Realty firms are using profits from their residential projects to keep commercial property projects going, which are otherwise stuck due to lack of funds. As residential projects ensure steady cash flow, developers are giving varied incentives to consumers to keep housing projects? order books full.
Although commercial projects give twice as much return to realty developers compared to residential ones, the payment model for commercial and residential projects differ. The cash flow for residential projects is steady and regular as the buyer either makes a one-time down payment, or pays in regular installments if it is a construction-related plan.
On the other hand, commercial projects mostly run on a rental models; pre-booking of commercial space is just a contract where normally, transaction of funds do not take place. Cash flow for this segment starts later.
“With demand falling steadily, realty firms are resorting to giving discounts to fillip demand. Realty firms are using profits from residential sector to develop commercial properties,” said a Bombay based analyst.
Rajiv Talwar, group executive director, DLF, wants mortgage rates to come down to give a push to sales of realty projects. He is also expecting that after measures at liquidity infusion and lower risk weightage on real estate, banks will start lending generously to the developers.
“I do not think there will be a further softening of prices. Besides, it is a temporary phase, and in 2-3 years? time, the situation will improve”, said Pradeep Jain, Parsvnath developers.
Meanwhile, a Goldman Sachs report released on Monday predicted that India?s property market is poised for a deep correction. Property prices have risen dramatically over the past three years, supply exceeds demand in most geographies and affordability lags prices, says the report. It goes on to say that residential property prices in some geographies may need to fall by up to 30% from their current levels for affordability to catch up. As elsewhere globally, the report said, this will have negative effects on the economy.
The Goldman Sachs report also says that decline in property prices is also being accompanied by an economic slowdown, which will lead to job losses and lower income growth. As declines in property prices also signals slower growth ahead, peoples? expectations about job losses and lower income growth, whether actual or expected, will act to reduce current consumption.