BUILDEYSBUYER:,

COVER STORY I REALESTATE I

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The residential market is still and listless. But prices haveabated, and with builders desperate, home buyers canbargain and squeeze out a sweet deal By Ashish Sinho € Sunil Dhowan

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·PR

•4~ I BW BUSINESSWORLO I 22September-50ctober2Dl5

Photograph by Ritesh Sharma

•

HE AMERICANS will hate to admit it, but the realestatemeltdown seemsto havehit them too. Afterfive yearsof marketing and engaging the best brok-ing houses,they could not sell 'Lincoln House',theeld US Consulate in Mumbai's Breach Candy,at thereserveprice they had set at Rs 850 crore. The worthof the sprawling three-storey heritage mansion wasarrived at with substantial 'due diligence'. But therewere no takers, till well-known businessman CyrusPoonawalla bought it for Rs750 crore, afigure sub-stantially below its MRP!

Realtors, too, hate to admit it, but there is ablood-bath in residential real estate,especiallyin smallertier-II and-III cities. The prices are down between10-25 per cent acrossmarkets like Chandigarh,Surat, Dehradun, and Delhi's Dwarka Expressway,and Gurgaon'sGolf CourseExtension. There are bar-gains waiting to be snapped up for ready-to-move-inhomes. In bigger markets like Delhi NCR, Mumbai,and Bangalore, builders are struggling to find homebuyers. The pile-up of unsold stock has exceededanestimated 7lakhs units and is putting abig down-ward pressureon prices, according to a recent reportby Knight Frank Property Consultants. With infla-tion coming down, the ReserveBank ofIndia isunder pressureto cut interest rates to enablebanksto offer cheaperhome loans.

There is a caveat,though. Realtors and brokersworking for them are holding the price line of theirunsold units. Their messageto home buyers is: this isthe right time to buy ahome becausethere won't beany further drop in prices. The buyer is, however,sceptical and is continuing to delay a deal in the hopethat prices will fall further. Sothere is stalemate,andaparalysis in the property market.

On the other hand, for the astute buyer, this justmay be the right time to scout around and zero in on

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a dream home, especially if one is looking for a ready-to-move unit.

The Crash ComethBrokers and property sitesthat paint a rosypicture arefinally admitting there is afree fall on. A recent AmbitCapital report on the residential property sector reportedthat prices had fallen 7-18per cent acrosscities. However,in media interaction, when the analysts predictedapossible 50 per cent fall in prices over thenext year, it created ahuge stir. Earlier, aKnight Frank report said prices couldfall asmuch as30 per cent over thenext six months.

The Knight Frank report on theresidential market saysDelhi- NCRand Mumbai together account for 55per cent of the 7lakh unsold unitsacrossthe Top 8 housing markets.The report goeson to saythat it maytake over three yearsfor this stockpile toclear; and that housing saleshave droppedby 19per cent and new launches by 40 percent during the January-June 2015period acrossthe eight cities ascompared to the year agoperiod. Theseeight cities are Delhi- NCR, Mumbai, Bengaluru, Pune,Kolkata, Chennai, Hyderabad and Ahmedabad.

The researchby another property monitoring agency,LiasesForas,points in the samedirection. The cumulativesalesacrosseight major cities in India declined by 4 percent on ayear-on-year (yoy) basis,from 75.6 million sq.ftin the first quarter of 2014-15to 72.3 million sq.ft in thefirst quarter of 2015-16.Ahmedabad, Bangalore,Chennai, Kolkata and NCR havewitnessed amajor fall insales,whereas cities like Hyderabad, MMR and Punehaveshown improvement in saleson ay-o-y basis,it says.

According to the Ambit Capital report, new projectlaunches are alsodown by 40-80 per cent compared tothe year agoperiod. The quarterly report releasedbyPropTiger.com showssalesin the realty sector dropped by18per cent over the last quarter but prices are likely toremain stable. Dhruv Agarwala, co-founder and CEO ofPropTiger.com, says:"The drop in saleshasbeen primar-ily due to adrop in new launches:'

UThedelays haveadded to the

stigma attachedwith unfinished

projects"SAN JAY DUTT

MD-India, Cushmant Wakefield

".

