Day Of Deliverance – Financial Chronicle – 27-Nov-2014

November 29, 2014 - Uncategorized

Real estate sector is banking on promises like finance minister Arun Jaitley’s Rs 40 billion earmark for the National Housing Bank

While the general slump in housing sales has been a matter of concern for the real estate sector, it is sales in the residential property market, which is causing greater concern. The slump is reflected in the falling prices and transactions at a significant rate.

Slowing economic growth, high interest rates and affordability constraints have, no doubt, played a part but other issues too have placed pressure on the sector. These include excessive land purchases, often at the expense of the developer balance sheet. Most of the sales have been made at the start of the project, thereby leaving them vulnerable to inflation. Naturally, in such a scenario, the mounting risk perception has led to choking of funds. So all in all, a vicious cycle has set in, which looks difficult to break at the moment.

This latest trend spotting comes in a just-released RICS Property Market update, which says that affordability in residential housing and inventory remain concerns, even as the commercial property sector is on the growth trajectory. “Due to India’s high level of inflation, it is important to view house price trends in real terms, i.e. with headline inflation stripped out. Focusing on nominal prices could therefore be deceptive. With this in mind, the Delhi house price index produced by the National Housing Bank – adjusted for inflation – shows real prices to have fallen sharply over the last year or so,’’ the RICs update points out.

It shows Q2, 2014, figures to demonstrate that prices have fallen by just over ten per cent on an annual basis. Of course these figures vary. The annual fall in Mumbai is pegged at 2 per cent while Chennai is estimated at around 8 per cent growth. The index also reveals that prices have fallen in 18 out of 26 cities over the past year.

The inventory situation tells the picture. Latest estimates suggest that Mumbai still has 50 months worth of residential property inventory (based on 2013 average monthly pre-sales) while inventory is equivalent to 22 months in Bengaluru and 30 months in Gurgaon. This backlog of properties has not just restricted price momentum but has gone a long way in hindering the number of projects launched in the near term.

Santhosh Kumar, CEO – operations & international director, JLL India, told Financial Chronicle: “the easing of FDI norms & government’s impetus on affordable housing is surely going to encourage both the investors as well as the developers. Affordable housing in India, being a $ 250 billion market, has tremendous potential and with the government’s backing with smooth approval processes and investor friendly policies, it will provide a boost to the Indian real estate industry in the coming years.’’

Experts believe affordability constraints and resistance to high prices are major factors driving this declining trend in house values. Figures reveal that between 2010 and 2013, real house prices increased by around 45 per cent in Delhi, 26 per cent in Mumbai and 44 per cent in Chennai. Such steep increases in the cost of housing have likely prevented many would-be purchasers from entering the housing market, what with prices falling.

Niranjan Hirnanandani, managing director Hiranandani Group, one of India’s biggest real estate companies, however, believes things may not be that bad. “It would be unwise to speak too soon. It is a fact that the secondary effect in the real estate market has not happened but you can be rest assured that once the market moves, it will move very swiftly. I believe the next five years are going to be better than the last five. In that sense, this market is not much different from the stock market,’’ he told Financial Chronicle.

Hiranandani says to boost developer confidence in residential markets a dose of cross subsidy will help – maybe, up to 15 to 20 per cent. He also turns the housing sales logic on its head. “This is a brick and mortar business and it is time India looked at tapping its large rental market. The idea that every one needs to own a home itself is flawed. India has a large rental market and it needs to be tapped to its potential, also because it is cheaper. Let us not forget that 40 per cent of US lives in rental accommodation.’’

While cross subsidy still remains in the realm of speculation, efforts like this week’s Delhi Development Authority’s (DDA) allotment of houses and flats is an exercise that needs to be carried out on a larger country-wide scale. Says Devina Ghildial, deputy managing director, RICS South Asia, “The transparent and detailed allotment of houses/ flats through DDA housing scheme 2014, is laudable. The allotment of over 25,000 houses in Delhi across categories has now set an example for other development authorities in the country to free land held under the government and provide housing to all those in need. In line with the government’s vision of housing for all by 2022, city authorities of big metros and state capitals should follow this as a model”.

Notwithstanding such efforts in the national capital, thanks to the mismatch between high asking prices and buyers’ ability to pay, residential absorption rates have dipped sharply. From a peak of just below 25 million sq ft posted in January 2011, absorption has fallen by more than 50 per cent with a figure slightly above 10 million sq ft recorded in June 2014, according to PropertyEquity data.

However, experts calculate that if potential buyers have deferred purchases for all these years, given the slump, there would be considerable amount of pent up demand. Therefore, any shift in sentiment (induced by the government, for instance) could open the floodgates. Indeed, data gathered at JP Morgan suggests that residential sales are already showing signs of improvements; not surprisingly, it comes from the Mumbai and NCR region, which as of June experienced year on year fall in pre-sales of 49 and 73 per cent respectively, the rics update showed.

The sector is also looking at the budgetary promises by the new government. Finance minister Arun Jaitley is the point of reference here. For instance, Rs 40 billion have been earmarked to go to the National Housing Bank in order to supply credit to the housing finance companies. This would mean that buyers of low-cost homes in urban areas have access to cheaper credit to fund purchases. More than any other, this policy has the potential to kickstart the realty sector.

So far, these announcements have remained what they are – announcements. Ultimately it boils down to how well the core sector does. So far, estimates of around 5 per cent GDP growth has not exactly had realtors and developers jumping with joy. “Residential property, like most other sectors in the economy, is waiting for the economy to pick up. Market sentiments have to become bullish and frankly, there is nothing you or I can do it. We are all waiting,’’ says Rajeev Talwar, executive director DLF.

But some crucial questions still need an answer. Commercial sales may be good for the industry’s health, but the votes lie with affordable housing. Housing for the lower sections may not make much economic sense to developers but will they come out this logjam and would it lead to a boost of residential sales?

Says Anil Mithas, CMD, Unnati Fortune Group, “the dream of owning a house has appeared to spiral out of the reach of a common man swiftly. In such times of immensely competitive pricing and apparent inflation in costs, affordable housing has come forth as one of the most aspired segments, both for potential buyers and investors. According to a study, India’s national housing shortage is estimated at 18.78 million homes, of which LIG/EWS category shortage is around 96 per cent, which pose a big opportunity for developers. By 2022, the overall housing shortage is likely to be at least 30 million, as per the government’s estimate. Considering the demand-supply mismatch, we are expecting a good number of sales in the affordable space,” he added. Well, things could finally be looking up.

Financial Chronicle

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