Friday, December 28, 2007

2007: Real estate growth moderate in Chennai

Hindu reporting

Many potential buyers adopted a “wait and watch” approach in 2007 preferring to stay in rental accommodation than buy, writes Ramesh Nair

Photo : N. Sridharan

Uncertain phase: The real estate prices went up and the buyers remained lukewarm about going in for purchase.

After a record 50% plus price increase per annum in 2005 and 2006, the Chennai residential real estate market witnessed moderate growth in 2007 with prices increasing 8-12% across various micro markets. However most of this price increase was seen in the first quarter of the year after which the prices and sales volume stagnated. Although the office market saw a record 7 million sft absorption in 2007 indicating new job creation and a strong economy, this did not translate to direct increase in prices and volumes in the residential market as witnessed over the last three years. Many potential buyers adopted a “wait and watch” approach in 2007 preferring to continue staying in rented accommodation than buy. The number of apartments being sold in 4Q 2007 was also lower than 4Q 2006. Also, the home loan market, which was growing at 30 % plus in 2005 and 2006, saw a growth of only 10-15%.

The key reason behind this slowdown has been higher prices and interest rates, impacting affordability, and to a lesser extent excess supply in a few micro markets, rather than slow down of economy. Developers, who were selling their entire projects in a few days, are now taking months to sell their unsold stock. Although, no major drop in prices are expected immediately as the vacancy rate of unsold completed residential real estate stock is still negligible. Developers have started offering a variety of offers such as free car parks and flexible financing options such as interest waiver during construction period so that they do not have to bring down the prices.

The year 2007 saw Chennai’s residential market returning to more normal levels of activity. Properties with deficiencies in location or overly optimistic asking prices were slow to move. The hardest hit was the Rs. 60 lakh plus apartment market. The past year saw return of negotiability in asking prices after a relatively long absence from the marketplace.

The city’s economy remains strong, and is creating jobs at a fast pace. Interest rates, which have been rising steadily, have begun to stabilise as inflation remains under control. These factors should continue to maintain reasonable demand, and prices from falling drastically.

. Contrary to what was seen in 2005 and 2006, the number of investors and speculators who entered the market in 2007 was lesser. Real estate private equity investors such as J P Morgan, Citigroup, Red Fort Capital and HDFC Realty invested in the Chennai real estate market. The difference in the launch price and sale price at the time of completion has reduced drastically in the last one year. The yields from residential property remained steady at 4.25 % to 5%. Home buyers have become more quality conscious and have started demanding better amenities and features.
Media savvy

Developers have become more media savvy and aggressively started spending on advertising and marketing. The home buyer’s exposure to real estate related advertising has increased drastically in the last one year. Developers also realised that they need to identify specific target markets to market their products. Many developers have started investing in setting up strong marketing teams.

After 3 years, the market started moving from a sellers’ market to a buyers’ market. Many landlords, who were quoting exorbitant land prices in corridors such as OMR, are now willing to negotiate at more realistic levels.
Outlook for 2008

With IT and BPO companies facing the brunt of the appreciating rupee and many investors and speculators preferring to invest in other avenues, residential demand is further expected to be under pressure in 2008.

Unlike the last 3 years where the Chennai real estate market saw only winners, 2008 will witness winners and losers. It is also expected that developers will construct smaller units without compromising on the amenities to make it more affordable.

With more than half the time spent in automobiles today representing time spent in severe traffic and soaring of fuel prices over the last few years, access to public transportation and road infrastructure will become key drivers for taking housing decisions in the future. Developers need to understand their consumers better and figure out a way to reach them the way they want to be reached. Developers need to realise that over the last few years the consumers have been exposed to new areas of real estate and become more knowledgeable.

As the market becomes tougher and the home buyer more choosy and price sensitive, developers will need to use many more innovative lead generation and touch point creation methods of marketing to successfully market their residential units.

The year 2008 will also see a number of large Pan India developers such as DLF, Hirco and Unitech announce their large residential townships projects in Chennai thereby increasing the supply, and keeping the prices under control.

s0The market is adjusting after a period of unprecedented expansion. It’s reasonable to expect that price appreciation will flatten or decline in some areas.

The length and depth of the adjustment remains to be seen. Even today, there have been instances where entire projects, which have been priced right, being sold within a few weeks of launch.

Although the Chennai real estate story is real, large in size and will pay in the long run, developers need to realise that volumes are inversely related to price and lower the price higher the opportunity.


bubblebuster said...

To supplement this guarantee by the author "Although the Chennai real estate story is real, large in size and will pay in the long run" i will add one more guarantee "in the long run we are all dead ".

Anonymous said...

I agree.

People who are putting more money than actual worth of te perperty are going to be dead as from 2008, ppl are aware of manipulated prices and risks of unmanagable loans, there will not be takers for high prics anywhere.

Add to it weak IT sector (look ar their stock performance over 2007), rupee appreciation, increased housing supply, bubble has started to bust and it will leave investors and speculators dead as they wont be able to come out of bad investments.