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7/31/2019 ET Wealth House

1/6

Despite the slowdown in income and jobs, high rising interes

rates and the overall economic uncertainty, prices of residential

property did not fall. Find out why realty prices remained unchanged.

And what you should do if you want to buy or sell a house now.


2/6

AMIT SHANBAUG &

SAKINA BABWANI

The last time BharatSharma went lookingfor a house that fit hisbudget of 40 lakh wasin January 2011. Prices

were high then and so were interestrates. The same month, he cameacross reports about a possiblecorrection in property prices in thenext one year. The arguments werecompelling. Property prices and in-terest rates were high, making EMIsunaffordable. Income growth hadslowed down, job creation was on

the wane, inflation was high andthere was oversupply in the

market. With everything pointingto property prices coming down,Sharma decided to wait. He is nowback in the market looking for aproperty, with a slightly higherbudget (`42 lakh). Butcontrary to hisexpectations, priceshave not gone down. Infact, they have risen.The project that I wasconsidering is now soldout and the otherslaunched recently in thesame locality are quoting athigher prices, he says. Why didproperty prices defy what the

market pundits were expecting?What prevented them from falling?

Continuing investor interestInvestors are the lifeline of a cash-strapped developer. They are theones who are keeping buildersafloat even now. Pankaj Kapoor,

managing director of realestate research firm Liases

Foras, explains thatcompared to 1995, whenthere was shortage ofliquidity in the market

which led to a crash inthe real estate sector, the

situation now is quitedifferent. There are hardly

any avenues which offer you safereturns today. The stock markets

are volatile and gold prices are alsoat an all-time high. So, investors

look at the real estate sectheir excess funds. It is nodevelopers who would haa price cut but the investoadds. According to Kapooinvestors who are instrumthe property prices stayinBesides this, there are a venture capital firms whibought huge stakes in reaprojects. For the developwin-win situation. Since talready cut down on theithey wont be losing mucthe rates come down a biadds.

However, in some case

because of these investorbuilders cannot reduce p

CoverStThe Economic Times Wealth, January 16-22, 20122

Customiseyour taxplanningPage 15

High inflation, risinginterest rates, waninggrowth and lacklustre

stock markets ...residential propertyprices in most cities hremained unaffected the spate of bad newsHeres why propertyprices didnt fall andwhat you should do ifyou want to buy now.


3/6

CoverStoryThe Economic Times Wealth, January 16-22, 20

bstantially. A big investor who puts inney at the pre-launch stage of the projectlso looking to exit at a higher rate later,s a Gurgaon-based real estate broker. Ifdeveloper reduces the ticket price, theestor will not be able to sell his propertieshe market and, therefore, will not investhe builders projects in future, he says.

stricted supply

e of the main reasons for residential

property prices correcting only marginallyin some locations or not at all in most, wasthe restricted supply of new projects.According to real estate consultancy firmKnight Frank, the pace of new projectlaunches was severely crippled in 2011.During 2010, roughly 3.61 lakh residentialunits were launched across the top sevencities of Mumbai, Delhi NCR, Pune, Kolkata,Bangalore, Chennai and Hyderabad. Howev-er, only 1.72 lakh units came up in 2011, adecline of 52% over the previous year. Thedecline in new launches was sharper incertain locations, such as Mumbai, whereprices were high and buyers few. Forinstance, just about 19,470 units werelaunched in Mumbai in 2011 compared withthe 54,968 housing units built in the

previous year.While fewer new launches were one

reason for the restriction in supply, projectdelays also played an important role. Thesituation is likely to continue for some moretime. According to property research firmPropEquity, nearly half of the 9.3 lakhunder-construction residential units in thecountry, scheduled for delivery between2011 and 2013, are likely to be delayed by upto 18 months.

While reducing the number of newlaunches is a natural reaction from thebuilders in a slow market, developers alsorestrict the number of projects in the marketby other means. Some builders have recent-ly started inserting restrictive clauses in thesale contracts that prevent buyers from

selling the house before a specified time(usually one year of buying). While the

NO SIGNIFICANT CORRECTION IN 2011spite the buzz about a correction, prices have not gone down significantly in most locations.

