Tuesday, October 21, 2008

Don't buy unfinished homes

The news is coming thick and fast. DNAIndia is finally doing some realistic reporting. The game is simple. Its a buyers market and the buyer can demand a 40% reduction of a completed property. A deal will only happen if both parties agree and today there are no deals since there is a disconnect. Greed is good but only for a limited time. Now it is the buyers time to get greedy. As the article rightly points out, going for an under construction property is a disaster waiting to happen. There are thousands of new projects which are launched in 2008 and most of them will be delayed by 2-3 years beyond their projected dates. Already Raj Thackrey's campaign is having an effect on mumbai's and Pune's construction market where builders are attributing him to delays. They are also invoking the Force majeure clause which allows them to disown responsibility for building delays. 99acres.com and magicbrics.com have thousands of properties for sale and half of them are ready to occupy. It is a buyers market like never before. So if you have cash, you are king.

Liquidity crunch delaying projects, only 30% price cut can help: Experts

MUMBAI: Want to buy a home this festive season? Then don’t go for a one that is still under construction, warn experts in the realty sector. The global slowdown and crash of financial markets has left builders with little money and they are struggling to wrap up even the half-finished projects, let alone going for new ones, according to industry analysts. Experts warn that the financial strain on realtors is causing indefinite delays in the completion of many projects.

“Those who intend to buy property should go for only completed flats. It’ll be too risky to buy properties under construction,” said an analyst with a foreign brokerage who did not wish to be named.

Real estate is an end-user sector where the money mainly comes from home buyers and development happens in phases.

“But developers across the board raked in money from initial public offerings and invested them in buying land parcels paying huge premiums. Now, banks have stopped lending, money from private equity is very costly and unorganised lenders are charging interest rates as high as 30%. So how can developers complete projects profitably,” asked the analyst.

He cited the example of a Mumbai-based realtor whose high-end residential project in Lower Parel, one of the city’s commercial hubs, was to be completed in 2006 but has now been delayed till 2009. Uncertainty looms large over whether even this deadline will be met, he said.

An official of the realtor in question had earlier told DNA that the project would be rolled out before Diwali this year. An email sent seeking clarification on the new deadline remains unanswered.

This isn’t an isolated case. Analysts say delays of three to four years are likely in under-construction projects.

Despite the headwinds, developers have stubbornly stuck to their pricing. This could be one of the reasons why sales have failed to pick up, even though builders are offering freebies such as free stamp duty registration and parking space, modular kitchens and interiors, and interest-free EMIs till the buyer gets possession of the flat.

“A price correction of a minimum of 30% is required for sales to pick up. If this correction does not come in six months then some listed developers will end up being negative cash companies. Even if buyers are desperately looking for houses, they should wait for a minimum of three months before taking the plunge. Also, they should look only for properties that are ready and available for possession,” said an analyst of a domestic brokerage.

Vikas Oberoi, managing director of Mumbai-based developer Oberoi Constructions, agrees. “Buyers should be wary of under-construction projects because developers who are overleveraged will not be able to complete their projects. So a buyer should look at a developer’s past projects. At these times, it’s all the more important for people to be careful about where they invest,” he said.

And though the slump is pinching, consolidation in the industry is not seen coming. An analyst said, “Even if a developer gets land at a discount of 35-45%, he will not buy it to save money for construction. Those who haven’t seen free cash flows in the last 6-8 months will halt their launches and sit tight till the tides turn in next 18-24 months.”

3 comments:

Observer said...

Housing corrections are not like stock market corrections. They take months and maybe years to play out. Case in point, the last correction in the late 90's. Stocks are easily traded, while houses are not. Transaction costs are steep for housing in India since it can average 10-11% of the house price.

My prediction has consistently been that the housing correction will be very similar to the 90's, when prices came down 40% over 4 years. The stock market is an early warning sign. When real estate stocks slump, the message is that people are expecting drastically lower profits in the year ahead. The next sign is that actual transactional volumes drop significantly. Scattered reports then emerge of discounts and freebies being offered to juice sales. And only finally does the realization set in that prices will have to be lowered. Part of the reason for the reluctance of builders to lower prices is the hope on the part of the builders that if they wait a few more months, maybe sales will rebound.

Observer said...

Here is another article from EconomicTimes.

http://economictimes.indiatimes.com/Opinion/Realty_check/articleshow/3625870.cms

The crisis in India’s real estate sector will cause a much needed course correction by the industry. It would start building homes for which there
is a genuine demand and not just for a small minority of speculators.

Much of the housing shortage in India is of the low income category. But property developers were focused on the top end segment with prices usually starting at Rs 60 lakh plus in the big cities.

The exuberance in this category was largely speculative, driven by cheap money. With high leverage fuelled supply of cheap money coming to an end, the demand for expensive housing has disappeared overnight.

As the market reverts to fundamentals, the disconnect between demand and supply has become very obvious. A look at the income profile of households underscores the point. Even the top 20% of urban households had an average annual per capita income of only Rs 48,517, according to a NCAER survey. And taxpayers with more than Rs 10 lakh annual earnings number only about 1.5 lakh.

Even after adjusting for unaccounted money, that number is unlikely to become substantial in the context of projects targeted at this category.

Clearly, the current inventory of houses would have to clear at a far lower price and new projects need to be better targeted. Some developers have started conceding that they need to focus on the sub 1,000 square feet dwellings.

But a more grounded real estate sector does not necessarily mean housing would soon get affordable for a large section of the population. The biggest hurdle to affordable housing is poor reach of urban transport and high land prices in cities and towns.

The scarcity of urban land, largely created by the state, has caused cost of housing to move up sharply. This is compounded by a lack of quality public transport, which has precluded the development of suburban areas as people are forced to live close to their work place.

An integrated land-use and transport policy therefore becomes central to efforts to provide affordable housing. Increased vertical spread through redevelopment can also enhance supply and help alleviate the pressure on prices. So, while the market adjusts to the new reality, the state also needs to do its bit.

Anonymous said...

Good points observer, however I beg to differ on the time of the correction. In today's times just as FII money can move in and out in a jiffy, so can prices. Prices have risen very fast, sometimes 100rs per sq/ft every fortnight. In the 90's information was scarce. You just had to go by what the brokers said. Now you have websites, blogs, TV and other media sources. Loans are common which wasn't there in the 90's. I remember a broker offered me an apt in Nov 2004 for 1.05crs in Vile Parle for a 2000 sq ft apt, something the guy had purchased in 1999 for 1.5 crs. I offered him 80L which refused. That was a good decision on his part since that couldve gone to 2crs in early 2008. However now there is hardly any demand now and people have lost 50-70% of the investments in the stock market and Vile Parle being a Gujju area is affected quite a bit.