Financially distressed developers have a compelling reason to boost sales
Against the backdrop of low demand and slow home sales, Reserve Bank of India (RBI) Governor Raghuram Rajan's plea to real estate developers to "adjust" their prices to encourage buying was met with a refrain: There is no scope to cut prices, which have already undergone correction.
That leaves home buyers and investors with a searching question - are we at the bottom of price correction and will prices go upward in the coming months?
Average launch prices have declined across major cities, making new homes cheaper than those launched about a couple of years ago (Photo: FreeImages.com/ Joe Earwicker - for representational purpose only)
It is not for the first time that the cash-strapped real estate developers have been asked to reduce prices to push up sales and cut huge inventory of unsold homes, which, at the current rate of absorption, will take on an average 36 months to clear.
It may be recalled that in 2014, Irfan Razack, the chairman of CREDAI (Confederation of Real Estate Developers Associations of India), an apex body of developers, immediately after taking over, had called for price reduction that went unheeded.
And today, the same CREDAI has ruled out price cuts, saying that 90 percent of the country's real estate stock has already seen a correction of 20-30 percent and there's no scope for further cuts as it would lead to NPAs and non-delivery of projects.
Realty experts like Devina Ghildial, MD, South Asia, RICS, also believe that the market has already seen distress sales, discounts in the secondary market and correction to some extent and any further downturn could adversely impact the sector.
But today, financially distressed developers have a compelling reason to boost sales to generate revenues and stay afloat. And experts like Farook Mahmood, chairman of Silverline Realty, a leading brokerage firm, believe that each developer has a certain cost attached to each project and some of this can be brought down.
He believes developers understand well that going forward when the real estate regulation comes into force, they will find the going all the more tough if they don't improve their financial position now.
Even Pankaj Kapoor, MD of property research firm Liases Foras, thinks that developers can come up with productive pricing and offer affordable units, the lack of which is holding them from realising the housing demand, provided there is adequate support from the government.
Though some developers are offering price discounts behind closed doors, yet the majority of them refrain from direct price cuts as this sends a negative signal to the market.
Rather, they prefer to provide indirect benefits to buyers in the form of EMIs, car parking, club facilities, registration and maintenance fee waivers, besides offering free modular kitchens, home automation, home furnishing, air conditioners, car and holiday package and the like.
In order to provide relief to home buyers, developers are also adopting the marketing strategy of lowering prices for new launches. Average launch prices have declined across major cities, making new homes cheaper than those launched 1-2 years ago.
Mumbai has witnessed highest (36 percent) drop in launch prices in Q 1 of 2016 compared to same period in 2014, followed by Pune (25 percent), Kolkata (5 percent) and NCR (two percent). Also, more than one-third of new launches (registering 26 percent increase in this quarter) are in the affordable segment.
Yet another strategy adopted by the distressed builders is outsourcing their projects to big and reputed builders like Godrej, Tata, Mahindra, L&T and DLF, as also to fund houses and development management firms to execute and fastrack their projects.
This three-pronged marketing strategy by developers has paid dividend in the form of increased sales of six percent in the January-March quarter of 2016, compared to same period a year ago. In fact, the last one year has turned the market end-user driven.
According to real estate transaction portal PropTiger, buyers are today more price- sensitive as 97 percent home sales are attributed to end-users, compared to 77 percent in the April-June period in 2015.
The last one year also witnessed the rising sale of affordable homes. Liases Foras says the sale of apartments priced under Rs.25 lakh increased 46 percent.
A recent HDFC study has also established that sharper increase in income levels compared with housing prices, together with affordable interest rates, has brought down the affordability ratio to 4.1 percent, below the previous all-time low of 4.3 percent in 2004.
The reducing gap between pricing of apartments and affordability has boosted buyer sentiment, fuelled home sales and even contributed to a moderate price rise.
Home sales have grown for the second straight quarter. In the first quarter of 2016, sales across eight top cities - Mumbai, Delhi NCR, Kolkata, Chennai, Hyderabad, Bengaluru, Pune and Ahmedabad - have improved six percent.
On the price front, while RBI data shows that housing prices across the country went up during quarter ended December 2015, statics released by global property consultancy Knight Frank show that all the eight cities have registered average home price increase of 3-15 percent between 2013 and 2015.
So, what's the road ahead for residential real estate, especially in terms of pricing? As end-users call the shots and affordability emerges as the key factor, property experts like Anurag Jhanwar, Business Head, PropTiger, believe that given the price sensitive behaviour of end-users, the downside on both sales and prices, if any, is expected to be limited from here on.
Going forward, as the buyer sentiment gets further improved with the implementation of real estate regulation and further softening of interest rates, sales will gain more momentum with prices firming up.
(Vinod Behl is editor, Realty Plus, a leading real estate monthly. The views expressed are personal. He can be reached at firstname.lastname@example.org) - IANS