Thursday, 19 January 2017

Far From Realty





The note ban may have brought real estate developers to their knees, but house hunters are looking on keenly from the sidelines
In October 2016, a Mumbai builder who runs a business worth roughly `500 crores was compelled to sell 1 lakh square feet of an upcoming residential project in the western suburb of Kandivali at `6,500 per sq ft when the going rate was around double that. To add to his woes, the broker in the middle charged a hefty 7% commission, or `5 crores, for arranging the `65 crore deal.
“The builder's profit was even lower than the brokerage he paid,“ recounts another developer, a friend of the `shortchanged' builder. “It's better to be a broker than a small developer,“ he adds as an afterthought. Broking firms, and not developers, grease the squeaking wheels of the construction business in Indian metros. In a market in which buyers are scarce and supply of under construction spaces is abundant, middlemen rule the roost, often arm-twisting cash-strapped devel opers to sell out cheap.

Till about a few months ago, developers did not solicit the help of brokers to sell projects as buyers showed renewed interest to own property across Indian cities. But the tables turned when the government announced its decision to ban `500 and `1,000 notes in the first week of November. It has been a grind ever since.

Developers are being forced to offer 5-7% as commission to off load inventory -which has swelled to over 6.71 lakh unsold units (across eight cities) in the second half of 2016. Consultants like Knight Frank not only count ready-to-move-in units as unsold units but also commissioned projects that are pre-sold to buyers before completion. The likes of Mumbai, Delhi (NCR), Pune and Chennai may show a dip in unsold units, but that's more a numerical mirage (See graphic).

“The dip in (unsold units) numbers is not because of actual sales but because of the fewer number of new launches. Builders have stopped announcing new projects lately,“ explains Samantak Das, chief economist and national director (research), Knight Frank. “It may take two to three years for developers to offload their full stock. In markets like Delhi NCR, where there's mass supply of residential units, it may cross four years.“

This is where brokers come into play.The canny ones are wheedling high net worth individuals (HNIs) and non-resident Indians (NRIs) to buy projects of small, capital-starved builders at prices almost 50% of the market rate.

The Faultlines

The year 2016 began well for the top residential markets (Mumbai, Delhi-NCR, Bengaluru, Pune, Chennai, Hyderabad, Kolkata, and Ahmedabad); sales volumes grew by 7% in the first half, as per data sourced from Knight Frank.

Factors such as probable interest rate cuts, political stability, economic growth, setting up of real estate regulators across states and imminent goods and service tax augured well for the sector -at least from a buyers' point of view.

Analysts and builders viewed this phase as the turning point of the real estate sector, which had not fully recovered from the global financial meltdown of 2008 and 2009; and, more importantly, since the lending restrictions (on real estate developers) imposed by the RBI on banks in early-2015.

Optimism sustained in the second half of 2016 too, with sales numbers between July and October averaging better than the previous ten quarters. Things looked good and rosy till the time government announced its demonetisation plans.

“Real estate sales dropped 40-44% across Indian cities post demonetisation. The fall was such that it brought down the yearly (2016) averages to below 2015 ­ which, again, was not a great year for real estate. The year ended with sales lower than in the past six years,“ analyses Das of Knight Frank.

It's not only sales of ongoing projects that have been affected. Builders have applied the brakes on new launches as they wrestle with uncertainties around latent demand, economic effects of demonetisation, implementation of Rea l Estate ( Regulation and Development) Act or RERA and probabilities of further rate cuts.

New residential project launches across eight key markets have fallen close to 28% in 2016, over a year ago, to 1.75 lakh units.There was 4.58 lakh new launches in 2012 ­ considered the best by far.

“Real estate sector has weakened even further post-demonetisation... Demand for new projects is also not very encouraging,“ admits Adi Godrej, chairman of Godrej Group, which owns Godrej Properties. “But we expect this to be more of a temporary blip... demand will pick up in a few months,“ he believes.

Established builders like Godrej and Niranjan Hiranandani, chairman of Hiranandani Group, are not worried about the build-up in unsold inventory or lower number of new launches. Lower rates and setting up of RERA will embolden prospective customers to get off the fence and buy properties, they feel.

“There's demand for affordable ready-to-move-in units,“ feels Hiranandani. “But there are not many buyers for under construction projects as of now... Project level booking has come down drastically post demonetisation, but that's more psychological... People are simply deferring their decision to buy an apartment to a later date,“ he says.

But such assur ances are pretty unconvincing if one glances through actual residential property sales data.

In 2012, over 3.59 lakh units were sold across eight Indian cities; this has fallen consistently over the next four years, hitting almost rock bottom in 2016 at 2.44 lakh units ­ a longterm sales erosion of over 32%.

Builders are putting up a stoic front.“We're already seeing some revival in January. Demand is coming back gradually. Indians are value-seekers...and this definitely is their market,“ says Cyrus Engineer, chief sales & marketing officer, SP Real Estate, a Shapoorji Pallonji Group company. “We're cautiously optimistic about the sector.There's a lot coming en route... RERA, GST... There could be some chaos when RERA is getting implemented,“ adds Engineer. “Uncertainty will last for another six months. But I am positive about long-term prospects of the sector.“

What Buyers Want

Home-buyers, on their part, are waiting for rate cuts before firming up their purchase plans. If bankers are to be believed, there could be at least 50 bps (one basis point or bps is equivalent to 0.01%) cut in rates over the next year. This may bring down home loan rates to as low as 8.25% (2007-08 levels); competitive, cash-flushed banks may start offering loans at even lower rates. It's anybody's guess if loan rates would touch 7.25%, the level of 2003­04. Potential customers are also hoping property prices to correct in the interim. But that's unlikely, says builders and sector analysts.

The sector has already undergone a “time correction“, wherein prices have remained stagnant for years together.Since 2013, real estate price inflation has matched the pace of general retail inflation ­ which is mostly in single digits.

“Property prices don't come off overnight, the only number of transactions falls,“ opines Sharad Mittal, director & head of Motilal Oswal Real Estate Fund, which manages over Rs 1,500 crore across three real estate funds.

“It's mostly a time correction ­ and not really a price cut. But there could be some level of price correction in high-end property and plots. But that again would be very negligible,“ says Mittal.

Contrarily, a few developers such as Hiranandani expect prices to inch up a wee bit once RERA comes to the fore. The Higher cost of compliance, title insurance, `escrowing' incoming funds (from home buyers) and defect liability clauses are likely to jack up prices post the installation of real estate regulators.

Also, in metros, developers buy land parcels from institutions (and not individuals). Such land acquisitions are “all white dealings“, with no room for “underbilling“ or covering up the purchase price to skirt transaction taxes.

“Builders may not give discounts as they'll be worried about taxmen. By lowering costs, developers may send wrong signals to the tax department that they're collecting the reduced amount of cash,“ says Hiranandani.

The sector is moving gradually towards only-cheque payments, thanks to the stringent inspection of builder-to-buyer deals by the tax department. Lesser use of cash could well ring the death knell for developers with dubious track records.

“Absence of cash may hit local builders in smaller cities hard. Cities like Surat and Rajkot use 50 ­ 60% cash in their property transactions... Builders in these cities are in for hard times,“ says Shashi Kumar, executive director, Ornate Spaces, a Mumbai builder.

“In cities and metros, only builders with good institutional backing would survive in the long term. We'll see a lot of industry level consolidation soon,“ envisages Shashi Kumar.

Source: https://goo.gl/APkfRF

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