No longer affordable

BANKERS’ CONCERNED

Bankers too are worried about the rate hikes that developers are resorting to. They feel that rising property prices in the metropolitan cities — which are especially pronounced in Mumbai and New Delhi — will have a negative impact on loan offtake.

According to Renu Sud Karnad,joint managing director of Housing Development Finance Corporation (HDFC),“Developers have to be cautious about raising property prices,or else they will erode long-term benefits for short-term gains.” She adds that an unexpected rise in property prices would hit the revival of the property market much harder than an increase in loan costs due to higher interest rates. Keki Mistry,managing director of HDFC,says that property rates have to be reasonable for the pick-up to turn into tangible growth. “Home buyers do not buy houses just on the basis of interest rates but on the actual prices of apartments,” he says.

In a similar vein,VK Sood,MD of PNB Housing Finance says: “In the recent past we witnessed some pick-up in demand for home loans. But for this demand to sustain,builders will have to maintain prices and not hike them,or else demand will get affected.”

TURNING UNAFFORDABLE

In addition to raising prices,builders are also resorting to subterfuge. Homebuyers are realising that the prices which these developers announce are not the real prices: there are many other hidden costs attached,which make these so-called affordable homes quite unaffordable.

For instance,developers could announce that they are offering affordable apartments for Rs 20 lakh to Rs 28 lakh. But later they add several other charges: electricity and water connection charges,external development charges (EDC),advance maintenance,corpus funds,and so on. Together with registration and other costs,buyers discover that the actual cost of the house comes to Rs 6 to 10 lakh more than the advertised cost. Further,some developers include the cost of one open car-parking slot in their advertised cost,but if a home buyer wants a covered car-parking slot,then there is an additional charge of Rs 1.5 lakh (this cost varies from city to city).

DECLINING ABSORBTION RATE

Starting in July last year PropEquity conducted a year long survey across 13 cities. As many as 1,06,008 apartments in the Rs 5-30 lakh range were launched across India during this period. Of these 48,826 apartments were sold,which amounts to a 46 per cent absorption rate. “Pune had the highest number of launches — 13,971 residences. It was followed by Gurgaon in Haryana with 11,388 houses. Mumbai came next with 11,098 houses. Pune also had the highest absorption at 7,043 units,followed by Gurgaon at 4,426. As property sales picked up,developers in Mumbai and Gurgaon increased prices by 10-15 per cent in the last three months,” informs Jasuja.

The initial euphoria in the affordable housing segment resulted in healthy absorption in the beginning. However,in Q3 of 2009 the rate of absorption declined. The falling absorption rate combined with oversupply in the affordable segment is resulting in inventory pile up,says the PropEquity report. Jasuja adds that the decline in rate of absorption coincided with the hikes in property prices.

THE IMPLICATIONS

The PropEquity report points out that the large number of projects announced in the affordable category by developers will affect their performance. Execution of such a large number of projects is likely to be quite a challenge for them,says the report.

“Many of these developers do not have any past experience in executing such large volumes of units. The land that is being used for development of affordable housing projects was initially purchased for the development of larger units and hence smaller volumes,” says the report. It adds that previously many of the large-unit projects have also witnessed delays across cities. Going by that evidence,it can be expected that execution of affordable housing projects may also face delays as delivering higher volumes is a bigger challenge.

Further,says the report,a rise in commodity rates could also have a drastic impact on the development plans of developers. Since their margins in affordable projects are slim,any increase in the costs of materials such as cement and steel would make these ventures unprofitable.

Jasuja is of the view that a number of developers may resort to the old practice of diverting funds from their affordable housing projects to the completion of older projects that have already been delayed. “Many of the developers who are under debt may also use the funds from their new project bookings to repay older debt,” he says.

QUEUING UP FOR FUNDS

Real estate experts suggest that by hiking prices developers could be trying to push up their valuations. Many of them are trying to raise funds from the equity market. Many developers have already submitted their applications for public offers to market regulator Securities and Exchange Board of India (Sebi). These include Mumbai-based Lodha Developers (Rs 2,700 crore),Lucknow-based Sahara Prime City (Rs 3,450 crore),Emaar MGF Land (Rs 3,800 crore) and New Delhi-based BPTP (Rs 2,000 crore). According to an estimate,IPOs worth around Rs 23,000 crore are planned by real estate firms over the next few months.

Homebuyers need to be clear about the amount of money they can afford to spend to buy their dream house. They need to negotiate the price and check the exact cost of their apartment before making a commitment. Or else they could end up spending much more than they had bargained for. l

praveen.singh@expressindia.com

Demand-supply gap

According to Knight Frank,an international property consultancy firm,there’s a huge gap between the preferences of buyers and the projects under development. The report states that the housing requirement for the Rs 3-10 lakh income group across 7 cities is 2.06 million housing units by 2011. These include Mumbai,NCR,Chennai,Pune,Kolkatta,Bengluru and Hyderabad. This potential market comprises 37 per cent of the total demand and translates into a market size of Rs 3,300 billion.