Monday, October 08, 2007

Who will Blink first ?? Its the builders stupid !!!

TOI has a 2nd page article on the realty slump in Mumbai. The question is not whether who will blink, but rather "Is it affordable ?" With expensive loans and speculators having left town, there is no hope for any sales at these prices. Times says they are writing about the realty slump, since May. This blog was started almost 2 years ago when the irrational exhuberance was overcoming buyers aided by low interest rates. I expect US style foreclosures to become rampant in Mumbai/Delhi where people have over-leveraged themselves. Rather then wait for builder incentives, end-users/bargain hunters should look for second sales for distressed propeties. I'm certain a 40% reduction in them is possible. As always time is the best teacher.

Mumbai: It may seem like an eyeballto-eyeball confrontation between builders and buyers. And who will blink first in coming weeks is the question on everyone’s mind amid an unprecedented slump in Mumbai’s residential real estate market.
According to property experts, the next three months, starting from the Navratri festival, will be extremely crucial for builders, who have seen sales of apartments dropping by up to 50% in 2007 as compared to last year. In fact, some leading developers have confessed in private that some of their projects registered “zero sales’’ between February and June this year.
Despite the slowdown, which is mainly due to the unaffordability factor and high interest rates on home loans, builders are holding on to their prices. Potential flat buyers, on the other hand, are deferring their decision as they expect the rates to drop. Some experts are of the view that a further 10-20% dip in flat prices cannot be ruled out.
HDFC chairman Deepak Parekh agreed with the contention that it is all about who blinks first. “The fact that they are holding on to their prices despite the drop in sales of between 30% to 40% is an indication that builders are showing signs of cracking up,’’ he said.
Parekh added that the developers are in a position to hold on mainly because of the phenomenal profits they have made in the past. “If the sales do not increase in the next few months, one expects a correction of about 10-15%, but definitely not a crash as many predict,’’ he said.
Last May, TOI was the first to report about how several builders, dealing on a one-to-one basis with home buyers, had already started offering freebies like throwing in free parking, not charging a premium for a floor rise and, in some cases, even offering to pay for the stamp duty.
Rajiv Sabharwal, senior general manager, ICICI Bank, too, admitted that the next three months are crucial for builders if volumes do not pick up. “The market is down in terms of unit sales, but the number of inquiries from flat buyers is increasing. This could lead to a positive trend in the next two months,’’ he said.
Sabharwal, however, added, that the market is slightly better than what it was in the first quarter of this year, which witnessed very low transactions. “There has been a slow improvement since then, but it will be difficult to quantify,’’ he said.
A property expert, not wishing to be identified, told TOI that if the market does not revive or sales fail to pick up in next three months, there could be a correction to the extent of 20% to 30% by next year.
“Ninety per cent of investors as well as end-users have already bought their first and second homes. Now at these high levels, both the speculator as well as the end-user do not find real estate lucrative to invest with high risk. In fact, speculators have started lending money to developers at 15% to 18% interest rather than investing in real estate,’’ he said.
Knight Frank India chairman Pranay Vakil observed that despite the booming stock market, investors are no longer booking profits and investing in real estate. He said the coming months would be keenly tracked to see how the residential market shapes up.
Suburban property developer Mukesh Mehta said the residential market is saturated in areas like Chembur, Santa Cruz, Khar and Bandra. “Prices have become unaffordable. Builders who have the financial muscle power can hold on, but the smaller developers will be thrown out in the next two years,’’ he claimed.
But Mafatraj Munot of Kalpataru Group put up a brave front. According to him, sales of apartments have picked up since June after the initial dull period during the beginning of the year. “In fact, there has been an increase of 10% in our prices since last year,’’ he said. “Today there are only actual buyers. The investors have all disappeared,’’ Munot added.
Arun Nanda of Mahindra Gesco said actual sales are still happening despite the slowdown. “At our projects in Goregaon and Kanjurmarg, prices have appreciated by as much as 15-20% since last year,’’ he claimed.
In fact, TOI has learnt from market sources that some big developers in the city have taken a gamble and hiked their prices in residential projects by up to 15% since the past two months despite few sales taking place.
In Powai, a developer has jacked up prices for his high end apartments from Rs 14,000 a sq ft to Rs 16,000 a sq ft. Similarly, another has increased the price in his Malad project from Rs 6,300 to Rs 6,700 a sq ft. A developer setting up a project near the Jogeshwari-Vikhroli link road recently hiked the price from Rs 6,800 a sq ft to Rs 7,100 a sq ft.
“These developers are trying to send a warning to flat buyers: buy now or expect the prices to rise even further,’’ said a market source. Whether the purchaser bites the bullet or not will be seen only in the next few months.
In the last three years, the property market has gone up by almost two to three times across the country. According to experts, the prices have reached a level where it looks difficult for further appreciation and there is now resistance from buyers. Reasons for the high prices are:
l FDI funding to developers l Mutual funds have entered real estate l Big developers from north moving towards south and west regions l Boom in shopping malls l Cash transactions
There is a lot of resistance for buying real estate because: l Real estate prices are at its peak. l High interest rates which make investment in property not worthwhile.
There is clear indication of slowdown as few people are taking housing loans as compared to last year. l Oversupply to hit the market in residential and commercial sector. l New townships likely to come up on the outskirts of the city, which will be well planned.

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