Real Estate

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Recession and real estate in India In an earlier article (ET, Nov 19) I had argued that the current global recession has clearly dominant Keynesian features. The crucial issue is not just the fact that there is a demand contraction but that this has been brought about by a market failure which fuels adverse expectations on the part of both producers and consumers. These adverse expectations lead to reduced production by producers anticipating lack of demand and increased savings by consumers anticipating lack of jobs. Over time, actions of both producers and consumers further justify their expectations which then become self-fulfilling. In the absence of government intervention (which fills in the missing demand) it is not clear when and how such expectations get reversed. In the 1930s, it took a whole decade to reverse such expectations and even then only because of government intervention. Today, governments have already started coordinating actions and it is unlikely that this recession would last as long. However, it is still foolhardy to guess when exactly the current recession would come to an end. We have various guesstimates ranging from end 2009 to middle 2010 but it must be clearly realised that there is no scientific basis for such estimates. After all, how can one estimate when the "feel good" factor returns to reverse adverse expectations? The crucial role of expectations is also clear from the fact that monetary policy has successfully driven interest rates to near zero levels in most OECD countries and yet there is still no sign of demand recovery. In India too the RBI has tried valiantly to drive interest rates down. Yet the impact seems limited. Over the period September to December last year the RBI pumped in almost all the liquidity it had sucked out of the system in the preceding 12 months. Yet, the PLRs of banks have barely fallen and the new funds have only found their way into the market for government's T-Bills. Bank holdings of T-Bills are way above the legal requirements. In other words, banks would rather hold government notes promising about 3% to 3.5% return rather than lend to investors at even reduced rates of 7% to 8%! A strange situation where the government pumps money into the system only to see it finding its way back to them via funding of government debt! Expectations are adverse indeed. This is particularly important in the real estate sector which is now going through very rough times (likely to get much rougher!). The importance of the real estate sector in India cannot be understated given the strong forward and backward linkages that it generates. The sector has demand implications for intermediate inputs like steel, cement, etc., while keeping afloat the whole construction industry including transport and other intermediate labour services. Given its importance for the economy it is worthwhile to see how adverse expectations are playing a role in this sector and what are the possible solutions. It should be noted that the role of expectations is particularly important in sectors where speculative activity is greatest. Speculation is typical of the real estate sector in India. A simple test is to compare the purchase price of a property (commercial or residential) with its rental rate. Casual empiricism indicates that the rental on a residential 2BHK property in a major metro like Delhi is around Rs 1,20,000 per annum. The purchase price of a similar property was around Rs 50,00,000 last year. However, the return on a fixed deposit of Rs 50,00,000 at around 10% per annum would be almost five times the rental. The difference is the return to speculation.

It is not surprising then that adverse expectations have hit the real estate sector hardest. Why are monetary measures not succeeding? For one, the banking sector has still not reduced interest rates sufficiently. Today, bank rates are still around 10-11% on a long-term housing loan. This must come down to around 6-7% to attract new borrowers. Second, as the RBI periodically announces measures to reduce interest rates this fuels expectations of further cuts and discourages investment in all fixed assets including real estate. Third, developers are obviously caught in the speculation trap having mopped up most of their own properties in the past on the assumption of a speculative gain in the future. While they have so far expected the government to bail them out, this is unlikely to happen and one can expect substantial property price reductions in the next one year. The bottom line? The real estate sector has so far relied mainly on upper income domestic demand and external demand. This is unlikely to revive in the near future. For the mass domestic market the 'Indian dream' of owning one's own home is unlikely to be realised at current prices. Only a combination of much lower home loan rates and a significant drop in prices can energise the real estate market on a sustainable basis. What is clear is that monetary measures alone will not suffice at least in the short run. Recession's positive effects on Indian realty sector Arti Khanna, a senior executive with a leading MNC, equates recession with the medicine that people initially complain 'is bitter' , but in the end, come out far healthier and are better off for it. More cautious spending and greater saving by consumers, more prudence by lenders, shift in focus from premium to lower- and mid-end segment of housing by developers, is exactly what our economy needed for its long-term health and recession is having the desired impact. Arti reminisces how they saw bad times during the dot-com bubble in 2001, and yet how the younger generation continues to be over indulgent, leading a hedonistic way of life and not paying heed to saving money. Arti says, "In many ways it brings the much needed discipline to people's way of life, while for corporates across various sectors, there are many positive ripple effects - for instance it allows people to analyse and identify their core competencies. It also helps in rebuilding focus, pruning tangential activities to achieve cost controls, which help in creating more effective systems and processes. And, it forces people to come up with innovative ways of handling problems, something mandatory for survival." Among the three most affected - end users, investors, developers - surely , the end user has benefited the most during this period. The end user has benefited as, finally , the supply chain started addressing the real demand in market - mid-end and affordable housing. Earlier, developers in their greed to garner higher profit margins, focused primarily on premium housing. But now, suddenly , the supply is shifting where the demand is. Even well known developers like Unitech, DLF, Raheja, Jaypee and Omaxe, primarily engaged in raising high-end homes, have begun talking of affordable options. Recession has also been a time to introspect for everybody. "It has been a good learning experience, though not a pleasant one," says Samir Chopra, CMD of RE/MAX India, (RE/MAX is a global network of real estate agents operating in 70 countries). "There have been things to learn, relearn and unlearn for all the three - end users, investors and developers.

