The real estate sector may be passing through a period of stress, but the long-term outlook continues to be positive, despite the terrorist attacks on Mumbai or the liquidity crunch. Here is what three key real estate consultants said:
Further 15-20% decline in prices in select micro-markets possible
The Indian realty sector has seen a progressive demand slowdown since early 2008. With fluctuating interest and inflation rates, the residential sector has been the hit hard. End-users, who are predominantly mortgage-dependent, have progressively withdrawn from the marketplace — especially first-time home buyers from the middle and lower-middle income strata.
The last 12 months have clearly confirmed the fact that the audience for high-value developments, large apartments and luxury products continue to be niche and that developers need to correct prices of existing projects and revisit overall product-packaging in for their projects.
Faced with a demand decline as well as a credit crunch situation, the developers now feel the need to focus on creating a balanced-mix to include economy and mid-range products. The need of the hour may also require developers to create value for money products by increasing space efficiency in new projects.
In the last six months residential rental and capital values across India have either remained stagnant or declined by 10-15 per cent on an average across micro-markets. The effect of the decline has been more evident in under-construction developments and is likely to continue in the same manner.
The scenario does not differ much for commercial office space, where rentals for key-markets of major cities have witnessed similar decline. Faced with over-supply in many locations along with decelerating demand, the markets are projected to see cautious approach by developers towards adding new supply.
At this juncture, the Indian real estate sector seems to have come full circle since its rapid growth in the last 4-5 years. In keeping with the current trend of capital and rental values, there is a possibility of a further 15 per cent to 20 per cent decline in prices in select micro-markets. Having said this, it is widely understood that Asian markets can recover much faster — since India’s indigenous advantages on the global business platform are unlikely to disappear in the long run.
Arvind Nandan, Director – Consultancy, Cushman & Wakefield India
Impact of Mumbai attack will not be pronounced
Property purchase sentiments are currently depressed because of an all-round shortage of liquidity, relative unavailability of credit and free-floating rumours of large-scale corrections in the offing.
In both commercial and residential real estate, there are definite downward trends evident in terms of rates. From 2001 onwards till 2006, it was a steady upward curve. The year 2006 to 2008 saw a very steep climb, and now we are seeing a plateau that threatens to yield to a downhill trend. Sale volumes have dropped by 30 per cent, sale prices are being negotiated 15 per cent lower than in the first quarter of 2008. As of now, prices have come down only in certain projects. Locations as a whole are still holding on their official rates. Price reductions are resulting only on the basis of negotiation, which has admittedly become easier in the case of lesser-known developers. Developers are hesitant to announce official drops in rates, since this would officially kick-start a cascading downward trend. The scenario is likely to look different in the coming quarter.
In a slump situation, it is not unusual for asset buyers to delay their investments for protracted periods despite seemingly attractive incentives.
As far as possible, developers do not offer rates discounted below the base cost, which includes the cost of land and construction. However, many are now offering incentives to prospective buyers to speed up the willingness to buy, and to catalyse the project’s off-take.
For buyers today, there is a definite danger in waiting too long for the perfect opportunity. Much as in the stock market, it is impossible to predict the point of lowest ebb in the real estate market. The danger in delaying a purchase too long is two-fold. Firstly, the buyer may lose out on the best properties. Secondly, the market may regain equilibrium, meaning that the add-ons and even lowered rates may no longer be available.
The impact of the Mumbai attack on the real estate market will not be pronounced, since this asset class has a long lead time. Nothing will change the fact that Mumbai is a key business location in the global context, and that it will continue to be a nexus for the biggest real estate transactions.
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle Meghraj
Rental housing, rental office space to become common
Over the past few months, the Indian real estate market has gone through some testing times. Rising interest rates and the prevailing global economic conditions seem to have subdued the demand from investors and occupiers alike. The Mumbai attack has happened at a time when the overall sentiment is low. In the short term, this may reduce the confidence level further. However, if we were to consider the development of the sector since the 1990’s, there are signs of the emergence of certain far-reaching and long-term trends that will drive robust growth for the sector in the years to come.
Foremost would be the institutionalisation of the sector. Instead of individuals, private equity funds, hedge funds, REIT funds, insurance companies, pension funds, banks and other financial institutions would own, invest or manage real estate assets in office, residential, hotels, industrial, retail space, etc. Public sector organisations like LIC, UTI, Public Provident Fund, other pension funds of central and state would hopefully become active investors in the real estate arena.
There will also be sophistication in the financial structuring of real estate investments. Apart from offering an exit route for the developers to revolve funds and improve their margins, REITs will also allow individuals investors to be a part of the real estate market. On the product side, there will be further advancement in construction management and project management techniques in order to optimise costs, meet construction timelines and achieve environmental and health and safety guidelines. Intelligent, energy efficient green buildings will become the norm of the day. Real estate activity would become more widespread and will take many smaller towns and cities in its fold.
Rental housing as well as rented office space (as opposed to owned) will become common as corporate entities will look at reducing their fixed asset liabilities. After witnessing periodic highs and lows the interest rates and real estate prices will undergo a rationalisation and will finally be market driven.
Anshuman Magazine, chairman and managing director, CB Richard Ellis
(Compiled by Joe C Mathew)