Realtors Wear a Brave Face _The apexbody of realtors, the Confederation of RealEstate Developers'Associations of India (CREDAI),which claims to have10,000 developer members, hastermed the various figures of inventory overhang as"wrong" and "confusing". Responding to questions posed

42 I BW BUSINESSWORLD I 22September-50ctober2015

by BW BusinesswoTld,GetamberAnand, president, CREDAI National,

says:"It is unfortunate that the messagebeing sent out to the home buyer by opinion

I makers is absolutely wrong and confusing:' Anand ques-tions the various surveysand broker reports. "Not one ofthese so-called 'knowledgeable agencies'have contactedthe developer community to askthe truth about thelaunched, completed and unsold inventory;' he says.. But the Knight Frank report captures the slowdown,"While the salesvolume dropped by 19per cent during thefirst half of2015 compared to the first half of2014, newlaunches fell by awhopping 45 per cent during the sameperiod. As per our projections, the salesvolume will be 9per cent lower in 2015 compared to 2014, and newlaunches are expectedto fall short by 34 per cent;' it says.According to the report, the NCR witnessed the sharpestdecreasein new launches at 68 per cent during the firsthalf of 2015."A mere 11,360residential units werelaunched in the NCR during the first half of 2015;' it says.

Is there away out of the mess?The real estatedevelop-ersare at loggerheadswith the government and the cen-tral bank, eachasking the other to take stepsto restart thebuying-selling cycle.

Taking note of the crisis, RBI governor RaghuramRajan has urged the developersto reduce prices andthereby stoke buying activity. "...1think we needthe mar-ket to clear the excessstock and with growing unsoldstock, we need to seethe waysto do it. Someof it might beby making loans easier;'Rajan said in a conversation withthe State Bank of India (SBI) chairman at abanking meet.

Photographs by Umesh Goswomi

SBI chairman Arundhati Bhattacharya askedthe RBIgovernor to allow home loans below the baserate asrealestatestockswere at a two-year high and bad loans in thehousing segment were at the lowest. CREDAI, in ariposte, told the RBI to cut interest rates instead sothatcheaperhome loans are available. It hasalsourged thegovernment to rationalise taxesand streamline theapproval processto bring down property prices.

... But The Heat Is On

When BW Businessworld askedthe developersaboutslowdown in the residential market, many choseto avoidofficial commerits. In private, they did concedethat saleshad been stagnating. Brotin Banerjee,MD & CEO, TataHousing, concedesthat there was indeed a slowdown."The real estatemarket is under pressurefrom the twinfactors of slowdown and ahigh rate of interest, which isputting a rein on prices in "keycities:' Banerjee saysthatthough the industry is grappling with low absorption

ratesfor the last few quarters, this is the right time for endusersand investors to buy homes. Girish Shah,CMO,Godrej Properties, is more cautious though: "The marketdynamics vary from location to location and it would bedifficult to generalise asto an overall slowdown:'

Anand of CREDAI sayscities like Coimbatore,Belgaum, Chandigarh, and Noida Extension haveamplesupply at Rs3,500 per sq.ft. ''Acrossthe country, the aver-ageprice of housing rangesbetween Rs3,500 and 5,500 asq.ft. To saythat there is apanic in the developer commu-nity is not true. The community is confident that .hehome buyer - sooner than later - will realisethat thereis going to be no further price correction and will buy atthe existing, realistic price levels;'Anand adds.

Will developerscut prices?Not likely, saya number ofdevelopers."Most developerspurchase land and there is ahuge cost associatedwith it. Add to it the rising costofmaterials and labour. In this scenario, margins are alreadythin;' saysShah ofGodrej Properties.

Anand saysgiven that the cost of construction is acon-stant, ranging from Rs 2,000 to Rs3,000 per sq.ft(depending on the height of the building) and given thatthe cost ofland acrossthe country (except for premiumlocations) rangesfrom Rs500 to 2,000 per sq.ft, "there isno scopefor aprice reduction".

Bangalore-based developer Pratik K. Mehta, MD,Unishire, attributes the slowdown to three major factors:Oversupply in markets like Mumbai and New Delhi, highinterest rates and'speculative investor-led markets. "Even'though Bangalore has not seenan oversupply, overallcountry-wide sentiments are impacting this market aswell;' saysMehta. He points to the speculative investor-led markets like Mumbai and New Delhi, which arewit-nessingstrong correction in realty prices and thesesenti-ments are impacting end-user driven markets like

Bangalore aswell.

