Real estate woes: Demand slowdown forces developers to reduce property rates

“It has been observed that some of the real estate players tend to offer certain freebies like cars, white goods, foreign trips for those who book during the festive season. However, freebies do not attract customers. We feel that developers should put all the possible strength in the product offered, by way of better specifications, amenities and facilities…,” reads an October 3 note from Pradeep Jain, Chairman, Delhi-based Parsvnath Developers.

At a time when the real estate market is going through one of its toughest phases, it seems like a bold decision for a company that’s reeling under debt – Parsvnath’s net debt stood at Rs.1,200 crore on March 2013, which is roughly twice its annual revenues of 2012/13.

Parsvnath is no different from other developers in the realty sector where project delays and over-leveraged balance sheets have become fairly common. Early this year, around 250 allottees of its Lucknow project Parsvnath Planet went on a day-long hunger strike to protest the delay in the construction of the project that was launched in 2006.

Festive season or not, the demand slowdown has forced developers to reduce property rates. While ‘official’ price corrections are few, developers have started providing backroom discounts by waiving off expenses such as preferential location charges (PLC), one-time parking costs and club membership fees. PLC charges are levied by developers on certain properties (within a project) which have a better location than most other apartments such as those facing a park, road or swimming pool, or close to the ground floor.

Residential prices across all major metros and several smaller cities have fallen in the first quarter of the current financial year. According to National Housing Bank’s Residex, an index developed to capture the price movement in residential housing across 26 cities, 22 cities have witnessed a drop in property prices in the first quarter as compared to the earlier quarter. Only four cities – Lucknow, Nagpur, Dehradun and Surat – have seen a marginal surge in prices.

Interestingly, the piled up inventory – growing number of unsold flats – is forcing developers to reduce unit sizes. Markets such as Delhi NCR and Mumbai have witnessed such a fall. In 2008, the median size of apartments across the country was close to 1,600 sq feet. While this number continues to remain more or less the same in most other cities, unit sizes in Mumbai and Delhi NCR have drastically reduced. They are currently 15 per cent and 14 per cent, respectively, lower than the national median size.

The decision to launch projects with smaller-sized units could be due to the sharp rise in apartment prices during previous years and concerns about the affordability of residential real estate, say experts at Jones Lang LaSalle India. “Prices in Delhi and Mumbai have grown at 20-25 per cent annually since 2009. Affordability has taken a big hit because incomes have not risen sharply. Moreover, the interest rates have also moved up between 2009 and now,” says Pankaj Kapoor, Managing Director at Liases Foras. The real estate research firm estimates the cumulative nationwide unsold inventory at 670 million sq ft, or roughly 600,000 units, as on June 2013.

As a result, wary developers are coming out with few launches. Real estate research firm PropEquity says that new housing launches fell by 38-59 per cent across different markets such as Gurgaon, Pune, Noida, Navi Mumbai and Kolkata. Noida in the Delhi NCR region saw the biggest fall in new launches.

Delhi NCR, which accounts for some 65 per cent of the total housing stock in the country, has been hit particularly badly by the demand slump. According to a September note by real estate consultancy CB Richard Ellis, capital values across most micro-markets of Delhi witnessed a decline owing to restrained demand levels, besides cautious buyer sentiment. Developers delayed the launch of new projects as they wanted to clear existing vacancy levels.

Source: indiatoday.in