Realty feels slowdown pinch

The economic slowdown, inflation and steep interest rates have been dampeners for the real estate sector. But if these conditions persist, they can work to the advantage of home buyers — especially in the National Capital Region and Mumbai where property prices have soared unreasonably high. A price correction is highly probable.

“Developers with large unsold inventories of high-end and luxury units will have to lower prices as the current run of sales through innovative marketing and offers such as the 20:80 schemes are coming to an end,” Shweta Jain, executive director of real estate consultancy Cushman and Wakefield, says. Despite lobbying with the government for incentives, developers say there isn’t much hope of these coming, at least not until the elections due next year.

As the worsening economic conditions dampened sentiments, sales of residential and commercial assets hit a slowdown resulting in unsold inventories, choking builders’ cash flows. Premium segment sales crawled. In 2012-13 things worsened. Launches and absorption of residential properties in the top seven cities plunged by 37% and 23% during FY11-FY13, aggravating the sector’s structural problems, a Knight Frank report says. “Developers were caught in a trap — of ambitious expansion, decelerating sale, hardening interest rates, and weakening cash flows,” it says. Their capacity to service debts further worsened. Fund inflow through FDI too dried up.

All this piled pressure on developers to cut prices. “There’s an undercurrent to cut prices to push sales. Developers are short of cash. But this isn’t yet visible on the ground,” CB Richard Ellis MD Anshuman Magazine explains. There’s a demand for residential property. But, other than the poor sentiments, sky-high prices are slowing sales.

A developer explains: The problem lies with the fact that only parts of projects launched in the last three to six months are sold. The remaining inventory in the same project is unsold. The developer can’t slash rates for the unsold units. If he does so, earlier buyers who purchased when the project was launched, too will ask for reduced rates.

Jain says despite poor sales, many developers are still holding on to their quoted rates and the declines over the past quarters are marginal, But “there are expectations that prices would be lowered given the mounting cash-flow problem resulting from low off-takes, mounting input costs and debt servicing.”

She says the scenario is especially true in the NCR and Mumbai where developers have launched major high-end and luxury projects. End-user driven markets in cities such as Bangalore, Chennai and Kolkata are still recording reasonably healthy transactions as projects are priced more reasonably.

The market rates are likely to be first cut by investors who buy projects for the short term. Most of them bought around one to two years ago. Since then rates have appreciated by around 20% to 30% in the NCR and Mumbai. Now, with interest rates rising and prices stagnating for at least three months, many are tempted to sell and exit.

An investor says there’s little hope of prices going up in the next one year. At the same time, he has to pay 11% interest on investment, that’s if he borrowed money or lose a like amount in opportunity cost. Prices have appreciated since he bought the property and buyers are a lot fewer. So, the only way out is in cutting price and pulling out. Even then, Magazine says, this will take a while to happen because investors are still hoping that prices will appreciate.

Builders are putting up a brave face and saying there’s no scope of a major price slash yet. “Input costs have skyrocketed in the last year and we work on low margins,” Vineet Gupta, ED, Ajanara group, says. If prices have to be shaved, there’ll be no new launches, which will affect supply and in the long term, because demand is perennial, rates will rise. Ultimately, realtors won’t be able to build by cutting losses.

Source: The Time of India

Mumbai apartment sizes reduced by 31% during the past five years

MUMBAI: Over the last five years, Greater Mumbai has seen a significant fall in the average size of residential apartments in the investible-grade category. Thane and Navi Mumbai, which along with Mumbai form the Mumbai Metropolitan Region (MMR), too witnessed a fall in apartment sizes, although to a limited extent, says Ramesh Nair, chief operating officer (business) of Jones Lang LaSalle.

With Delhi-NCR too exhibiting the same trend, this appears to be a phenomenon of the larger metro cities. Other cities such as Bangalore, Chennai, Pune, Hyderabad and Kolkata have, in fact seen a varying rise in median apartment sizes. The dynamics of apartment sizes has a tale to tell — a tale about affordability and development of the residential sector across cities.

In 2008, apartment sizes in Greater Mumbai were, on average, 20% larger than those observed on a pan-India level. The median size of apartments across the country at that time was close to 1,600 square feet. “While this number continues to remain more or less the same in most other cities, unit sizes in Mumbai have drastically reduced and are currently 15% lower than the national median size. This is a fall of approximately 31% from 2008,” said Nair.

NCR in the same time frame saw a drop of 14% in apartment sizes while Pune saw an increase in apartment sizes by 23%. Thane and Navi Mumbai witnessed apartment size reduction of 17% and 18% respectively.

“The fall in apartment sizes in Thane and Navi Mumbai has been less severe as compared to the trend seen in the Mumbai residential real estate market. It would be reasonable to assume that the rising levels of affluence in the city would yield a preference for larger apartment sizes, but this is not the case,” said Nair.

