For a country where a roof to call your own is a luxury, it is ironical to hear of a glut of housing that has no takers. But that?s where the real estate market is poised today?oversupply on one hand and high unsold inventories on the other.
The rut is deeper where the luxury segment is concerned. Buoyant developers after the slowdown focused on the high margin segment, only to be left with ghost towns, especially in Mumbai and Delhi-NCR.
Here is the reality: Jones Lang LaSalle (JLL) India points out that the second quarter of this year witnessed around 67,171 new residential launches (across segments in top seven cities). The absorption rate for the projects is around 21%, which is not alarming, but taking into consideration that every quarter around 75,000 residential units are being added and prices have gone up by 20-25%, one can say easily that there is a supply overhang. As per Royal Institution of Chartered Surveyors (RICS), the total residential supply (14%) is in the luxury, premium and boutique segments. Further, the unsold inventory has touched the level of 12 months against seven-eight months last year.
As reported in The Indian Express on August 11, a staggering 96.3 million square feet of residential space?or about 80,000 homes?is lying unsold in the Mumbai Metropolitan Region (MMR), the highest-ever inventory pile-up for the area. Sales are down 38% over last year. Data compiled by real estate research firm Liases Foras shows that at the end of June 2010, the unsold residential space in Mumbai, Navi Mumbai, Mira-Bhayander and Thane was nearly twice the 58.9 million sq ft that was available in the MMR in June 2008. Liases Foras CEO Pankaj Kapoor told ENS that if flats that are currently lying with investors, which will eventually return to the market, are taken into account, another 50 million sq ft will be added to the unsold space.
So, it?s a no-win situation for the real estate sector, with overpriced housing and negligible transactions. ?There are certain pockets in cities like Delhi, Mumbai, parts of Chennai and Pune, where prices are higher than justified. Though there is latent demand, this is not getting converted in sales of residential units, as people have purchasing power constraints, especially in an inflationary environment. Such a situation is not healthy for the sector,? says S Sridhar, CMD, National Housing Bank.
Here, too, while the big daddies of the realty sector have been able to tap the potential of luxury housing segment, it’s the deluge of projects by smaller and lesser known developers that has resulted in the oversupply. ?DLF, Unitech, Hiranandani and the likes can get away with hefty price tags as they are big names that deliver on time. A project with the right location, price and the ‘wow’ factor attracts buyers. But in places like Sohna, Navi Mumbai and Greater Noida, it’s difficult to sell very costly homes. Initially, few projects got a good response as there was pent-up demand, but then developers started launching luxury products like crazy,? says Abhishek Kiran Gupta, head, research and real estate intelligence services, JLL India.
?Too many developers have entered the market post-recession as they saw launched luxury projects doing well. There is demand, but not infinite demand for luxury projects, as it’s difficult to break the physiological barrier of Rs 1 crore. Therefore, now we have an oversupply,? says Om Chaudhary, CEO, Fire Capital.
The Express news report says Mumbai will have over 9.55 million sq.ft. of luxury housing space constructed over the next four years, of which only 5.1 million sqft is likely to be absorbed. Looking at such figures one speculates if India is set for another real estate bubble? ?Not really, because the oversupply is mostly in Delhi and Mumbai,? says Sachin Sandhir, MD, RICS India. However, an intermediate shakeout is not ruled out. ?Many developers have the holding power, but they will have to let go of hefty profits to have higher sales. Pricing-wise, the market will have to correct itself, or else there will be a shakeout,? says Sridhar of National Housing Bank.
Another cause of worry for India’s real estate sector is that most buyers for many housing projects have been investors. So the next two years will also see investor’s inventory coming back to the market as they sell, worsening the oversupply situation. ?This is especially true for NCR, which has a high absorption rate, but is mainly driven by investors,? explains JLL?s Gupta.
?There are many corporate executives and GM-level employees today who can easily afford Rs 1 crore-plus houses. Banks are also more liberal with their loans today. Also, luxury means a product with features that assure low maintenance cost. So initially the cost is high, but over a period of time it means lesser cost,? says an Ansal API official. Some features that premium segment homes have are solar power and solid waste recycling, besides use of eco-friendly material.
India’s largest developer, DLF, which has a section called ?Premium Homes?, is gung-ho about the luxury residential segment. ?If the location is right and the builder has the credibility, developed units will be sold. We don’t have any piled up unsold inventory. But you have to provide the right ambience for a project if you call it luxury,? says a DLF spokesperson. He adds that in the first phase of Capital Greens (DLFs luxury project in Delhi), all the flats were lapped up within two hours, whereas in the second phase they were sold out within a day and that response is fairly good even for the most expensive flats in phase three. DLF has also introduced ‘sale-by-invitation’ for its Aralias project that has condominiums located in Gurgaon.
Though real estate companies insist that sales for luxury homes are on a rise, they also agree that it’s affordable or mid-segment houses that drive the volumes. ?The volume of sales for entry-level housing projects is more than that of luxury apartments,? confirms Manu Goswamy, head, sales and marketing, Jaypee Greens.
