Sneha Partha Sarthi, 29, a sales and marketing professional in Mumbai, wanted to buy her first home in the eastern suburb of Chembur. Her budget was by no means modest, over a whopping Rs 1 crore for a two-bedroom apartment.
But Sarthi found nothing within her budget. Finally, she settled for a 1,100-square-feet flat 30 km away, in Thane, a far flung north-eastern micro-market, for almost Rs 2 crore.
For some time now, India’s realty market has been caught in a sales-demand-pricing paradox. Demand is low, sales have been tepid but prices continue to defy gravity, making the buyers’ wait eternal. More on the triad later.
Sarthi, along with her husband, did the math to arrive at the loan amount. “We availed of the 10-75-15 scheme the developer offered and that was the only reason we could go ahead with the booking,” said Sarthi. Under the scheme, 10% is paid upfront, 75% is financed by the bank and the interest is paid by the developer until possession, and the final 15% has to be paid on securing possession.
Such subvention schemes act as a moratorium before interest payment on the loan begins. Several developers, including Rustomjee, DB Realty, Godrej Properties, DLF and Emaar MGF, have launched these tripartite schemes in a desperate bid to generate sales. This becomes even more relevant at a time when affordability has taken a hit.
The RBI noted in a recent report that the loan-to-annual income ratio, a measure of affordability, has risen, which means affordability is suffering. It also stated that consumers’ purchasing power is at the same level as it was four years ago.
While sustained inflation, interest rates and low economic growth have adversely impacted affordability, a hike in property prices, too, squeezed buyers out of the market. “In some of our projects, prices increased by 60% or so between 2011 and 2013 but income levels did not increase at this pace. At the same time, interest rates remained high, impacting affordability,” reflected Sunil Mantri, chairman of Mantri Realty, which has projects in Mumbai, Bangalore and Pune.
In the last one year, sales have plummeted as much as 30%; in some cases the decline is as sharp as 50%.
Data obtained from PropEquity, a property research analytics firm, say home sales have nosedived nearly 30% during FY15 in the major micro-markets of Mumbai (MMR or Mumbai Metropolitan Region), Thane, Navi Mumbai, the National Capital Region (NCR, which includes Gurgaon, Noida and Greater Noida), Pune and Bangalore. NCR, where sales declined almost 50%, led the plunge, followed by a sharp 30% drop in Thane and Navi Mumbai.
In such a scenario, prices should ideally have declined, but they have not. In fact, developers have held on to prices stubbornly. PropEquity statistics show that prices across segments have not increased more than 10% across the top seven cities. “Developers are playing the who-will-blink-first game with consumers,” said Ashutosh Limaye, head of research, JLL India. Instead of cutting prices, developers have borrowed heavily from private sources, even at the cost of increasing their finance cost, added Limaye.
Cutting prices in under-construction projects, where apartments have already been sold to consumers and investors, is not possible, said a developer. Where consumers can pay a higher booking amount, the discounts are steeper, he added. But end-users can rarely pay over 10% of the booking amount — it is the investors who have the wherewithal to book with a 20% booking amount.
What deepens the crisis is that project launches have declined sharply even in the micro-markets typically associated with high-volume sales, such as Thane, Navi Mumbai and NCR. During the past one year, launches have declined by as much as 60%. Bangalore, Navi Mumbai and Pune have seen an over 80% decline in new launches. Launches in
Thane have fallen 70% and Mumbai by 28% during the year.
“Typically, developers had five-to-six quarters of unsold inventory, which has more than doubled. Developers are holding unsold stock of 12-15 quarters,” said Mudassir Zaidi, national director (residential), Knight Frank India. “In the absence of sales velocity, launching new projects will only make levels of unsold stock unmanageable for developers.” Zaidi added.