Consumers have become more vigilant in transactions , and they are more thorough about both the market situation and their own needs. They are beginning to learn how to investigate and research before spending their lifelong savings. Investors have also become more conscious. They are more careful about spending huge sums of money in development and are looking for other avenues for investment in the real estate sector. They have become more delivery oriented, innovative and price conscious in this volatile market . They have learnt from the difficult times, reduced prices, and learnt to make more beneficial offers to consumers ." While at a superficial level investors may seem to be winners with recession giving them an opportunity to pick investments at more realistic prices, recession has also seen them investing less. According to investor Shalabh Bhasin, director of Kshitij Portfolio Services Pvt Ltd, "The recession period has seen me investing less in property market because the previous prices where unduly inflated and even now it can't be said with surety that the prices have bottomed out. Also, most of the investors were already stuck with loads of investment at higher prices, so there was not enough liquidity for further purchases." Citing examples, he says he had invested in Parsvnath Panchkula flats at Rs 3,250/sq ft and Parsvnath Dharuhera flats at Rs 1,800/sq ft, but there is no buyer in these projects and three years on, the builder is yet to start construction. But on the upside, the investor is now carefully assessing a project and is no longer fooled by lucrative promos and advertising of the property. As for developers, on the face of it, they may seem to be the biggest losers with the fund flow nearly stopping and sales drying up. But recession has been a blessing in disguise as it has forced them to innovate to cut costs, improve sales and raise funds. Recession has seen developers changing their product and strategies. According to Mohammad Asif, chief operating officer of High Street Capital, "The shift in strategy is in terms of market focus, product size, pricing and promotion. In residential sector, they have started focusing more on affordable and mass housing. Today's market is customer driven and developers are offering suitable payment plans and other freebies like sharing of stamp duty and housing loan EMI burden to ensure transactions . In commercial segment, the decline in demand from IT/ITeS sector has forced them to look at other business sectors such as logistics, biotechnology , hardware, pharmaceuticals, tourism and education. In the retail segment, instead of fixed rentals, revenue sharing model is becoming a common practice. Developers have also been forced to work out an optimal tenantmix strategy and work on new project design to reduce operating costs. In hospitality sector, the focus now is more on budget hotels and services apartments." Overall, recession has been a time to innovate. In a price sensitive market, the effort has to be to reduce cost, and to achieve this, both the construction cost and land cost have to come down. FOCAL POINT Recession helps in rebuilding focus, pruning tangential activities to achieve cost controls, which help in creating more effective systems and processes The end user has benefited as the supply chain started addressing the real demand in market - affordable housing. Well known developers are now catering to this demand. Rising property rates and non selling residential property in Mumbai The prices of residential property in Mumbai have increased by 12 percent in India. In step with Mr.

