Real estate Sector

With fall in interest rates in the last eight months, affordability factor of house buyers has improved substantially. During the period, interest rates on home loans up to Rs 30 lakh have declined by around three percentage points to 9%, from 12%. This sharp decline in rate has improved the capacity of borrowers.For instance, at 12%, the EMI on Rs 10 lakh loan to be repaid in 20 years is Rs 11,010. But, with interest rate at 9%, a person can borrow Rs 12,30,000 with the same EMI. That means, now he can buy a house that is almost of 20% higher value than what he could have done in 2008.

In the meantime, since January, prices of residential units have also fallen by up to 30%. Together, these two factors have led to an increase in construction activities in the country. This has also brought housing within the reach of a large number of buyers. As per the Housing Development Finance Corporation Limited (HDFC), the largest lender in the housing loan market in India, the maximum affordability of a household has been computed to be 5.1 times its annual income. In other words, for a household earning Rs 3 lakh a year, an affordable house should cost at most Rs 15 lakh. The report of a high level task force under the chairmanship of Deepak Parekh, chairman of HDFC, delves into the various aspects of providing affordable housing and has recommended a similar definition of affordability. In fact, it has been seen that if one buys a house within these limits, the chances of default go down substantially. A prospective buyer's purchase decision is influenced by a host of factors ranging from price points to location. Due to the growing awareness among consumers, choice of facilities and amenities are also found to be important determinants. Uninterrupted power supply, water supply and safety and security are the other three important factors influencing a buyers decision with respect to residential project in a preferred location. The potential buyers are not much concerned about developers brand and goodwill. The survey has brought out factors influencing preferences of potential buyers pertaining to locations, projects and amenities within the projects.

Many of the so-called affordable projects are offering apartments with an area of 1,200 sq ft and above. In such cases, even though a project is affordable on the basis of rate per sq ft as calculated by Knight Frank research, the larger size of the apartments make them unaffordable. Higher cost of living and lifestyle have adversely impacted affordability of households in Mumbai and Bangalore, compared to cities like Kolkata and Hyderabad. For instance, middle class households in Kolkata, Chennai and Hyderabad can afford houses valued at Rs 14-45 lakh, whereas households of a similar status in Mumbai can only afford houses valued at Rs 12-38 lakh.The primary deterrent in providing affordable housing in cities is the high land cost involved in developing such projects. While construction cost has increased marginally in the last few years, land cost in contrast has gone up several times.

With developers forced to return to the drawing board to make projects financially viable, the landscape is, indeed, changing.Look what TTK Prestige, the cooker-to-condom maker, said in a notice to the Bombay Stock Exchange last week.In 2007, the company had entered into a joint development agreement with Kolkata-based Salarpuria Group to develop a 6.3 acre site in Dooravani Nagar, Bangalore.The initial plan was to construct a mall to ensure recurring rentals. But the financial crisis has forced a change: residential blocks will be added to the project."Taking into account the ground reality, Salarpuria suggested putting up a residential-cum-office space. But a decision on this is yet to be taken," said K Shankaran, director and secretary, TTK Prestige.The management feels the new plan makes sense from a liquidity point of view.

Also last week, another firm, Sunteck Realty, said it was revisiting its project --a commercial complex on a 1.5 acre site between Kandivali and Borivali. "The project hadn't even reached the drawing board when we closed the deal a few months back. However, taking into account the oversupply situation in Mumbai's commercial space, we thought it prudent to develop a high-end residential complex instead, with a small portion of retail added to it," said Sunteck Realty managing director Kamal Khetan.Orbit Corporation, the south Mumbai realtor, decided convert its 2.5 lakh sq ft commercial development, called the Hafeez Contractor House in Lower Parel, into a residential project. Pujeet Agarwal, managing director, Orbit, said the company is actually converting two commercial developments -- the Lower Parel one and another in Andheri -- into residential ones.Realty analysts said oversupply and declining demand is making such commercial space development unviable."The government's initiatives towards reducing borrowing costs is reflected in declining interest rates on home loans. This, coupled with realty prices getting more realistic are helping maintain the excitement in the residential space," said Sanjay Dutt, CEO, business, Jones Lang LaSalle Meghraj, the real estate consultancy.Revival in demand for commercial space, meanwhile, will largely depend on the global economic scenario.

"The only movement that I see is offices being relocated to more reasonably priced commercial developments thereby cutting costs," said Dutt. Investment bank Goldman Sachs in a recent report, said primary residential volume trends (year to date till May this year) indicated recovery in markets such as Mumbai and Noida."Inventory days in the two cities have fallen back to early 2008 levels or better. However, the overhang in Bangalore, Chennai, Gurgaon and Hyderabad remains significant with at least 15 months of inventory in the pipeline," Goldman analysts Vishnu Gopal and Aditya Soman wrote.

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India’s struggling realty industry may have sprouted some green shoots of late, but the top nine listed real estate firms posted a 76% dip in profit and 57% fall in sales in the June quarter, prompting the segment leader to observe that the industry is not “completely out of the woods”. Analysts said the revival in demand could improve things, especially in light of a government subsidy for loans taken for affordable housing, but warned that a possible price war between players sitting on huge inventories could spoil the scene. “The recovery of the sector will depend a lot on the sustenance of demand,” said Shailesh Kanani, a real estate analyst with Angel Broking.

Rupesh Sankhe, another real estate analyst with Centrum Broking, felt low-priced homes will continue to drive up demand , even though it may not be, “anywhere close to what we saw in 2006 and 2007”. DLF, India’s largest listed real estate developer, sold 2.5 million sqft of home space in Delhi and Bangalore in June quarter and wants to launch another 16 million sqft of residential space this fiscal. DLF reported a 79% decline in profit and 57% slide in sales for the June quarter.“There has been a reasonable revival in demand for homes not just in low-cost or mid-income , but also for high-end ,” DLF vicechairman Rajiv Singh told an analyst conference call on Friday. His immediate competitor, Unitech, reported 63% decline in profit with sales down by half. “Property prices have come down and so has the interest rate. That’s why home buyers are again looking at the property market ,” said R Nagraju, head of corporate planning at Unitech. The firm is targeting to sell a total of 30 million sqft of space this fiscal. Other realty players Indiabulls Real Estate, Parsvnath, Omaxe, HDIL, Akruti, Sobha and Purvankara too have reported decline in profits up to 95% for the June quarter. Parsvnath chairman Pradeep Jain said the worst was over for the sector and demand had started picking up. But the pick-up in demand hasn’t really erased all concerns as DLF’s Rajiv Singh said the sector was still not “completely out of the woods.”

Much of the new bookings received in residential projects have been in what developers call ‘affordable’ category or homes priced between Rs 20-35 lakh. Encouraged by the response , more developers are readying to launch homes in this segment. The tax benefits announced recently by the government for smaller homes is likely to act as additional incentive for projects in the category. “Supply is likely to increase faster than the demand in the residential market, as many developers, who had been postponing their launches for a long time are now launching new projects ,” says another analyst with a Mumbai-based brokerage firm, who didn’t want to be named. He says prices may correct further as new supplies hit the market.Mr Sankhe of Centrum believes the scope for price correction in low-price segment is limited, but high-end homes can still see property prices drop at least 10%. Some real estate developers such as HDIL and privately held Lodha developers have claimed that prices have already started firming up in Mumbai. But analysts as well as some developers, including DLF and Unitech, say price hike would hit demand and not be good for the sector at this stage.

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