While a major part of the fall seems gradual, a closer look at some sharp variations during the last 4-5 years could possibly help understand this trend better.

The average unit size of investible-grade apartments in Mumbai, Navi Mumbai and Thane witnessed a sharp fall in 2009. Many would argue that this was the after-effect of recession that hit the world — and India — in mid-2008. However, it is pertinent to note that typically, construction of investible-grade apartments takes a minimum of three years before

This means that developers would have been required to anticipate the unfolding of a recessionary period at least by 2006 to have started constructing smaller-sized apartment projects that would see completion in 2009. This seems highly unlikely. Could it have had nothing to do with recession at all?

Certainly, the prediction of a recession with enough accuracy to warrant radically altered investment and construction plans is not a plausible explanation. Rather, the decision to launch projects with smaller-sized units could be a result of the meteoric rise in apartment prices during previous years. As per JLL real estate intelligence services data, the period of 2005-07 saw an astronomic rise of 110% in residential property prices across the MMR. In Greater Mumbai alone, the figure was close to 120% on a simple average growth basis.

With Mumbai already being the costliest city in India, such steep escalations in capital values definitely challenged affordability. At the same time, the more reasonable prices in Thane and Navi Mumbai did not present such hurdle to saleability. It appears that developers perceived the need to reduce apartment sizes in order to maintain a comfortable level of affordability.

“Contrary to popular opinions on the issue, it emerges that developers have indeed had concerns about the sustained affordability of residential real estate in and around Mumbai. One must not forget that developers receive real-time feedback from property buyers, and are therefore quite informed about matters such as affordability and preferences,” said Nair.

While property prices are not purely a product of developers’ discretion, the decision to alter apartment sizes as per the needs and spending power of buyers is definitely within their ambit. It will be interesting to see what the lowest possible limit to this fall in apartment sizes is before it entirely breaches preferences of home buyers in Mumbai.

Source: The Time of India

Investment Windfall in Asansol-Durgapur belt

DURGAPUR/ASANSOL: At a time when the Rupee has taken a beating and the economy is floundering, the Asansol-Durgapur belt, also referred to as the Rurh of India, seems to have bucked the trend.

Be it central public sector or private sector projects, they are all progressing at a decent clip notwithstanding the minor time and cost overruns.

The Rs 5,000-crore 1,000 mw greenfield thermal power plant of Damodar Valley Corporation (DVC) at Andal has already commenced commercial generation and secured the energy needs of this rapidly industrializing belt.

The Rs 17,000-crore greenfield 2.5 million tonne integrated Iisco Steel Plant of SAIL is set to start commercial production in months. Once operational, it will mark the revival of a steel plant that everyone, including its employees, had given up on till a few years ago.

Construction of the Rs 5,000-crore Matix Fertiliser Plant of the Essar Group at Panagarh is progressing steadily. The NHDP of the Centre has sanctioned the six-lane conversion of NH-2 connecting New Delhi with Kolkata, expanding what is already the lifeline of the area.

The first phase of the Rs 10,000-crore airport city project is nearing completion. When it does take off in the first half of next year, it will shrink the world for those living in the region. Agriculture minister Moloy Ghatak is confident that the airport city will completely transform the socio-economic scenario of south Bengal.

Essar Oil & Gas Ltd is setting up the Rs 3,000-crore coal bed methane gas extraction project in Durgapur that will open new vistas in alternative fuel and green energy in the region. The pipeline network has already been laid.

Several companies like HR Johnson (ceramic unit at Panagarh) and Jayashree Tea (fertilizer plant at Panagarh) have evinced interest. DVC chairman RN Sen has also announced that the company will develop an unused 250-acre plot at Panagarh to set up an industrial park. The biggest paper unit in the east — Ballavpur Paper Mill — is planning to expand the Raniganj unit.

Pramod Srivastava, director of Allied ICD Services, eastern India’s only operational dry port at the Export Promotion Industrial Park (EPIP) in Durgapur, is extremely upbeat about the future. While the ICD handles 1,200 containers per month at present, he is confident that the figure will shoot up to 2,500 containers by next March.

P&H Joy Mining, the Indian subsidiary of US based Joy Global Inc, has purchased 25 acres in Andal to set up a manufacturing unit. Ardex Endura and Shyam Agro Foods have also taken land at the airport city as has Mission Hospital.

With industries pouring in, real estate sector is also abuzz with activity as some of the leading groups in the realty sector line up projects. Consumer goods firms and auto companies are also making a beeline to tap customers.

“The Asansol-Durgapur belt is attracting the biggest investment in the state at present and the Andal airport city is poised to play a bigger role in its further development,” said Burdwan district magistrate Saumitra Mohan.

Asansol Chamber of Commerce secretary and Ficci member Subrata Dutta is delighted at the strong showing by both central public sector undertakings and private companies.

Kobe Steel of Japan is setting up a Rs 5,000-crore steel unit in Durgapur.

Source: The Time of India