Experts believe consumers are shying away from purchases even though mortgage rates have dropped to levels of 7.5% — down about 350 bps from their peak — as they are waiting for a meaningful price correction.
Nearly half the unsold residential real estate inventory in the country, or 0.8 billion sq ft, may remain incomplete, according to an assessment by Liases Foras. That’s approximately Rs five lakh crore worth of property across some 6.75 lakh units, assuming a conservative average rate of Rs 6,000 per sq ft.
With bankers unwilling to extend working capital and sales stalling developers are struggling to finish projects and unfinished projects could bigger risk for the sector than a price correction. Some projects have moved out of weak hands. “Over the last three to four years, weaker developers have started shedding projects to stronger ones and new business models of collaboration such as profit-sharing and development management have evolved,” analysts at Jefferies recently wrote.
Nonetheless, the total inventory at the end of March was a staggering 13.45 lakh units across 1.58 billion square feet, with the property market now having been in a down-cycle for seven straight years. The velocity of sales in the quarter ended March plummetted to 0.90% way below the levels of 2.08% typically seen in a good market. The annual housing market in India is pegged at around Rs 7.5 lakh crore, of which the top 10 cities account for around Rs 2.5-3 lakh crore. Organised and large developers currently control less than 10% of the market and analysts believe there could be a fair amount of consolidation as these players are able to attract funding. The downturn in the industry since 2013, regulatory reforms in the form of RERA and the credit shortage since mid 2018 have left smaller players struggling for survival.
While the government has been exhorting builders to offload inventory by lowering prices, this has been constrained by the fact that the fact that the difference between the market value and the circle rates have narrowed significantly. In Mumbai’s Lower Parel, for instance, the gap between the two is just 6% today as against 37% five years back, Anarock Property Consultants pointed out. While the average market value is Rs 34,600 per sq ft, the ready reckoner rate is Rs 32,609 per sq ft.
Experts believe consumers are shying away from purchases even though mortgage rates have dropped to levels of 7.5% — down about 350 bps from their peak — as they are waiting for a meaningful price correction. Liases Foras’s findings reveal that only 50% of all residential projects are safe from both execution risks and price correction. The remaining 50% are either under risk of being delayed, susceptible to price correction or both.