Real estate inventories close to record high

Analysts say numbers nearing 2007 levels

Inventories in the residential real estate market are close to an all-time high in all the major cities in India.

Builders in Mumbai are sitting on an inventory of 48 months. Delhi is sitting on an inventory of 23 and Bangalore on 25 months. This is above the comfortable level of 14-15 months. Analysts said these are close to the levels of 2007, when the residential real estate market's inventories were at an all-time high.

Jones Lang Lasalle, in its latest report, RBI Bans 80:20 Schemes: Correction On The Cards?, says due to these high inventory levels in seven major cities, a price correction is likely. “Inventory levels in the leading seven cities in India are much higher than the comfortable industry levels seen eight-10 months ago, which is between 14 and 15 months’ of unsold supply.

As a result, the ability of the market to cling to current prices is under severe stress,” said Ashutosh Limaye, head, research and real estate intelligence service, Jones Lang LaSalle India.

Mudassir Zaidi, regional head, north, Knight Frank, said, “Five to seven quarters of inventory are comfortable. Anything above is worrying. Already, these markets are stressed as the supply has already come, whereas demand is not-so-stable.” “I think buyers would start having some confidence after next Diwali, once polls are over and there are some decisions on the economy,” said another real estate broker. 

The report, based on the inventory levels of the second quarter, said though price cuts were inevitable, there would be a resistance to cut due to the land cost. However, there could be a correction in the mid-income segment in the range 12 per cent to 18 per cent, depending on specific projects and builders’ holding capacity and financial strength. “A correction in prices beyond this would affect developers’ profitability to a non-acceptable extent,” said the report.

Land prices as a percentage of project cost are 60 per cent in the cities and 40-60 per cent in the suburbs. Niranjan Hiranandani, managing director of Hiranandani Group said the 80:20 or 75:25 schemes would impact the market more in the north, as it was an investor-driven one. “These schemes are meant more for the investors who pay 20 per cent initially and want to earn profits when the projects are completed.”

There are 50-100 projects in Mumbai–Thane under these, said experts. In other cities, the number is double. “The real-time rise in property prices (adjusted for inflation) in Tier-I cities since first quarter, 2012 has not exceeded four per cent-five per cent, a fact that could dissuade developers from reducing property prices significantly,” said the report.