Sales picking up,but will prices drop?

Demand in key markets has witnessed growth in the first three months of this year,fuelled by new launches and discount schemes.

Written by ENS Economic Bureau | Published:April 6, 2013 12:49 am

Demand in key markets has witnessed growth in the first three months of this year,fuelled by new launches and discount schemes. But the price-affordability gap remains wide

The first three months of the year is a period when developers look forward to closing good deals and commencing the year on a positive note.

This is also the new year celebrated in various regions such as Ugadi,Gudi Padwa etc and buyers usually seal a deal in what is seen as an auspicious period.

This year too,the January-March period has seen pick-up of sales volumes across major cities primarily on account of new launches and discounts offered by developers,a report by financial major Bank of America-Merrill Lynch (BofA-ML) has said.

“Historically the second half of the financial year have been better than the first half as developers launch more projects,advertise more in run-up to Diwali and local new years such as Ugadi and Gudi Padwa,” said Abhishek Kiran Gupta,research analyst and author of the report. “Leading listed developers have sold better in the second half than in the first half,” adding that the proportion of inventory sold was in the range of 70 per cent during the latter half of the financial year.

Santhosh Kumar,CEO – Operations at real estate consultancy Jones Lang LaSalle India says that residential sales have picked up in areas where price points have either reached a degree of rationality or the supply/demand dynamics indicate that no correction is imminent.

“Another reason is that the RBI has clearly indicated that there will be no major relief for home buyers in the near future. This has resulted in many fence-sitters finally going in for purchase decisions which were made earlier but kept on hold in anticipation of stronger signals from the market.”

Mumbai

In Mumbai city,the report states that prices have appreciated at a compounded annual growth rate (CAGR) of 14 per cent over the last decade,which would make it unsustainable. Gupta believes that the prices in Mumbai would have to correct and remain subdued over the next two-three years,enabling an improvement in affordability as income levels catch up.

“Today,the most affordable project within Mumbai city quotes at more than Rs 10,000 per square foot,which translates into Rs 1.5 crore for a 2 BHK apartment. Only households with an annual income greater than Rs 35 lakh would be able to afford it,” says the report.

However,BofA-ML expects prices to see a correction over the next three-four quarters.

Even as the prices reign at stratospheric levels,no developer has actually cut base prices yet. Buyers are being wooed through 20:80 payment schemes,stamp duty waivers,floor rise waivers and other freebies.

Freebies,Gupta admits,only provide a feel good factor. “However,a 20:80 scheme does translate to a nearly 8-10 per cent benefit on prices over a three-year period.”

“Festive offers do play a role,but are temporary phenomena,but they can act as an incentive to buy if such a purchase decision has been made but kept in abeyance for lack of overall attractiveness. New projects in slow-moving areas of the metros are being launched at lower price points to catalyse sales,” says Kumar.

Gurgaon

The general trend of robust sales has an exception in Gurgaon,that is seeing a downward trend,the current period being the third successive quarter of slowing demand.

BofA-ML says that the prime reasons for this trend is the slowdown in new launches as developers focus on execution and inventory clearance,and the rising prices.

The average increase during the current quarter ended March 31 has been 4.5 per cent quarter-on-quarter. The report also says that although Gurgaon has the lowest unsold inventory in the country,speculation remains high,and expects prices to remain at current levels even as volumes are slated to go up.

“There has been a decline in sales in the market in the second half,as prices have witnessed strong appreciation in 2011 and 2012. Bulk of the market activity in Gurgaon was focused in emerging markets such as New Gurgaon and Dwarka Expressway,” said Anshuman Magazine,CMD,CBRE South Asia.

Noida

The other major market in the National Capital Region,Noida,saw a slowdown in new launches but demand remained steady averaging 11,500 units per quarter for the financial year 2012-13,the report says. The market is witnessing a trend where certain developers have delivered well while others are struggling in terms of sales,approvals and execution. “Timely execution will be the differentiating factor in Noida in the near future,” says Gupta.

The market is also witnessing the effects of a flurry of new launches in 2010,followed by the unrest over land acquisition in 2011 leading to poor execution. BofA-ML maintains a negative outlook on Greater Noida as the primary challenge would be execution more than demand,which is why volumes are slated to drop while prices remain stable over the next three quarters.

Bangalore

The information technology capital has bucked the trend in the north and the west and has seen launches at an average rate of 10,000 units per quarter for the third time since 2008,and the maximum sales happened during the second half of the year. This,BofA-ML attributes to increasing affordability,as prices in Bangalore have risen 8.5 per cent CAGR over the last decade.

A moot question is whether prices will drop at all,given the huge unsold inventory. “In many markets,discounts are available with developers who are saddled with a lot of unsold stock and are unable to proceed with their planned projects unless sales happen. These discounts tend to

materialise when a prospective customer displays convincing intention to buy. However,there has been no move to officially announce lower rates as this would signal a correction,” says Kumar.

With no respite on the interest rate front,the only option fence-sitters may have is to try hard at getting a good bargain.

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