Volumes, not prices, are the way ahead

20 Nov 2009, Supriya Verma Mishra,


India’s realty firms would like to forget the festive season
of 2009 considering that home buyers stayed away even
during the most auspiciousperiod of the year when normally sales pick up.

The economic slowdown had a major impact on home
sales, although there are indications that buyers are slowly
 coming back to the market. The latest data confirms that property
 registrations in Mumbai are plateauing out.

Despite the visible caution on the part of buyers, developers
continue to launch new projects. Recently, Brigade, a South-
based realty company, announced its foray in the affordable
housing segment. Being a high-volume low-profit game,
developers are still optimistic that this model may work now j
ust as it clicked during the downturn of 2008.

According to Ambar Maheshwari, director, Investment Advisory
 for international real estate consultancy, DTZ , “Volumes of 2007
will not be back and neither will the economy grow at more than
 6.5%. Most people’s salaries have not been restored, so exponential
demand is a far-fetched dream.” The upswing in the stock market and
an early recovery in demand prompted developers to hike property
prices. Developers have raised prices ranging between 5% and 15% in
 some of the recently launched projects. In fact, some builders are even
delaying the launch of the second phase of their projects to gauge
demand and then assess the prospects of jacking up rates.

The NCR and Delhi-based builders are reverting to the practice of the
good old days. “Basically brokers underwrite the projects at a discount
to the launch price and commit to sell within a stipulated time.

The amount received over and above the underwritten price is
pocketed by the broker and if sales do not take place within the
given time, brokers take up the inventory,” Pankaj Kapoor, managing
director, Liases Foras.

A likely revival in the real estate sector could well be jeopardised
because of the irrational exuberance of builders. There are others
concerns too. It is likely that from next year, the first instalments of
restructured debt of most of these builders would become due.
According to RBI data, there was a 55% year-on year (y-o-y) growth
in August 2009 in bank loans to the realty sector compared to the 46% y-o-y
growth in August 2008.

It is this huge exposure to the high beta sector that led RBI to
increase provisioning norms on realty loans by banks. Developers
 will need to ensure that cash flows are sufficient to service their debt.
 That will call for a focus on increasing volumes and not prices.

Not too long ago, property registrations rose by 20% starting March 2009.
The growth continued at a monthly average of 7%. However, builders seem
to have got carried away and misread the pent-up demand with the result
 that price started to rise in August 2009. The impact was felt
immediately — a 13% drop in flats registered in August.
The trend continued in September. The decline was attributed
to ‘pitr paksh’, a period considered inauspicious for buying homes.
However, with October being no different, it is clear that the going
will not be easy for the realty sector.