Tuesday, February 06, 2007

Ecnonomic times : Bubble trouble ??

What goes up must come down....The great property spiral may finally have to kowtow to the laws of nature. For real-estate prices are in for a correction at least in North India.

While the decline is relatively sharp (10-20%) in 'B' cities like Chandigarh, Amritsar, Jaipur, Rudrapur and Karnal, it's moderate (5-10%) in the National Capital Region (NCR) of Delhi. And prices in other cities like Mumbai, Bangalore, Pune and Chennai are showing signs of stabilising.

It's happening in Delhi too. Barring posh South Delhi, where residential prices are still rising, there's been a 5-10% fall in the months since Diwali in suburbs like Noida, Greater Noida and Gurgaon, and in areas like Mayur Vihar, Patparganj, Rohini and Dwarka.

The main reasons are fairly obvious: an unprecedented price boom, which has made property unaffordable for a large chunk of the middle class; a flood of new projects, and the complete mismatch between capital value and rental rates.

However, developers and consultants take heart from the high economic growth; the decline, they say, is unlikely to be steep or last very long.
"The correction was inevitable given that prices had become unrealistically high. In that sense, it's good for the sector," says CB Richard Ellis (South Asia) MD Anshuman Magazine. But, he adds, it should not be seen as the beginning of a slowdown as latent demand is still "very strong".

Exit speculators

The trend, which could be limited to stabilisation in prices instead of a decline in certain markets, would force speculators to exit, paving the way for end-users to enter.

So far, a majority of plots or apartments in a project were cornered by speculators and brokers at the pre-launch stage, who, in turn, sold them to the end-users at 25-50% premium.

Now, with end-users increasingly baulking at steep prices, investors are stuck with their investment. With no money flowing in, they are not being able to block apartments in upcoming projects.

This has also made it more difficult for developers to find buyers for their projects. Says Magazine, "Earlier a project would be sold within a few days, now it might take a few months, but it is going to end users.

Therefore, the price discovery is genuine." In the last three months, developers have not been able to increase the selling price of their projects and, thanks to the absence of the speculators, people are being able to buy property directly from builders at rates cheaper by 10-25%.

A senior banker reveals that in a project in Greater Noida, brokers cornered almost all the apartments in a project being developed by a respected developer, thinking they would sell it at a substantial premium.

Finding no takers, they are now selling the apartments at a discount 15-20% less than the official launch-price of the project.

What's more, such discounts could get even better when the large number of projects are completed. As Vivek Dahiya, director of global real-estate consultancy firm Debenham Tie Leung, points out, a number of projects launched in the last two years would be ready for delivery in the next six to 18 months.

"When that happens, speculators would want to exit. This would increase supply and prices could witness a sharp correction."

Growth = Demand

However, the market is hoping that the decline wouldn't go beyond 10-15% from present levels as long as economic growth continues to create new buyers.

Says Unitech executive director Sanjay Chandra: "In a city like Delhi, for instance, there would not be much problem for developers as demand for residential real estate is genuinely on the rise. This stems from large-scale absorption of commercial real-estate space in 2006."

According to one estimate, 6.4 million sq ft of commercial space was leased out in NCR in 2006 as against 3.2 million in 2005. This translates to 75,000 new jobs, since every 1,000 sq ft of office space is supposed to accommodate 12 employees.

Even if only 25% of them go in for a new house, there would be a demand for around 19,000 houses. Against this, the annual supply in the region would not be more than 10,000 houses. "This means a huge mismatch in demand-supply. Though the price points could be an issue, which would see some minor correction," says Chandra.


But the situation could be different in 'B' cities like Amritsar, Chandigarh, Jaipur, Karnal and Rudrapur where commercial activity has not picked up. Besides, a large number of developers have already entered these markets to cash in on cheap land and easy investor money.

But there is no huge demand from end-users. Developers and consultants feel the upcoming townships near these cities might witness a sharp correction in coming months.

However, Assotech CMD Sanjiv Shrivastava points out that prices in 'B' cities are still substantially higher than what they were one year back. He believes the correction would not be very steep in areas where developers had planned projects with an eye on end-users' requirements.
Even in 'B' cities, by the time the projects and townships are completed in the next three to five years, there would be enough demand if the economy continues to grow at the current pace of 8-9%."

Besides, the new townships would also fuel economic activities in these areas. "But there could be problems if investors enter these markets to make a fast buck."

ATS Infrastructure promoter Getambar Anand attributes the correction to the large number of project launches announced by developers without commencing development work. This has affected market sentiment.

Pawa Builders MD Pankaj Pahwa blames unscrupulous elements in the business for playing havoc with market sentiment. "Many developers have sold apartments or plots without even having land. There is a need for a regulator to keep an eye on such irregularities."

Dahiya concludes: "Clearly, a correction is inevitable as more and more projects enter the market, interest rates inch ever upwards, vacancy levels in completed projects increase and end-users question the rationale behind the price rise.

But it is still unclear which reason might act as the proverbial last straw."

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