Foreign Investors Cash InWhile the retail buyer is in a

wait-and-watch mood,institutional investorsseesoft prices and trou-bled builders with overleveragedbalancesheetsand incompleteprojects asa definiteopportunity. After all,

buying cheapand exit-ing at higher levels

remains the mantra acrossall assetclasses.According to

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VC Edge,the data researchplatform ofVC Circle, in thefirst half of 2015,real estateattracted $1.3billion against$892.81 million in the first half of 2014,agrowth of45 percent in foreign investments.

Among the big investors havebeen Goldman Sachs,which hasbought a minority stake in Piramal Realty,theprivately-held real estatearm of Ajay Piramal-Ied diversi-fied firm Piramal Enterprises, for Rs978 crore. It was alsoreported that Warburg Pincus too had pumped in Rs1,800 crore to buy aminority stake in the samecompany.

Goldman Sachsand Creador have alsopicked up stakein North India-based Ashiana Housing. Even DLF, India'slargest realty firm, has reportedly sold about 50 per centstakeeachin two upcoming projects to Singapore'ssover-eign wealth fund GIC for Rs1,990 crore. Rising institu-tional interest in the realty spacemay be a sign that thesector is bottoming out.

Ground View Contradicts BuildersOn the ground, the reality of apricecorrection is evident. BW

Businessuorld's dipstick sur-vey showsthe averagepricerangeon DwarkaExpresswayhascomedown by around 10 percent compared to what itwasayear ago."The aver-ageresidential rate wasRs4,500 per sq. ft inApril-June 2015 againstRs5,000 per sq.ft in thecorresponding period lastyear.There is an oversupply ofunder-construction units in thisregion and, asa result, there are multi-ple price points depending on the project'slocation, amenities offered, and date of delivery;' saysRazaKhan, another local property dealer.Sameis thecaseof Ulwe region ofNavi Mumbai. Projects are sellingat multiple price points. There was somepressureonprices last year in the region. At the current averageofRs5,600 per sq. ft, prices haveremained flat sincethe start ofthe year.

"Even the resalemarket hasbeen adverselyaffected.According to the latest NHB Residex,atable that chartsprice trends across18cities in the country, Chandigarh,Meerut, Surat, Dehradun and Lucknow haveseenadecline in rates.Chandigarh sawthe maximum drop of4.4 per cent during the April-June 2015period;' saysNeeraj Bansal,partner and head, Real Estate andConstruction, KPMG India.

Photograph by Ritesh Sharma

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Areas in Chandigarh such as Dera Bassi andZirakpur-Kalka Highway have seen prices drop 25 percent and 23 per cent, respectively, during the firstquarter of 2015. Most sectors of Mohali have also reg-istered a downward trend during the first threemonths of this year. In some of the over-supplied mar-kets, resale prices are 15-20 per cent lower than theprimary property rates, he adds.

According to the Ambit Capital Research report,prices in South Delhi are already down by 20-25 percent. In the smaller cities, the situation seemsto beworse; Jaipur, Rajkot and Lucknow have had a 15-20per cent y-o-y correction.

SanjayDutt, managing director, India, Cushman &Wakefield, says:"Infrastructure development didn't matchpacewith skyrocketing capital valuesof residential space.The undue delay in completion of projects alsoaddedtothe stigma attachedwith under-construction projects.This led to,buyers becoming increasingly reluctant to buy

into under-construction projects, leading to theslowdown in salesactivity and pile of inventory:'

net worth individuals, who may otherwise havebeenactive investors in this segment:'

Bon~ Credit, Block Money ExitsThe RBI figures show bank credit to commercial realestategrew 5.3 per cent (24 July 2015/25 July 2014)

against 19per cent during November 2010. SaysSunilRohokale, MD & CEO,ASK Group; "Bank credit is stillavailable for bankable projects, but poor salesvelocity, sof-tening prices and much-delayed completion of projectsmay lead to interest payment defaults impacting the non-performing assestsof banks:'

It's awidely acceptedbelief that it's the investor com-munity representing about 80 per cent of the market thatdetermines prices more than the end-buyer. The BlackMoney (Undisclosed Foreign Income and Assets) andImposition of TaxAct, 2015got its teeth in July this year.Therefore, there is aperception that the government get-ting active against black money has resulted in investorsshying awaythereby impacting real estatesales.

