Lease gains favour as Mumbai house prices remain stubborn

Rentals in the National Capital Region declining due to increased supply

Mayur Shah, vice-president of a domestic brokerage, wanted to buy an apartment in 2012 in Dadar, Mumbai. Shah thought the prices in a particular residential project in Dadar West will come down from Rs 25,000 a sq ft to around Rs 22,000 in six months due to a slowdown in the market. Instead, prices shot up to Rs 27,000 a sq ft. In June 2013, he took a house in the area for Rs 60,000 rent.

“I felt it does not make sense to buy at those prices. So I opted for leasing it,” said Shah.

He is not alone. Mumbai is seeing increase in registrations of lease deed agreements in the last four months as prospective buyers are opting for renting their apartments than actually buying it out.

Sanjay Sanghvi, a prominent realty broker in Dadar, said: “People are reluctant to invest in homes now. Sale of residential units is hardly going through.”

The number of registered lease agreements have gone up from around 10,000 in February this year to 12,000 in April and May 2013, said stock brokerage Prabhudas Liladher in a recent report. At the same time, the number of registered sale deed agreements has come down from 7,000 in March this year to around 6,000 in May.

“This trend clearly displays a preference towards leasing over buying property, given the sticky property prices and declining rentals. Lease numbers have remained strong despite slackness in the commercial real estate space. Hence, any pick-up in the same could only propel the number northwards,” said Kejal Mehta and Pratik Shah, analysts with Prabhudas Liladher.

Mumbai has clearly become unaffordable for many. According to global property consultant Knight Frank, Mumbai remains the most unaffordable market with 29 per cent of the city’s total under construction units surpassing the Rs 1-crore mark, compared to 11 per cent and five per cent for the National Capital Region (NCR) and the Bengalore markets, respectively.

According to a recent Goldman Sachs report, average home prices in Mumbai are up 49 per cent since March 2010, which is higher than the national average increase of 41 per cent.

“People are deferring purchase decisions as sentiments are down. Revival in growth of economy is taking time and income growth is revised downwards. People are not confident of buying homes and paying their monthly instalments,” said Samantak Das, chief economist and director at Knight Frank.

Accordingly, the inventory pile-up across the NCR, the Mumbai Metropolitan Region (MMR) and Hyderabad has almost doubled in the last three years, according to realty research firm Liases Foras.

Inventory denotes the number of months required to clear the stock at the existing absorption rate. An efficient market maintains an inventory level of 8-10 months. The inventory levels in MMR was at 40 months at the end of March 2013, against 17 months at the end of March 2010. However, property consultants said in the NCR, the number of people opting to rent properties is coming down.

According Cushman & Wakefield, the NCR has witnessed the second highest number of residential launches in the first quarter of 2013 at 7,603 units, of which 6,500 units were in the mid-end segment and the rest is in the affordable segment.

“Residential rents have come down by 10 to 15 per cent in places such as Gurgaon,” said Santhosh Kumar, chief executive officer-operations at property consultancy JLL. Added Manish Mehta, vice-president of Indiahomes, a property services firm: “In the NCR, we are seeing good home sales. Rental market is seeing a slowdown as people want to buy their own homes.”