COST OFCONSTRUCTIOHeres how the cost components housing project stack up.

2The

inth

conin

2%Approvals

y District June 2008 June 2009 June 2010 June 2011

angalore Malleshwaram, Rajajinagar 4,500 - 6,000 3,900 - 5,400 3,800 - 5,400 4,300-6,200

hennai Velachery 3,800-4,200 3,800-4,000 3,500-5,000 3,500-5,300

yderabad Banjara Hills 6,500 5,800 6,500 6,850

umbai Bandra (W), Khar (W), 28,000-32,000 20,000 - 24,000 24,000-31,000 24,000-32,000Santacruz (W), Juhu

elhi NCR Defence Colony, Gulmohar 24,000-25,000 20,000-23,000 24,000-32,000 27,000-40,000Park, Hauz Khas Enclave,

Safdarjung Development

Area, Panchsheel Park

une Koregoan Park, Bundh Garden 7,000-12,000 6,000-9,000 6,750-10,500 9,000-13,000

olkata Ballyg unge , Que ens Park , 8,50 0-10,000 8 ,300 -9 ,500 9 ,500 -11,50 0 10,000-17,000Rainy Park, Gurusday Road

ces in `per sq ft. Source: Cushman & Wakefield

UP

UP

50%Construction

material

30%Labour

18%Fittings

-5

0

5

10

15

20

Bricks & tiles

Stone

Grey cement

Aug 2011 Dec 2011

Stainless steel & alloys

{Rawmaterial

ostnflationar-on-year % changeWPI

HE DEMAND ISTILL THEREspite the slowdown in sales, the

mand for real estate still continuesbe strong.

Mumbai

Pune

derabad

Kolkata

NCR

Chennai

ngalore

Gap

Demand

Supply

0 200sing units (in thousand) Source: Cushman & Wakefield Research

400 600 800


4/6

builders claim that they are doingthis to prevent speculators frombuying into the projects, the realreason is that the developer doesnot want the housing units to be outin the market at a lower price (bythe seller) in times of a slowdown.This is primarily to have controlover the time period before theirproperty comes back in the market

for sale. It would also deter specula-tors to offer the property at a lowerprice than what the developer isoffering, says Ravi Goenka,advocate at Mumbai-based GoenkaLaw Associates.

Rising construction coAlmost all builders will todthis as one of the main reaincreasing property pricethe impact is often exaggemay sometimes look like athe fact is that the cost ofconstruction and materiaactually gone up in the payear. With the cost of raw

like cement, steel and othgoing up by 25%, it is just possible for developers tothe cost, unless the governoffers some subsidy, saysHiranandani, managing d

Cover StThe Economic Times Wealth, January 16-22, 20124

NRIs flocking toinvest in propert2011 has been a good year for non-residIndians (NRIs) remitting money to India.the Indian rupee depreciating by over 20against the dollar in the past five monthhomes are increasingly cheaper in dollaterms. For example: $1,000 sent from t

was valued at `44,800 on 7 June 2011.

now valued at `52,730. This means a 20discount straightaway for NRIs without effort. NRIs are already cashing in on it actively trying to invest in the Indian promarket. Om Ahuja, managing director, rtial services, Jones Lang LaSalle Indiaexplains that the depreciating rupee hasone of the major reasons for large deveto hold on to the prices. The depreciatirupee has also caused NRI property purto increase in the larger cities, again mapossible for many developers with goodects to hold on to their rates," he says. Nbuyers are responsible for around 5-8%total sale in the real estate market in InThe added advantage for NRIs in Europethe US is that property prices in both thlocations are also close to their all-timewhich means repatriating gains made inis also a good idea. For those looking atinvestments with a time horizon of at lethree years, a property under-constructoffers the best deals in the market todathose with lower budgets, a real estate may also be a good option. These fundssimilar to mutual funds but are usually ended. This means that investors can eonly when the fund is launched and mulocked in for the duration of the fund. Thfunds have a minimum ticket size of at l