Samantak Das, national head (research) of Knight Frank, intrinsic factors drives the costs of property in every town. Base costs in tier-2 cities like Bhopal and Guwahati are reasonable compared to huge cities like Mumbai, that are reeling beneath value pressure. The value distinction in return reflects on flat sales across varied cities across the country. While the realty markets in some countries are still doing well, globally the image doesn’t look therefore rosy. International property costs have seen their weakest annual performance since the depths of the recession in 2009, recording solely 0.9% growth within the year ending March 2012. Doubts over the Eurozone’s future, alongside Asian governments’ efforts to cool down their markets and deter speculative investment, have taken their toll and house costs were static within the first three months of 2012. Except the Eurozone malaise, the weakening sentiment is due to lower GDP forecasts and a priority that the world economic recovery could struggle to gain any real traction. The uncertainty surrounding the sovereign debt crisis in Europe and therefore the political paralysis in Greece are influencing trade conclusion and client confidence worldwide. There are few signs to spice up the boldness of European house owners. Unemployment is rising due to cuts in public spending, inflicting wages and disposable incomes to be lessened, thereby weakening residential housing demand. Residex index: City logs 9 percent growth Mumbai logged a growth of 8.6% whereas Kolkata had a slum, with a negative return. The same trend was conjointly mirrored within the National Housing Bank’s Residex index. The index for Chennai rose by 39.5% within the last quarter (January to March 2012) of 2011-12 compared to constant duration last year. The real estate sector is perhaps set to repeat its 2008 story of high costs and few consumers. Property consultants believe the market is volatile once more, touching the heights of 2008, because developers are showing no signs of lowering the costs despite poor sales of the residential units. A recent Crisil report says sales of latest homes declined forty percent between March 2011 to February 2012. An analysis done by property analyst, shows average property costs are 15% higher in Mumbai and 30% higher within the Mumbai Metropolitan Region over their previous peak in June 2008. Whereas the average value of the property in Mumbai rose from Rs 14,553 per sq ft in June 2008 to Rs 16,686 per sq ft in December 2011 within the MMR it jumped from Rs 8,124 per sq ft to Rs 10,559 per sq ft. The rise resulted in an exceedingly more increase in unsold residential units. The non selling number of residences in Mumbai has gone up in December 2011 after the recession of 2008. Going by the quantum , it'll take roughly forty four to fifty eight months to clear the unsold stock in MMR. One is witnessing a situation almost like 2008, when developers refused to heed the worldwide economic recession and high interest rates to scale back costs. Now, whereas developers once again don't need to acknowledge they're financially overstretched, affordability may be a major concern due of high interest rates. Within the second half of year 2008, property costs dropped by nearly forty percent within the MMR. what's stopping developers from reducing costs to spice up sales. A report on the property market by Kotak Institutional Equity analysts said that the RBI data pointed to many negatives - future weak launches, build-up of inventory, deterioration in absorption and additional moderation in housing loan uptake. If weakness in sales continued, deleveraging can stay a remote goal for property firms. However, a number one developer and member of the Maharashtra Chamber of Housing Industry said that they haven't been ready to launch new residential property in Mumbai or complete existing ones owing to delay in getting it sanctioned. A sea change in development and funding prices, besides amendments to the DCR, can increase prices for builders and stop a discount in costs.

Why residential property prices never fell in cities People are willing to pay a high price to stay nearer their workplace. Though there are projects available farther away in the city periphery, the clamour is for the projects closest to the city's business districts. This means that even in a lukewarm market when there are very few buyers, the best locations and projects will be the first ones to be picked up. As our survey shows, a majority of the buyers would be back in the market if they can afford the EMIs. With interest rates set to go down (a few banks have already brought down their base rates), some of the latent demand will start coming back to the market. Two years of salary hikes and property price stagnation in the past one year has already cushioned some of the impact of high prices. This will also result in hardening of prices, especially for projects that are ready or are nearing completion.

Mumbai is a different market Most of the news about a possible correction in property prices is coming out of Mumbai. But keep in mind that Mumbai is a very different market from the others and what you read about the price trend in the city, whether it is the record high deals or a correction in the market, may not be true for your city. The impact of even something like a global crisis on the real estate market varies from city to city. "Take the example of a city like NCR, where you have a mix of salaried individuals and businessmen. Most of these businessmen have not been affected by the global recession, so I don't think it will affect demand in the real estate market," says Shveta Jain, director at Cushman & Wakefield. However, the same may not hold true for an IT city like Bangalore, which largely comprises the salaried class. "Even Chennai has a mixed set of salaried and businessmen, so I don't see global factors affecting demand there," adds Jain. /photo.cms?msid=11485913 Rentals have been going up This is especially true for the bigger cities where there is a significant chunk of floating population. As buyers continue to be on a wait-and-watch mode, the rental segment of the market has been reaping the benefits. Residential rentals, especially in locations closer to work places, have consistently risen in the past two years. Some locations in the metros have seen residential rentals go up by more than the usual 10% annual hike. So if you are one of those who has been staying on rent waiting for an opportunity to buy, higher rental payouts would mean losing out from one hand what you gain from the discounts on your property.

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