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Real Estate: Regaining Strength

There was a time when Real Estate used to be a calling of the upper class. But with changing economic dynamics came about a vast change in the demography and the prosperity levels of the Indian population particularly in developed cities and towns. This coupled with the changing face of the financial sector brought about an unprecedented boom in Real Estate which continues even today. No matter how gloomy the scenario surrounding this sector, the economic equations of demand-supply and prices have never reflected true economic  principles. Prices have defied gravity in prime cities and locations despite the fact that the overall economy has been facing greater difficulties. It is this very nature of the sector that makes it different and worth talking about.

Buying a dream home has always been a priority for everyone. It is an aspiration that none would want to give up on and achieve as soon as possible. The want of buying a home has always been high; no wonder property prices have been rising making it difficult for many to fulfill this much coveted dream. As realty prices continue to skyrocket there has always been a never ending debate on whether this is the right time to buy realty.

With property prices on an every upward growth trajectory, it is obvious that buyers look at timing the market. Over the past one and half year, property prices, though have not witnessed any run-up, they have neither gone down. Now, there are certain green shoots that are indicating towards an improvement in prices. And, if these green shoots convert into a full-fledged revival, prices may again be out of reach for many. Hence, the one vital question to be answered in the current context is whether it is the right time to buy property now?

So, what is the right time to buy into Real Estate? The answer to this is not as straight-forward and simple as the question seems to be. Here are some pointers that could help you make a more informed decision.

The Current Market Scenario

The difficult phase that the Indian as well as global economies have witnessed for quite some time now is known to everyone. The Indian Economy has been witnessing a period of slow growth and high inflation for several quarters over the recent past. This scenario led to a higher interest rate regime, directly impacting the sales volumes in the residential segment. A slowdown in demand was acutely visible while on the supply side too matters got complicated as projects had to be stalled midway through for want of funding. This was particularly true of the three leading markets including Mumbai, Delhi-NCR and Bengaluru.

The first half of 2012 witnessed the addition of more than 19000 units across 66 projects in the NCR, Mumbai and Bengaluru regions; a drop of about 40 per cent as compared to more than 26000 units from the 83 projects that were launched during the second half of 2011. According to Pranab Datta Chairman Knight Frank “the economic growth in the last few quarters has remained stagnant with the manufacturing and service sector growth rate reducing with each passing quarter. The Real Estate sector is not immune to this and hence the impact has been similar”. As a result, volumes declined significantly in the leading markets of Mumbai, Bengaluru and Delhi (NCR). Further, the residential segment also faces another important issue where projects, particularly in the leading markets are priced beyond the affordability levels. So there has been a lower off-take and buyers have been waiting for price corrections.

This sentiment is also shared by Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India, a leading Real Estate research firm, who say’s “generally speaking, the residential market is currently at low ebb. Many projects in the central locations of our metros are priced beyond affordability. This has caused a supply overhang in older projects, while newer projects are already being launched at lower rates but are still selling only sporadically. The general sentiment is muted and buyers are awaiting either a correction in prices or more reasonable home loan interest rates”. So, while developers continued to face challenges of high borrowing costs, rising input prices and shrinking profit margins, buyers had to bear the brunt of high interest rates coupled with delayed product delivery thereby resulting in a sluggish market.
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The scenario was no different for the commercial real estate also as amongst the three verticals of Realty viz residential, commercial and retail, commercial is highly linked to the global economic scenario. The health of the Retail segment is one which is indirectly related to global economic fluctuations. However even the retail segment was not doing well as disposable incomes declined sharply in the scenario of high inflation and interest rate regime. Margin pressures kept retail players out of flavor with many retail players curtailing their expansion plans.

So, all three segments have been going through a very dull phase since the past one year or so. However, there are certain factors that are indicating towards expected improvement in realty as an asset class. But is it sustainable? This is exactly where investors/buyers are confused. Is it the right time to buy? After all, a buyer’s market has always been wishful thinking of home seekers. Moreover, it seems, many of the prospective home buyers who had put their plans on shelf due to the threat of job loss & inability to pay their EMIs borne out of recession are back in the hunt. We are of the opinion that the green shoots are expected to turn into grass and there are compelling factors for recommending an investment or buyout of a property at this point in time. But before you look at what is prompting us to suggest a buy on real estate one needs to know that being cautious will help.


Interest rate - Scenario Expected to Improve

As mentioned earlier, a high interest rate regime on the back of consistently higher inflation levels has been the primary reason affecting the realty sector. With most of the residential real estate deals happening on housing finance this was bound to happen. We are of the opinion the scenario is expected to improve soon. Though the RBI has not gone ahead with rate cuts (Except for the 50 basis point it cut in April 2012), but it has provided a good amount of liquidity. Further, banks have made sizeable efforts to provide some respite by reducing the interest rates for end users.