`25 lakh. Apart from lower entry price,

funds also offer the benefit of diversifyivarious real estate properties and that twith the help of a professional manager

FROMTHESELLERTO THE

BUYER

1.BuilderCost of construction:

`2,500 a sq ft

Sells it for:

`3,000 a sq ft

Margin: 20%

2.Underwriter

Sells it for:

`3,450 a sq ft

Margin: 15%

3.Big brokers

Sells it for:

`3,725 a sq ft

Margin: 8%

4.Sub-broker

Sells it for:

`3,900 a sq ft

Margin: 5%

Bu56%

ove

Waiting for a correctionAn online survey by economictimes.comlast week found that though buyers have beenexpecting a correction since property prices are high, most of them have not actually seenprices coming down in their locality.

Do you think propertyprices will go down in 2012?

Why do you think there may bea correction in prices?

Would you wait for a correctionbefore you buy a house?

Would lower home loan interestrates be a reason to buy?

Have rentals increasedin the past one year?

Yes67%

No 33%

Rentals have increased despite a slowdown in theproperty market.

Number of respondents: 1,760

A majority expects property prices to go down but asignificant number also thinks otherwise.

Affordability is the main reason behind expectations ofa correction in prices.

Lower home loan rates will bring many buyers into the

market as it would improve affordability.

12% 37% 51%

Can't say No Yes 20%No

8%Can't say

72% Yes

74%

Prices aretoo high

76%

No

17%

Yes

7%

Can't say

12%

Everyoneis talkingabout it

14%

I have read itin the papers

52%

Yes

40%

No

8%

Can'tsay

Have developersbrought downproperty pricesin your locality?

Despite the buzz, the majority has not seen a realcorrection in the past one year.

Only a fifth of therespondents arewilling to goahead and buy atthese prices.

ANOOP VERMA

GETTYIMAGES


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WHY YOU

SHOULD NOT

BET ON ACORRECTION

Real estate is unlike anyother investment inmany waysthe entrybarrier is high, liquidi-ty is low and reliable

market information is rare. It isdifferent from other investmentsalso when it comes to a correction.When it comes to the primarymarket, builders rarely everdecrease the price. In case of a cashcrunch, the first resort is attracting

buyers by offering discounts, whichvaries from buyer to buyer. Thismeans that you cannot point to anew lower base price. If the builderis really short of cash, then insteadof reducing the ticket price of his ex-isting project, he launches a newone with different specifications at alower price point. But this too is nottechnically a correction since theproject and specifications are differ-ent. The same holds true in theresale market. Unlike in stocks ormutual funds where you can trackprices or NAVs, you do not haveaccess to a reliable valuation of yourproperty on a given day or month.

Best locations get sold out firstGetting a good property is also

about getting a good locationbothfor the project as well as for yourapartment within a housing project.And the fact is that the bestlocations get sold out first, such aspark-facing corner apartments. Oneof the major reasons for prices hold-ing up in places close to businessdistricts or work places is thatconsumers do not want to travellong distances for work. People are

willing to pay a high price to staynearer their workplace. Thoughthere are projects available fartheraway in the city periphery, theclamour is for the projects closest tothe citys business districts. Thismeans that even in a lukewarmmarket when there are very fewbuyers, the best locations andprojects will be the first ones to bepicked up.

Affordability will catcAs our survey shows, a mathe buyers would be backmarket if they can afford tWith interest rates set to gfew banks have already brdown their base rates), solatent demand will start cback to the market. Two ysalary hikes and propertystagnation in the past one

anandani Group. The incidenceaxes, among the highest in therld at nearly 30-32%,anandani points out, is also com-in the way of a price reduction.

ultiple intermediariesmany markets in North India, theveloper is no longer the oneing his project to the retail

yers. There are underwriters, bigokers, brokers and sub-brokers in

market who have entered thees flow (see From the seller to theyer) and who have their ownrgins to take care of before an

artment reaches the end-user.The intermediaries also affect theale market. The estate agentsthe first point of contact who in-

ence the decision makingocess of both the buyer and theer, says Ganesh Vasudevan,e-president,Indiaproperty.com,eal estate portal.

