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.

Wednesday, December 26, 2007

Housing boom fades in Hyderabad

Real estate boom fizzles out fast
Deccan Chronicle Hyderabad,
Dec 25: The real estate boom which held sway in 2006 petered out in 2007. The poor response to auction of Kokapet lands in the third week of December was only the latest instance in the downswing. Except for a few projects catering to high end consumers in up-market areas such as Madhapur and Gachibowli, the construction scenario was dismal in the capital and surrounding areas.
The number of real estate transactions in Hyderabad and Ranga Reddy districts declined by 40 per cent when compared to the previous year. Fall in NRI investments because of the increased rupee value and the real estate industry reaching saturation levels were cited as the main reasons. The slowdown in the IT industry also contributed to the downturn. However, the prices of apartments remained high in the city after construction came to a halt in the wake of stringent building norms introduced through GO 86.
"The growth rate from April to December this year is 13 per cent while it was 38 per cent in the previous year," said a senior official of the Stamps and Registration Department. Real estate transactions almost came to halt this year in areas such as Maheshwaram, Shamshabad, Nizampet and Ibrahimpatnam, which saw tremendous growth in 2006.
Interestingly, the revenue increased from Rs 752 crore (between April-December 2006) to Rs 762 crore for the corresponding period this year in Ranga Reddy because of revision of market values of lands. "But the number of transactions declined from 1.72 lakh to 1.03 lakh in Ranga Reddy and 33,000 to 28,000 in Hyderabad," said the official.
In Hyderabad, the revenue also dipped from Rs 312 crore to Rs 299 crore. Top builders admitted that the situation had drastically changed when compared to last year. "Though the price did not fall, there is no rush to buy property," said Indu managing director, Mr Shyamprasad Reddy. However, the year also saw the launching of the first ever public private partnership township at Srinagar where owners of plots became equity holders.
Other positive developments in the real estate front were the mega venture of Lanco Hills at Manikonda and payment of Rs 444 crore by American real estate giant Tishman Speyer for the 500-acre township at Tellapur. Township projects of Indu Aranya, Palm Meadows and Aparna also started off in 2007. The year also witnessed the implementation of GO 86 which stipulated mortgage of a portion of the constructed area to the civic authorities. Builders would have to forfeit the area if they violate building norms.
"We made it compulsory for builders to register themselves with civic authorities," said Greater Hyderabad Municipal Commissioner, Mr C.V.S.K. Sarma. "We also introduced tatkal scheme for independent buildings whose permissions will be sanctioned in 48 hours."

Sunday, December 23, 2007

Economic Times on the Real Estate Slowdown

Economic times acknowledges the housing bubble though it is still afraid to displease the builders. A simple reality check is all you need. Goto to the hundreds of housing complexes which have sprung up all over the city of mumbai and check the occupancy. The people living there are either the buyers who got in cheap or the apartments are rented out. Technically in Mumbai, every apartment if priced right will be picked up in seconds. If the price is not right, I think the bubble will grow bigger and the crash will be steeper. So a 30-40% drop is not too big considering pricess have jumped 3times in the past 3 years

ET article follows.

HIGH interest rates and rapid escalation that land prices witnessed this year may be one indicator of an impending real estate bubble of sorts. Softening of prices in select pockets such as Gurgaon, Noida & Ghaziabad in Delhi NCR and certain areas in Mumbai over the last 6-8 months has already been witnessed. But what does all this signify for the Indian real estate sector? Will the bubble burst or are these mere speculations? SundayET gets to the root of the matter.
There are several indicators that could suggest a bubble. Unreasonably inflated real estate prices across the board, higher vacancy rates in residential and commercial projects with unwarranted project delays by developers and a steady withdrawal of both domestic and international investors are some of the signs that imply a real estate bubble in the market. Experts suggest that a 10-15% correction in prices does not imply that the sector will slow down. The real estate sector is currently on a high due to high economic growth, shortage of residential spaces, growth in IT/ITes, retail etc. The focus though will now have to shift more towards Tier II and Tier III cities since the metros are getting saturated.
Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj (JLLM) says that there are no indications that investor activity has overtaken genuine buyer activity. “The residential sector is led by end-users and it is they who dictate the state of the market. There is no evidence of a ‘bubble.’ Neither is there a significant correlation between the state of the stock market and that of the property market. There are instances of overheating but these are localized.”
Developers are quick to brush off the idea that any signs of a bubble may even exist. Dr B P Dhaka, COO(MP), Parsvnath Developers feels that it will be completely wrong to think that the current real estate boom is a bubble waiting to burst. “The growth in realty has evolved back-to-back with all round economic development witnessed by the economy over the last decade. The boom in real estate might have looked like a bubble about to burst, but the fact remains that the burst has been converted into further opportunities because of transformation of the real estate sector into an organized sector and its penetration into the Tier II and Tier III cities.”
Agrees Avneesh Sood, director, Eros Group, who feels that the 10-20% correction in property prices augurs well for the industry because there are various unorganised developers who create unrealistic
price mechanisms, hence making it unaffordable for genuine home buyers. “The picture is really not as bleak as it is made out to be. Demand is not exactly non-existent. There will be a decent growth at an average of 5% between 2008 to 2010. Developers for their part are still very optimistic, as buyers’ continue
to pick up property for end-use. Developers’ should now target the affordable quality housing segment for the middle class and offer decent value for money dwelling units.”
When a bubble develops in any market, it is essentially because prices for that particular commodity or asset have gone through the roof and beyond affordability levels. Hence, real estate bubbles are invariably followed by severe price decreases. So what exactly can be done to avoid the house price cash from finding its way into the Indian market?
Ganesh Raj, Partner & National Leader, Real Estate Practice, Ernst & Young, feels that the government has to play an active role to keep the situation in control. “Severe price decreases happen if there is a demand-supply mismatch. We currently face a shortage of about 24 million households. In order to control any severe fall, the government has to take certain measures. Steps like repealing of ULCRA are a positive move. Similarly, checking that speculators are not entering the market, appointing of regulator in order to check that real estate developers are not involving themselves in unfair practices, increasing the FSI especially for residential sectors would help in controlling the prices.”
Raj’s cautious approach is only natural as he remembers the last time when the burst in the mid 90s wrecked havoc in the property market in India. At that time the reason for the crash was mainly due to there being more investors than end users. “The real estate markets closely tracked the stock-market fall at that point of time. Housing prices that had zoomed during the bull run of 1993-94, started showing a downward slide in 1995. The burst in real estate market lasted far longer than the burst in the stock-market. Between 1995 and 2000, the property bubble that was built on speculations burst, and prices declined by almost 30–40 per cent across India. Artificial demand was created and there was no supply to meet that demand which led to a crash in prices. The bubble burst in 1996 as speculators were desperately liquidating their holdings,” he adds.
With land always being a scarce resource, property prices would invariably follow basic economics of demand-supply and pricing. Once asset prices start escalating, the initial interpretation always suggests a bubble. However, an in-depth analysis of price appreciation in real estate and understanding the reasons could help in comprehending these fears. Moreover, the available landbank and technology together with innovations in the realty sector is likely to avoid a real estate bubble burst and sustain the current scenario.


Unreasonably inflated prices, higher vacancy rates, steady withdrawal of domestic and foreign investors are signs implying a real estate bubble

Govt measures such as appointing of regulators to check against unfair practices and increasing the FSI for residential sectors can help in controlling prices

Landbank and technology with innovations in the realty sector are likely to avoid a bubble burst and sustain the current scenario.