Sumchit Anand, founder and managing director ofAcquisory Consulting, says:"Cashtransactions may havebeen impacted by atight control on the black money/cashpart by the government. This may restrict cashrich high

A Good Time To Buy?Pricesin locations that are poor in infrastructure couldseefurther correction. RajeevKumar, president, Sales,AIRWIL, says:"Buyers today havebetter negotiationpower asthere is excessivesupply and lessdemand.Depending on the 'distress' of the builder, we may seeprice cuts, especially in locations where infrastructuralconcerns persist:'

ASK Group MD & CEO Sunil Rohokale says:"Intoday's real estatemarket, speculators are non-existent,while there are large proportion of end-users and few •investors:' Rohokale'sadviseis to selectthe right under-construction project and avoid investing in afresh project"asthere may be adelay and asituation may arisewhereboth EMI and rentals may start pinching:'

The home buying market is not uniform and eachcityshows a different price movement. Within the city, too,there arejnicro-markets that are at variance with one

another. In Mumbai, for instance, in the farsuburbs ofDombivili or Virar, price cor-

rections havebeen in the 10-15percent range; however, in the island

city of south Mumbai, prices areholding though not rising asthere is hardly any fresh supply.

According to AcquisoryConsulting's Sumchit, "In theGurgaon, Noida~ Faridabad and

other NCR suburbs, prices havecorrected more than 12-25 per

cent over the past two years:'Rather than waiting, try bargaining

with the builder for abetter price.Sumchit suggests,"The general perception

for buyers is to wait asthe prices may come down fur-ther in the future. This, however, may be true for newprojects, but unlikely for projects nearing completion:'

Anand, who is alsothe managing director of ATSGroup, givesamore pointed advice: "The prices for anyproject, asit nearscompletion, tend to go up. The besttime to buy is between 8-12months before the completionof aprojectf 'As abottomline, we believe sluggish demandin real estateis more due to high prices rather than highinterest rates;' saysSumchit.

Most real estate experts say that around 80 per centof the unsold inventory today is held by re-sellers. Andthe sticking point is that re-sellers won't be the first tostart selling at a lower price. It is the builder who hasto crack first.

Uln today'sreal estate

market,speculators arenon-existent"

SUNIL ROHOKALEMD t CEO, ASK Group

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What will be that breaking point? "If during festiveseason, October-December, there is no improvementin sales in the residential segment, the developers maybe forced to reduce prices and sell out unsold invento-ries;' feels Sumchit.

Adds Dutt of Cushman & Wakefield, "Buyers lookingfor avalue deal should carefully evaluate discounts suchasno EMI for 24/36 months or subvention schemeunder I

which the developer paysthe EMI on behalf of the buyerfor the specified period. Theseschemesare usually higherpriced compared to aconstruction-linked plan or posses-sion-linked plan. It is advisableto scout the secondarymarket before purchasing directly from the developer asone is likely to find similar spaceat a lower price:'

Pune-baseddeveloper Kishor Pateof Amit Enterprises,on the other hand, advisesnot to expecttoo many pricecuts. ''What will be in evidenceis developers' increasedwillingness to reducethe financial burden of purchase bywaiving chargessuch asservicetax and stamp duty:'

Dealer commissions offered by builders to brokers andother intermediaries vary between 2-10 per cent.However, in practice, a large portion of these commis-sions arepassedon to the buyer. Dealer discounts alongwith builder discounts and the other freebies should besqueezedout to get the best deal. .

A word of caution from Kishor Patethough: "The offersthat will appear asthe most tempting may come fromdeveloperswhose projects lack the necessaryapprovals or .areunsound investment options:'

Recovery Any Time Soon?How and when will this traffic snarl of builders not budg-ing on prices and cash-strapped home buyers waiting foracheaperdeal end?

Agarwala of Prop Tiger. com feels that some funda-mental parameters have to change to kick-start thissector. "We need infrastructure development to con-nect affordable areaswith commercial hubs (func-tional expressways, metro lines, roads). This should becombined with streamlining the approval process forreal estate projects to enable developers to deliver pro-jects on time;' saysAgarwala, adding: "The most cru-cial is economic growth resulting in salary increasesand ultimately better affordability."

The single-biggest trigger for a change in sentimentwhich Agarwala and others seeis a combination ofsteep reduction in interest rates and sharp price cutsby developers. Agrees Acquisory Consulting's Anand:"The answer is developers setting realistic sales prices,a boost in consumer confidence and a possible reduc-tion in the rate of interest for the construction sector

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FIRST PERSONSanjay Chandra, MD, UnitechThe slowdown in the real estate sector is defi-nitely a reality. However, I feel that things havehit a bottom, it is unlikely to fall more. Over thenext few months, the sector will see on upwardmovement. Revival in the sector is imminentand a few triggers like rate cuts by lenders overthe next few months will odd impetus to thisrevival. I am getting this indication from therobustness returning to the commercial leasingspace. As commercial leasing increase, espe-cially in markets like Gurgaon, demand for hous-ing follows.

