After hitting rock bottom, residential real estate sales are showing signs of recovery as fence-sitters realise that property prices may not fall further. "Price points cannot go down any more. From a technical as well as market perspective, prices have bottomed out and there is no scope for decline in the near future," says Siva Krishnan, Head - Residential Services, Developer Solutions and Strategic Consulting, JLL India.
One reason is the cost incurred by developers, which has three main components - land, construction and interest. "Today, if you add up these three, without even including inflation and minimal margin for developers, prices are lower than the total. This shows there is no scope for further reduction in prices," says Krishnan.
According to data from real estate consultancy Liases Foras, property prices have not increased in the last two years. In fact, the weighted average price in the top eight cities of India has been stagnant at around Rs 6,800 per sq.ft. for the last two years. And the unsold inventory will take more than three years to be cleared up. "An efficient market maintains 8-12 months of inventory. An inventory overhang of 40 months indicates pressure on prices in all the major cities of India," says Pankaj Kapoor, Founder and MD, Liases Foras.
"The market has hit the bottom and can go up in terms of sales but not in terms of prices. With high levels of unsold inventory, pricing will be under pressure, and new supply will add to it. We believe that prices will not go up for the next two years," adds Kapoor.
The average price in NCR, for example, was Rs 4,627 per sq.ft. in the September 2019 quarter compared to Rs 4,732 in the year-ago period. For MMR, the price declined from Rs 13,130 to Rs 12,471 per sq. ft during the period, according to Liases Foras.
Sales Inching Ahead
Tier-I cities recorded sales of 115,073 units during January-September 2019, an increase of 14 per cent over the year-ago period, according to data from JLL. Mumbai, Delhi, Bengaluru and NCR continued to drive sales, with Mumbai alone witnessing more than 20 per cent rise in the nine-month period.
According to Knight Frank, at the end of the January-June 2019 period, sales picked up moderately. The first half recorded sales of 129,285 units in top eight cities, up 4 per cent year-on-year.
"The festive season this year has been rather good compared to last year. So, I feel that the sector is gradually regaining strength, and our experience in the last two months has been encouraging. We see significantly better demand in the months to come," says Aspan Cooper, Founder and Chairman, Spenta Corporation.
What is clearly visible now is that most projects that were launched between 2010 and 2012, and were struggling, are also seeing better days, says JLL's Krishnan. Most of these projects were either offering houses with the wrong size or at price points that were not correct that time. Price appreciation was so sharp that it led to wrong price discovery for many projects. "But now, some of them have reached a level of completion as developers or institutions are pumping in money. Besides, the price points have not moved up and we are seeing traction as they (projects) are nearing completion. These are green shoots and it is a welcome sign," he adds.
The second welcome sign for the realty market is that after 2015/16, when prices began to decline or stagnate, developers started moving into middle income housing and affordable housing segments. That also led to a price correction.
As things stand, affordable housing has been the silver lining - while 32 per cent of total sales were in the affordable category in the December 2015/16 quarter, the number is over 50 per cent now.
The sub-Rs 50 lakh segment is seeing most of the action. "Most of the sales have been generated in the affordable segment backed by government sops to buyers," says Shishir Baijal, Chairman and MD, Knight Frank India. Under the PM Awas Yojana (PMAY), households with annual income of up to Rs 18 lakh can avail of Rs 2.3 lakh upfront subsidy for a home. Buyers are also eligible for income tax exemption on housing loans. Developers, under Section 80-IAB, also get 100 per cent deduction on profits generated from an affordable housing project for flats up to 30 square metres in four metro cities and 60 square metres in other cities. This also gave a boost to supply in the segment. In tune with the demand, 55 per cent of new launches in the January-September 2019 period was in the sub-Rs 50 lakh bracket.
The affordable segment is currently doing far better than the luxury segment because there is usually more demand, says Cooper.
Government's Helping Hand
While it is a good time for homebuyers to take the plunge, many developers have been struggling since the NBFC crisis broke out in September 2018 post the collapse of IL&FS. Since banks don't offer loans for land, developers had been dependent on NBFCs for most of the financing, including construction. But with the NBFC crisis, developers are not able to access funding and NBFCs themselves are struggling to roll over debt.
For the period ended June 30, 421 developers were under the corporate insolvency resolution process, as against 209 at the end of September 2018 (as per the Insolvency and Bankruptcy Board of India).
Kapoor says builders need to go back to basics to solve this problem of liquidity. "In the pre-liberalisation days and before the sector was opened up for foreign direct investments, builders were mostly dependent on customer advances. It was only later that they started borrowing big money and increasing prices... It is now time for them to focus (again) on financing using customer advances."
Alongside, government measures have helped. "The government has taken many significant steps to help both demand and supply, including rationalisation of home loan rates, repo rate reduction and setting up stressed asset and alternative investment fund (AIF)," says Baijal of Knight Frank.
With a corpus of Rs 25,000 crore, the AIF will provide priority debt financing for completion of stalled housing projects in the affordable and mid-income housing sector. The RBI has cut repo rate five times so far this year, a move that will encourage homebuyers.
Yet, the effectiveness of all these measures is dependent on customer sentiment. "While things are looking up for the sector, the only dampener could be the overall economic scenario and caution among customers about whether they should invest or not. If customer sentiment was good, the volumes would have been much higher," says JLL's Krishnan.
Baijal agrees that the real issue continues to be creating customer confidence which can translate into sales. "The current economic scenario, marred by poor employment rate, reduced GDP growth and low industrial output, continues to remain subdued, impacting buying decisions." According to him, a full-fledged recovery will depend on demand picking up for the sector.