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Will real estate developers blink?

Seems to be only option left during slowing economy to prop volumes but don't expect a steep fall in prices this festive season

Ram Prasad Sahu  |  Mumbai 

With inventory levels near six-year highs, interest rates unlikely to soften and demand sluggish, developers are likely to start offering price cuts or discounts to improve sales volumes. This is because, historically, residential sales volumes have had a strong link with mortgage rates, income growth and prices, according to Abhishek Kiran Gupta, analyst at Bank of America-Merrill Lynch. Of these three factors, none are in play currently. Take interest rates. Post the credit crisis, interest rates came down to sub-9% levels making it attractive to buy homes, but given RBI's hawkish stance, this is unlikely. Current interest rates on home loans start at 11%.

Except strong user led markets such as Bangalore, which continue to see good demand most other markets have inventory levels in excess of what is considered normal at 8 quarters. With income growth as well as prospects in the information technology and services space strong, higher prices for employees in this sector might not pinch that much. But for most other sectors, single digit income growth on lower base is impacting affordability defined as price to income levels. Finally, prices in most markets have increased impacting demand. Such has been the fall in demand that residential pre-sales according to Ashish Jagnani of UBS Investment Research are now close to 2008 levels. He blames the decline in affordability to slowing economic growth, high inflation and offcourse rising property prices which are up 10-47% from 2012 levels.

With the rapid rise in prices across key markets a major demand deterrent, what are the options left for builders? On the operational side, there is little hope for developers as they are sitting on rising inventory, slowing construction due to the cashflow constraints, and approval delays amid a weak macro. Expect the situation to continue till elections in May next year, feels Jagnani.

The situation could improve if developers do moderate prices or offer discounts in the festival season to boost sales. Says Ashutosh Limaye, Head of Research and REIS, JLL,“The December quarter could be a make or break period for developers who are excessively leveraged. Expect either price cuts or discounts to improve volumes in this crucial season.” Gupta, too, believes that price cuts is the best way for volume recovery.

While most analysts believe that sentiments will improve on the back of discounts, freebies and special schemes, they do not believe price cuts if they happen will be steep. “FSI costs/taxes, higher land prices post recent land acquisition bill, construction cost inflation will restrict sharp fall in prices,” says Jagnani.

First Published: Thu, October 17 2013. 14:32 IST
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