As to the issue of price cuts, if you look atwhere prices have been in the post few years,you will see that in most ports of the countryprices have been static. So in effect. real pricestaking inflation into account have actually gonedown. Higher input costs, high land prices andhigh borrowing costs mean that developershave little room for bringing down prices. Butyes, what buyers are getting today are at yes-terday's price.

Photograph by Bivash Banerjee

COVER STORY I REALESTATE

CLIMB DOWNReal estate prices in key sub-markets have seen significant softening over peak values

Peakcapital Peakcapital Capital valuesvalues Peakcapital values (Rs/sq. ft) as of

City Submarket (quarter) values (year) (Rs/sq. ft) Q22015 Change(%)

Oelhi-NCR Golf Course Extension Road 04 2012 10}50 9,250 -14%

Oelhi-NCR Southern Peripheral Road 04 2013 7,2S0 6}50 -7%

Oelhi-NCR NewGur~aon 02 2013 5,500 4}50 -14%

Oelhi-NCR Owarka Expressway 02 2013 8,250 6}50 -18%

Oelhi-NCR Naida Expressway 04 2013 5}50 5,500 -4%•

Oelhi-NCR East of centro! Noida 04 2013 5,200 5,000 -4%

Oelhi-NCR Naida Extension 04 2013 3,200 3,000 -6%

Kolkata North-east 02 2013 3,125 3,050 -2%

Chennai Rajiv Gandhi SalaHI 01 2013 4,500 4,250 -6%

Mumbai NaviMumbai 04 2012 10,000 8,000 -20%

Mumbai Thane '. 04 2012 9,500 9,000 -5%

Mumbai Western suburbs 04 2012 14,500 12,500 -14%SOURCE: CUSHMAN t WAKEFIELD

and for home loans." Builders in a recessionary griphave a stock response. They begin changing their pro-'ject profile to fit into the 'affordable' segment. They didit in the past, and they are doing it now. By offering anincreasing number of smaller homes in the Rs 20 lakh-Rs 75lakh range, they are hoping to stoke demand."Affordable housing may be the answer to beat theslowdown blues. Given the fact that there is latent .demand for affordable housing, it is one way of boost-ing our prospects, saysTataHousing's Banerjee. Tata Housinghas a separate entity known asTata Value Homes that exclusivelyfocuses on value and affordablehousing segments. Even Mumbai-based Niranjan Hiranandani, .know more for his luxury projects,is for the first time developingsmall, 'affordable' units.

A possible trigger canbe the gov-ernment's Housing For All scheme.If it getsgoing in multiple cities withpartnerships between the privatesector for hundreds of affordable,home loan-linked projects, lakhs ofprospective home owners will enterthe market creating apossible bullrun. Mehta of Bangalore-basedUnishire Group agrees.He saysthe

government's Housing For All project will pavethe wayfor agrowth in budget homes. "Bangalore will seea surgein affordable and mid-segment residential market.Demand for housesin the range ofRs 40-75lakh arelikely to go up;' he says.

Others feel things will changeonce the recessionarycycleabates.SaysSunil Rohokale of the ASK Group: "Wehaveto await an uptick in the investment cycleleading toagrowth in economy,job creation and rising incomes in

addition to softening of residentialreal estateprices by 5-10per cent.The big trigger will be when con-sumers feel confident that they aregetting value for money:'

Realtors and property brokers, onthe other hand, are not apessimistictribe. They have sat out recessionarycyclesearlier, and they arewilling todo sonow. Sitting in his office inCentral Noida amidst a dead prop-erty market, realty broker RajeevGupta says:"Yehmandi hai,Bhoolcmari toh nahi!" (This is arecession;it is not famine!) IlrIl

No TakersMumbai and Delhi NCR have thelargest unsold inventory among

major cities

MUMBAINCRBENGALURUPUNEAHMEDABADCHENNAIKOLKATAHYDERABADTOTAL

194,500191.100101.500

54,80041.400

39,10037,00033,500

702,900Figures are unsold units. Source: Knight Fronk Report

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~ ashish.sinha@lmsinessworld.in;sunil@lmsinessworld.in

~ @ashish_BW;

@dhawansunil