Real estate developers maintain price levels even as demand slows and interest rates rise.
This year, the unsold inventory in residential real estate was the highest in Delhi-NCR at 102,758 units, followed by the Mumbai metropolitan region at 90,512. Bangalore came next with 46,596 units, and Pune followed with 40,734 units, according to PropEquity, a real estate intelligence platform.
The inventory pile-up is due to a combination of factors like slowing demand, a rise in interest rates and developers maintaining price levels. The figures considered for the study were till September.
Limited access to funds, increasing cost of debt and high construction costs remained a concern for developers this year, said Samir Jasuja, founder and chief executive, PropEquity. Developers were also affected by regulatory bottlenecks like delays in project approvals and land acquisition-related uncertainties. Affordability was the biggest concern for buyers.
The Reserve Bank of India (RBI) raised its key policy rates 12 times, aggregating 375 basis points, since March 2010. Banks responded with similar rises in lending rates. Though buyers were expecting a price correction in real estate prices, it hasn’t happened yet, Jasuja said.
Even as developers have slowed fresh launches, prices are mostly headed north. Gurgaon has seen the maximum price appreciation at 21.4 per cent, followed by Mumbai at 13.2 per cent, and Pune 12.5 per cent, compared with the previous year, the report shows.
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International consulting firm, DTZ, has said the residential sector is likely to remain under downward pressure in 2012, owing to high interest rates. “As increasing inflation levels continue to remain a concern for RBI, the residential sector may witness further increase in home loan interest rates. This would further impact demand for the residential segment, particularly among the mid-range and low-end segment,” said Anshul Jain, chief executive, DTZ India.
New project launches are likely to remain restrained in 2012, too, said Jain, adding the “rise in capital values would be low and specific across micro markets, particularly for ready and near-completion projects.”
Ajit Krishnan, partner and national real estate leader, Ernst & Young, said the initial quarters of 2012 were likely to witness a wait-and-watch approach by investors. “The focus of most developers is likely to be on execution of existing projects in their portfolios and improvement in sales,” he said.
| EMPTY NESTS Metros show a rise in unsold inventory in residential real estate | |||||||
| Unsold inventory | Absorption* | Inventory overhang months Q3 2011 | New launches* | ||||
Source: PropEquity (Real Estate Data, Intelligence & Analytics Provider)
On the residential sector, Krishnan said developers were likely to continue to face a liquidity crunch, owing to the soaring interest rates and a slowdown in sales. “This may lead to a slowdown of construction activity. Rising home loan interest rates shall keep buyers at bay in the short term. The rise in capital values would be marginally on account of the anticipated slowdown in sales,” he added.
PropEquity’s Jasuja said the near-term outlook for the residential real estate market in 2012 was likely to be cautious, owing to “the likelihood of low market sentiments”. Key market indicators, including absorption and new launches, were likely to remain low, given execution concerns, he said. “Developers may focus on execution and delivering the committed projects in 2012, rather than launching a slew of new projects to avoid an insurmountable inventory overhang,” said Jasuja. On prices, the appreciation may be marginal because of low sales volume and decline, he added.