The Economic Front – Getting Back On Track

We expect sentiments to improve a bit on this front. The Government has taken to the reforms process rather seriously, corporate results are coming in line with expectations and inflation seems to be contracting. A combination of all these factors has provided a much needed impetus to the Indian economy at the right time. As the economy falls back in place, the sentiments in the realty markets are also expected to improve. In addition the stock market has witnessed some revival and this is a very positive factor for the realty markets, as the bullish phase in the stock market helps the realty sector significantly.

Financial Health Of Realty Companies; Likely To Improve

Real estate companies have been going through a very difficult phase where they are debt laden and are not generating enough cash flows. This created a much larger doubt about their overall financial health. However as economic health of India improves, we expect realty companies be able to generate cash flows. “Currently, most of the realty companies are unable generate enough cash due to a slowdown in demand. However, things are set to improve in the coming quarters as the economy recovers and demand starts picking up in the realty sector” says Datta.

These are the main factors that indicate towards an improvement in the scenario, but yet do not answer the question we raised earlier. The answer to whether it is a right time to buy into property now is different for the three different segments.

In case of the residential segment experts suggest, if the house is for self-occupation, the right time to buy a house is now. The individual should not wait for a major correction in prices, though the right time and price for a real estate investment is of essence. According to Puri “for end users with a genuine need to buy a home, the right time is always now, subject to the availability of a good deal on a property that meets all of one’s needs”. However there are certain cautions to be maintained. The other factors to be considered are: the right cost of finance, location, ownership and legal scrutiny, transaction transparency and hygiene, the tax advantages of owning a house over a rented one, etc.
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As regards the regional dynamics, experts suggest that some Tier II and Tier III cities such as Pune, Nagpur and Ahemdabad offer great potential as prices are quite low and possible appreciation is healthy. However, again this holds true if the above mentioned conditions are fulfilled.

About which segment will recover first, we are of the opinion that the residential segment is expected to be the first to recover. The simple factor which will aid this is, there is a huge demand-supply gap in the residential segment and hence if the economic situation witnesses an improvement, the residential segment will be the first to recover. However, experts are also expecting the retail segment to recover on the back of the recent announcement which allows FDI in multi-brand retail. But the commercial segment it is expected to witness a very slow recovery.

So all in all, those who want to buy their first house property the right  time is now. Along with our analysis, we have provided the views of leading realty research firms ahead. Further  we have also provided views from a research house on the leading three cities  viz, NCR, Mumbai and Bangalore.

Outlook On Residential Segment In Some Leading Markets - CBRE South Asia

The easing of mortgage rates is likely to improve buyer sentiment and rejuvenate market demand in the coming few months. This should help investors and end users to shift focus to the residential sector again, thereby easing the supply overhang in most cities. The bulk of the demand is likely to remain in the mid-segment and the low-end category of housing. Prices are likely to witness a subdued growth in most markets in the short-to-medium term till the pressures of unsold inventory are eased out.

Infrastructure initiatives such as the Greater Noida metro rail network and the proposed metro link in Northwest Bengaluru are likely to have a positive impact on the residential markets of these cities.

National Capital Region (NCR)

Most micro-markets in Delhi and NCR are expected to maintain stability in capital value appreciation over the next six months. Home buyers and investors are in a cautionary mode and are deferring purchases in anticipation of a reduction in interest rates. The Noida Extension and Greater Noida micro markets are expected to pick up pace as land acquisition issues in the area have been cleared. Some good infrastructure development projects for convenience have been approved, which is expected to provide a fillip to the real estate profile of the region.

Mumbai

While Mumbai continues to be a prime residential investment market in the country, affordability and credit costs have become critical issues guiding residential demand in the city. Most prime locations are witnessing a gradual slowdown in demand as transaction volumes decline across projects. This may lead to a depreciation in capital values in new developments in the short term, which would be instrumental in rejuvenating residential demand in the city. A downward revision of interest rates by the central bank could also encourage buyers and investors to revive purchase decisions in Mumbai.

However, the recent amendment in the DCR (Development Control Rules) to include balconies, flower beds and terrace area in FSI (Floor Space Index) by offering fungible FSI to the extent of 35 per cent at a premium is expected to further increase the cost of construction, which is likely to be transferred to buyers.

Bengaluru

Developers continued to launch residential projects across various categories during the first half of 2012, a trend which is expected to continue. Whitefield will be a focus destination for residential development, as it has witnessed a renewed interest from office and retail occupiers in the last two quarters, which is expected to have a positive impact on housing demand in this micro-market. Capital values are expected to stabilise across most of the locations, with a marginal increase likely in only a few micro-markets in the short-to-medium term.

The second phase of the Bangalore Metro Rail has been approved, which would enhance connectivity to peripheral locations of the city such as Whitefield in the East, Tumkur Road in the North West, Kengeri in the West and Off- Kanakapura Road in the South. As a result of this, these locations are expected to witness an increase in demand in the medium-to-long term.

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