ilder cartels also at workhile on the one hand builders

mplain of cement and steeltels pushing up the constructiont, they have now started

erating their own mini cartels inaller markets. They fix theoted price as a group in aation. There is usually a patternwhich the developers increaseces around the same time, saysmarketing head of a real estate

mpany. Its another matter thatdifferentiation in price happenshe form of discounts beingered to serious buyers. When 37-ar-old Vasanta Sobha Turagam Hyderabad started scoutinga property in the prime location

Banjara Hills, she found it toughget one in her modest budget of0 lakh. Though there is virtuallydemand in the market, the devel-ers just wont let the prices comewn. Many brokers do agree thaty hardly manage any business,t the developers work in tandemd just wont agree to sell the prop-y with a price cut, says thenservation architect.

it sizes have shrunkother tactic that builders areng to maximise their returns isreducing the size of the units.e standard apartments being solday are far smaller than the

rage unit sold a few years ago.he per square feet valuemaining constant, what hasunk is the size of units in placesere density norms were eased,h as in Noida, and where FSItrictions have been rejigged,s Jayashree Kurup, head, digital

ntent and research, Magicbricks,eal estate portal.By building smaller flats thelder not only makes more moneyce he is selling more units, hispenses on the common facilitieso remains the same despite thee in units. Builders have alsogun to increase the marginween the super area (which he

otes while selling) and the carpeta (the usable area that you get).

Cover StThe Economic Times Wealth, January 16-22, 20126

AmarnathBanerjee35, MumbaiBanerjee, a software engineer,

wants to buy a 2BHK flat in Mumbai.

He has a budget of around `30-35

lakh. In 2008, some real estatebrokers told him that prices are

likely to crash by up to 30%. Butmuch to his disappointment, prices

have not corrected that much.

The correction inproperty prices wasonly to the tune of

10-15% and that too inselect pockets in far-offsuburbs. In the city,property prices never

actually came down.

`5,000

4,562

persqft

persq

THE AFFORDABILITY FACTORA 15-20% price correction and lower mortgage rates can improve the affordability from the current high leve

This can begin to tap the pent-up demand. However, affordability can also go up due to a r ise in incomes.

NO INCREAIS ALSOCORRECTIIf one takes into account

inflation in the past one yincrease in property price

actually a correction in re

(The average All india WPI between Jan 2011 and Nov9.59%. The real value of the

worth `5,000 a sq ft would

to `4,562.50 a sq ft in real t

Source: HDFC, Credit Suisse estimates

EMI as percentage of monthly net income Mortgage rates (%)

100%

80%

60%

40%

20%

0%1998 20022000 20062004 2008 2010 2012011E

Interest rateshave started

moving down. Ifincomes go up,

affordability willalso rise.

BHARAT CHANDA


6/6

THE

STRATEGY

TO FOLLOW

Despite factors in favourof a correction,property pricesremained mostlystable in the past one

year. So should you still wait for acorrection? Most experts are of theopinion that a broad-basedcorrection may never happen. Evenif one looks at the most pessimisticview regarding price corrections, itis unlikely to be more than anaverage of 10% in select pockets inthe metro cities.

Window shopThe first thing to keep in mind is

that this is a very good market tobargain for discounts. Even if youhave decided to wait for some timeto see if the prices may actuallycorrect, you should go out in themarket and see what is on offer. It isstill possible to get an apartmentwithin your budget after the builderthrows in some discounts. Chancesare that before the market picks up,you may land a property that iseither ready-to-move in or nearingcompletion.

Check out the resale marketSome of the best discounts may beavailable in the secondary market ifyou have enough money for a

higher down payment. This isbecausemanyinvestors whohave

been stuck in a stagnant propertymarket are looking for an exit route,even at lower margins. Theadvantage for the buyer here is that

he is dealing with an individualinstead of the builders marketingteam. But this also means runningaround more and approachingmore number of brokers to identifythe right properties in the marketand get the best deal. The resalemarket also comes with its ownchallenges of verifying whether theseller holds the title of the propertyor if the property is legal.

