Sud Karnad, Managing Director, HDFC.
Rate cuts may help but won't lead to any signifi cant rise in sales as affordability remains an issue. Even if one assumes that the rate of interest falls by 0.50 per cent, the EMI for a home loan of Rs 50 lakh for 20 years will go down by only Rs 1,645, assuming that the current interest rate is 9.5 per cent. There is a doubt if this will make people rush to buy homes.
Lack of transparency: Despite the fact that buying a house takes up a big part of people's earnings, real estate is still one of the most unregulated sectors in India. This has made it easy for builders to break rules.
However, the government is making efforts to bring in more transparency and accountability in the sector.
Now, one has to provide permanent account number (PAN) for any purchase or sale of Rs 1 lakh and above. In 2013, it was made mandatory for anyone buying an immovable property (other than agricultural land) exceeding Rs 50 lakh in value to deduct one per cent TDS (tax deducted at source) before paying the seller. The tax can go up to 20 per cent, if the seller does not disclose his PAN. This also applies to purchases financed by banks and housing finance companies.
Getamber Anand, President, CREDAI, believes this has only added to the burden of buyers.
Not everyone agrees. "Introduction of TDS is one more procedural step. It has not materially impacted the sector and the home-buying sentiment," says Om Ahuja, CEO, residential, Brigade Enterprises.
Recently, the Cabinet approved the Real Estate (Regulation and Development) Bill. The Bill recommends strict penalties on developers who don't comply with rules.
"The Bill will boost transparency. This will instil confidence among investors, providing the sector better access to structured capital," says Anuj Puri, Chairman & Country Head, JLL India.
THE WAY AHEAD
Real estate prices don't seem to be in a hurry to go up. At the current pace of sales, it will take another 56 months or close to five years to clear the existing inventory in Delhi-NCR. This figure is 48 months for MMR, as per Liases Foras.
But experts say it is the right time for end users to get into the market as buyers may get a good deal due to low demand. "As developers remain under pressure due to excess inventory in Gurgaon and Noida, buyers and investors can expect significant discounts from developers," says Santhosh Kumar, CEO, Operations & International Director, JLL India.
"Prices may not go up in the near future even if demand rise as developers will wait for volumes. Investors entering now for up to five years will get good returns provided they invest in the right kind of property. Location, employment opportunities and infrastructure play a major role in deciding returns from property," says Somantak Das, Chief Economist and Director, Research and Advisory Services, Knight Frank.