Buyers, it
is time to rejoice as affordable
housing projects are here to stay. While recession had developers reducing
prices of their housing units, their rising debts are forcing them to continue
with it
The market
may witness an oversupply like condition in the affordable segment of
residential real estate making prices range bound in times to come. Though the
global financial crisis affected developers badly, it brought cheer to the
middleclass end users as builders were forced to bring down their units prices
to the affordable range of Rs 5 lakh to Rs 30 lakh.
In fact, the
crisis led to emergence of a new segment of affordable housing in residential
real estate in the country. This helped revive realty market and instilled
a new confidence among developers and end users, according to Samir Jasuja,
founder CEO of PropEquity Research.
In order to
bring down prices to drive sales, developers cut the rate by lowering
specifications and also by reducing the size of units. The combined effect of
cutting the rate and reducing the size led to a steep fall in prices of two and
three-bedroom apartments, by as much as 30% to 40% from their peak level of
early 2008.
The fall in
prices spurred demand. Many developers even sold their entire projects in only
a couple of days. This is mainly because developers could successfully convey
the impression to buyers that
availability of apartments at prices at which they off e re d would not
last long. This made the buyers queue up to buy these apartments.
But as
demand rose sharply in this category, more and more developers launched
apartments in the affordable segments and supply increased manifold. According
to Jasuja, this category is now beginning to get overcrowded with a rapid
increase in supply, which is outstripping absorption and leading to an
inventory pile up. According to the accompanying chart, absorption rate or
sold-out rate in the last one year in apartments in the price range of Rs 5 to
Rs 15 lakh is much better than that in the Rs 15 to Rs 30 lakh range. This is
also because of the number of apartments launched in the Rs 5 to Rs 15 lakh
price range is much smaller than that in the Rs 15 to Rs 30 lakh range in the
National Capital Region (NCR).
Gurgaon saw
the launch of maximum number
of apartments in the affordable range. But the sold-out rate here is the
second worst at 37%, next only after Greater Noida, where it is only 25%. As
sales in affordable range of apartments picked up, many developers jumped onto
the affordable housing bandwagon to bail themselves out of the global economic
crisis. Many of them treated affordable housing category as the new mantra in
marketing and launched several projects in this category resulting in an
oversupply in the market, Jasuja says.
Interestingly,
as demand picked up and number of transactions increased, many developers’
revised prices upwards, by around 10%. However, consultants feel price hike is
more cosmetic in nature as developers are giving discounts over quoted prices.
Some developers increased the quote prices, but the discount was also suitably
hiked. Data collected by PropEquity from 13 cities suggests that rate of sales
(absorption) of affordable units have slowed down in the September 2009
quarter. In the early phase, the euphoria was mainly due to a huge pent up
demand in the category.
Falling
absorption velocity coupled with an oversupply in this category has now
resulted in an inventory pile up. As cost of carrying inventory in real estate sector
is very high, developers will resort to price correction at the cost of
profits.
But
developers argue the prices are at rock bottom. In most of the areas of NCR,
developers are selling apartments at 30% to 50% discount to the average price
of apartments in the area. In most of the cases, they are working on a very
thin profit margin. Therefore, a further cut in prices will be a big
disincentive to launch the project itself. However, bankers and consultants
feel that most developers are under a huge debt. As they are not able to raise
funds through equity-sell, they have no choice but to launch projects for the
purpose.