Avoid new launches for nowUnless you are looking at theestablished players in the market, itis better to go for a project whichhas something to show on theground in terms of actual

construction. The cash crunch overthe last two years has resulted in

many projects getting delthose of smaller developetaken over.

Dont be in a hurryThough prices are unlikeldown, they are also not goshoot up in a hurry becauimpact of factors such as linterest rates and higher scomes with a lag in the madont see an upside in reaprices for the time being. after three years, we woulupside. If you stay investeabout 4-5 years, you woulappreciation. Usually, theannual increase of about 8prices, says Uday DharamCEO, Usha Breco Realty.

eady cushioned some of thepact of high prices. This will alsoult in hardening of prices,ecially for projects that aredy or are nearing completion.

umbai is a different marketst of the news about a possiblerection in property prices is

ming out of Mumbai. But keep innd that Mumbai is a veryferent market from the othersd what you read about the pricend in the city, whether it is theord high deals or a correction inmarket, may not be true for

ur city. The impact of even some-ng like a global crisis on the realate market varies from city toy. Take the example of a city likeR, where you have a mix ofaried individuals andsinessmen. Most of thesesinessmen have not beenected by the global recession, so Int think it will affect demand in

real estate market, says Shvetan, director at Cushman &kefield. However, the same mayhold true for an IT city like

ngalore, which largely comprisessalaried class. Even Chennaia mixed set of salaried and busi-

ssmen, so I dont see globaltors affecting demand there,ds Jain.

ntals have been going ups is especially true for the biggeres where there is a significant

unk of floating population. Asyers continue to be on a wait-and-tch mode, the rental segment ofmarket has been reaping the

nefits. Residential rentals,ecially in locations closer to

work places, have consistently risenin the past two years. Somelocations in the metros have seenresidential rentals go up by morethan the usual 10% annual hike. So ifyou are one of those who has beenstaying on rent waiting for anopportunity to buy, higher rentalpayouts would mean losing outfrom one hand what you gain fromthe discounts on your property.

Its not all about residentialBuilders derive a lot of value fromcommercial and retail real estate .Any pick up there also increasestheir holding power for the residen-tial segment. According to recent re-ports, as the economy startsrecovering in the second half of theyear and companies start investingthe cash they are sitting on, thecommercial real estate sector willbe among the first to benefit. Withthe notification of 100% FDI insingle-brand retail being

announced recently, the retailsegment is also likely to see somedeals being struck. Since mostdevelopers have a mix of bothresidential and office space/commercial developments, anypick-up in one segment benefits theother. Despite the fund crunchsome developers have managed toraise funds from alternate sourceslike private equity. Private equityfirms pumped $2.68 billion (about`14,000 crore) into real estate firmsduring 2011, a 69% jump over theprevious year. Even if the high costalternate fund sources are availableto builders, they may be willing tostick to offering discounts rather

than bringing down ticket prices oftheir projects

CoverStoryThe Economic Times Wealth, January 16-22, 20

Please send your [email protected]

Vasanta Sobha Turaga37, HyderabadVasanta, a conservation architect, has been eyeing a 1,20

ft property in the Banjara hills area of Hyderabad. Though

sees no demand in the area, the property is still priced atcrore and she thinks that prices should come down.

Developers continue to quote absurdprices. Its like they have nothing to loseEven if one or two sales materialise in amonth, they recover the cost. So they arholding on to the rates.

T'S NOT JUST ABOUT RESIDENTIALst listed Indian property developers derive a significant share of value (in terms of Gross Asset Value contribution) from

office and retail segments as well. Any pick-up in this segment would also increase the developers holding power.

ce: Company data, Credit Suisse estimates

D L F U N I T E C H O B E R O I S O B H A P R E S T I G E

Residential GAV

Others

Office/ Retail GAV

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0%

0%

0%

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