Both the economy and the residential property sector are currently in a state of uncertainty. This has resulted in a rather prolonged period of vacillation and hesitancy among home buyers in India. The reduction in sales has impacted the capital availability of developers, and we are going to witness widespread delays in the construction of the residential projects across segments.
There has been a significant reduction in the sale of high-end homes priced above Rs. 1 crore and above across the country. There are various reasons for this phenomenon, including dampening of overall market sentiments due to the current economic flux and a general trend of over-pricing. The reduced availability of funding to the sector is going to impact the execution capability of developers who are focusing exclusively on luxury homes and do not offer a diverse mix of typologies in their projects.
The current market conditions are therefore less than ideal for luxury home developers building high-end homes priced above Rs.1 crore , many of which have projects in locations such as Noida, Thane, Navi Mumbai, Ghaziabad, Faridabad, Chennai, Bangalore, Hyderabad and Kolkata. In Gurgaon and Mumbai, projects with units priced above Rs.2.5-3 crore are definitely going to face challenges. We are looking at a scenario wherein luxury home developers will be prevailed upon to negotiate on their current pricing.
Since residential construction accounts for nearly 70% of the activity in the Indian real estate sector, the effect of slow sales in the high-end segment will result in delays in office and retail projects as well. The cash-flows in the residential segment are typically front-end loaded, while those in office and retail are typically realized post construction.
That said, a slow-down in the sales volumes of high-end residential units is not indicative of a country-wide correction in the residential segment. On the whole, the luxury homes segment is a niche that does not represent the overall residential market in India.
Currently, between 60-70% of the entire residential inventory on the market is priced between Rs.2000–4000/sq.ft. Cities like Bangalore and Pune have, in fact, shown very encouraging residential sales volumes over the past two quarters. The more rationally priced residential projects in our cities’ suburbs will continue to see healthy demand. Nevertheless, it is evident that the time has come for many developers with projects in the more central regions of our cities to relent on their pricing.
As a matter of fact, it is more than likely that these developers will be offering 10-15% discounts on their brochure prices during the upcoming festive season. This will prove effective in catalysing increased sales in the residential sector across all segments. Also, new launches during Diwali should happen at more rational prices to attract buyers.
Finally, all is not doom and gloom on the project funding and demand front. The situation is dynamic at the moment, meaning that the market has yet to adapt to the on-going turmoil. However, the outlook is going to improve once the currently hidden but nevertheless clearly inherent advantages of the situation begin to manifest.
In light of larger uncertainties in developed economies, Indian shores are already being perceived as a better bet for long-term future investments. This is going to result in an increase in remittances and investment from NRIs. Moreover, there is still considerable foreign and private equity capital available to established, large-scale residential developers who have credible completion track records.
The author, Anuj Puri is Chairman & Country Head, Jones Lang LaSalle India
