India Today Insight: Understand The Reason Why The Real Estate Prices Are Not Coming Down

During the lockdown, the big question on every potential home buyer’s mind—especially in big cities—has been whether real estate prices would fall enough to make property more affordable. However, despite near-stagnant demand, huge inventories and a spate of repo rate cuts by the Reserve Bank of India, real estate prices have remained out of bounds for everyday buyers.

This is because developers have maintained their prices in anticipation of a revival in demand. In the past decade (from 2010 to Q1 2020), average property prices in India’s top seven cities rose nearly 38 per cent, from Rs 4,063 per sq. ft in 2010 to Rs 5,599 per sq. ft, according to property consultant Anarock. The highest growth was in Pune, at 67 per cent, while the national capital region (NCR) saw the lowest growth, at 19 per cent. This growth, however, was lower than the 52 per cent average increase in property prices in the preceding decade (2000-2009). JLL, another property consultant, has estimated unsold real estate inventories in the first quarter of 2020 at 455,351 units across Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune, worth about Rs 3.7 lakh crore. Developers have nonetheless launched new projects after witnessing some green shoots in demand, with the result that new launches exceeded sales, further increasing inventories.

With the country having been locked down from March 25 to control the spread of COVID-19, it was expected that prices would take a severe knock. Deepak Parekh, chairman of HDFC, had said in mid-April that he expected real estate prices to fall by up to 20 per cent due to the lockdown. In an interaction with real estate players earlier this month, Piyush Goyal, union minister for commerce and railways, had asked them to reduce inventories by reducing prices, rather than getting stuck with unsold units and seeking government succour. This suggestion has not gone down well in the industry—as it is, the sector has experienced severe pain in the recent past, for reasons including economic stress in certain segments, high leverage, tight liquidity and rising non-performing assets in construction finance. This prompted builders to hold on to prices, in anticipation of future demand. However, the lockdown has played spoilsport with their calculations.

Media reports suggest that prices are falling, though not across the board. In Mumbai, some luxury properties have seen prices reduce by 20 to 25 per cent, while rentals have also fallen in high-end properties by up to 25 per cent. In Delhi, some deals have seen a reduction in prices of around 8 to 15 per cent. For instance, a ready-to-move property in Gurgaon by a prominent developer recently sold for Rs 3.1 crore, while before the COVID-19 crisis it had been priced at Rs 3.3 crore. Experts say that such price cuts are being negotiated on a case-to-case basis. “Average property prices are normally calculated on the basis of new launches in a given period or quarter. Since there have been no new launches during the lockdown period, one can assume them to be stagnant,” says Prashant Thakur, director & head of research at Anarock. “Lower prices are still being negotiated on a case-by-case basis.”

Ram Walase, MD & CEO of VHBC Value Homes, says that the issue has more to do with demand than prices. “This is not a supply-side issue, but a demand-side one,” he says. Customers have, by and large, been slow in making decisions and the NBFC crisis has hurt the sector badly. Developers who have a reputation for quality, a good brand image and track record and who have deep pockets can naturally hold on to prices. “Also, it is not [guaranteed] that customers will walk into the site if you give discounts,” he adds. That may even be counter-productive, because some customers might doubt the developer’s intentions and whether they will be able to complete the project in time. There have already been price corrections in the past three or four years, and developers have pared prices “to the bone.”

In markets like Mumbai, there is some scope for discounts since some properties are priced as high as Rs 30,000-50,000 per sq. ft. But developers operating on low margins do not have the luxury to do so. Moreover, there is no point in a builder offering heavy discounts if they are not confident of surge in sales—that would harm their profitability. To overcome issues like inventory pile-up and cost overruns, developers are instead coming up with innovative offers—refundable booking amounts, cashback schemes, flexible payment plans and freebies on booking are some of the popular offers. “For instance, there is a scheme in which a customer can pay 10 per cent now and the remaining 90 per cent on possession,” says Thakur. In another offer, one can book a property by paying Rs 1 lakh while the remaining booking amount can be paid over the next 100 days. The customer can even cancel the bookings within 90 days with a full refund. In another scheme, there is a cashback offer of 5 per cent of the property cost if it was booked during the lockdown period. Walase says that during the lockdown, it was commonplace for developers to offer 5-10 per cent discounts on a case-by-case basis, or in some cases, additional amenities.

The real estate sector is caught in a loop. Post the lockdown, some markets such as Bengaluru are showing signs of revival, but for the large part, the sector is mired in uncertainty. Only a revival of the economy, and more specifically an uptick on the jobs front, can help it come out of the red.

(Source: India Today)