Pricing pains hit real estate

Written by Garima Pant | Updated: Dec 1 2008, 05:27am hrs
Its an uncertain world out there in the real estate sector. If 2007 was a memorable year for the Indian real estate market as record highs painted the realty canvas, 2008 saw that growth dwindling. Homebuyers have been deferring purchases owing to the growing negative sentiments; developers are finding it hard to get the desired prices. With voices echoing the need for price cuts, the sector is headed for a major price correction. According to a report on Indian real estate by Goldman Sachs, prices may have to fall by up to 30% for affordability to catch up. The report by the global financial institution endorses the views of Finance Minister P Chidambaram, who requested the industry to reduce prices to boost consumer demand.

The industry too has been echoing similar sentiments. The National Real Estate Development Council (NAREDCO) that works under the patronage of Ministry of Housing and Urban Poverty Alleviation, Government of India and its members including leading developers as members such as DLF, Unitech, Ansals, Parsvnath, Omaxe, Assotech among others requested all its members to review their property prices. CREDAI, the apex body of real estate developers in the country with a membership of more than 3,500 plus developers in 18 states across India also urged and advised its members across the country to make every effort in lowering prices to the levels possible.

Price correction imminent

Industry experts are of the view that the correction in land prices was imminent since the beginning. Says Anuj Puri, Chairman & Country head, Jones Lang LaSalle Meghraj, Land prices in many locations will come down as developers who have been holding on to it for future development release it to the market in order to generate funds for completion of their ongoing projects, or to ease their debt burden. Demand will also sink as the lack of liquidity among potential buyers makes itself felt. Developers expect a lot to happen in the coming few months. If Government starts supporting developers in development of affordable housing by working towards controlling high prices of land, price cut will happen, says Rohtas Goel, CMD, Omaxe. He adds that interest rate on home loans should be drastically cut by at least 3-4% so that cost of borrowings can be reduced for the common man.

Profits in land investments

With builder flats and projects not able to attract buyers at the current or proposed reduced prices, land investments do present a profitable alternative. The market in most known growth sectors will improve within two-three years, so the holding period should be at least that long. In a growth sector with new market drivers coming in, a plot of sufficient dimensions makes a lot of sense since it has equal potential for developers from the residential, retail, office and hospitality sectors. As an area attains more and more market drivers and begins to saturate, plots increase in value manifold and can be sold in a sellers, not a buyers market, says Puri. According to experts, possibility of a profit is always there, depending upon the availability of liquidity. Sometimes the best deals happen when the market is down, asserts Prakash Gurbaxani, founder and CEO, QVC Realty.

Where to invest

Metro cities still seem to be holding the focus when it comes to the ever important question of where to put your money. In terms of residential land, one should consider areas beyond the currently favoured residential zones that are scheduled for residential development in the future. The NCR region is a good bet, owing to future prospects of industrial and commercial growth. However, the necessary holding period would be a minimum of 5-7 years. Tourist spots such as Goa, Dehradun, Nainital, Mussoorie as well as religious places such as Haridwar are suitable for long-term investment, suggests Puri. Goel believes that with rising demand and population the sector will also witness scarcity of land with a shift of demand from Tier-I to Tier-II and III cities. Bhatinda, Lucknow, Jaipur, Nai Raipur, Ludhiana etc should attract attention. We foresee continuous boom in the sector for at least a decade in Tier-II and III cities, he adds. Vijay Jindal, CMD, SVP Builders believes that cities like Ghaziabad, Greater Noida, Meerut, and Panipat are preferable destinations that can earn lucrative deals for buyers as well. Puri advises investors to judge buying opportunity solely on local demand for the property typology being invested in, the number of units already sold/booked in the project, and market drivers scheduled to arrive in that locality.

Affordable housing an option

In India about 100 million people live in slums and slum-like conditions without adequate basic facilities such as piped water, sanitation, schools, health, and more. According to the State of World Population Report 2007, these numbers are expected to touch 200 million by 2020. If the current trend continues, the number of urban dwellers will reach almost five billion by 2030. In India, the urban population is expected to reach 576 million in 2030 from the current 328 million. With this rapid urbanisation, one of the biggest challenges will be providing affordable housing to city dwellers, especially the poor.

With increasing difficulty in procuring funds to finish existing projects, developers are turning towards the affordable housing sector. To counter the pressure on customers of high interest rates, rising inflation, etc and keeping in mind the high demand of housing, affordable housing is the feasible option for now, says Goel. However, these sentiments are not echoed by all. Gurbaxani finds a market opportunity in affordable housing but refuses to acknowledge it as an option in the current scenario. Larger developers are not talking about this different market segment, he adds. The industry patiently awaits tax breaks and reduction in stamp duty to increase affordable housing.