REALTY - THE BUBBLE HAS TO BURST
By Ruma Dubey
Builders seem to be going bonkers! Otherwise how does one explain this new “offer” from a builder in Thane - a residential project on the Mumbai-Nashik Highway is enticing buyers with never-before-seen offers – camel rides, fishing, ice-skating and rock climbing. Why would someone who wants to buy a flat want to have a complex with a camel ride?
Then there are “freebies” from other builders which are at least saner – no floor rise price rise, free stamp duty registration fees, free parking, no club membership fees and so on. Another builder, selling 1 and 2 BHK flats is offering a gold course! Lodha Developers recently launched its new project in Lower Parel with an advertising blitzkrieg featuring Bollywood star Aishwarya Rai. Monarch Builders has roped in Kareena Kapoor. Another builder in Gurgaon ferries potential buyers in Audi Q7s, offering them 5-star lunches.
This reeks of desperation. When builders get onto this kind of “offers” mode, surely it means that there are no buyers and they need to offer something more. Sadly none of them want to do that which will get buyers in droves – reduce the prices instead of giving these offers! But maybe once the builders realize that these “offers” are meaningless, they might finally bite the dust and bring down the prices – that is most certainly where we are headed.
The scene on the Indian realty sector is grim – currently looking like a half constructed and abandoned site. The fact that there are no buyers is evident from the pileup of inventory or unsold stock. As at 31st March 2013, 616 million square feet or around 5,60,000 apartments were unsold and this figure has risen to 670 million square feet or 6,00,000 unsold apartments at end of June 2013. This inventory is valued at around Rs.58,000 crore and as per the industry norms, would take two years to get cleared.
DLF, which was growing at the fastest pace is today the hardest hit. Its brand name is no longer enough to get buyers. Of the total pile up of inventory, one third is accounted for by DLF alone, followed by HDIL. On the third rung is Indiabulls Real Estate. If this is the scene at big builders, can one imagine the plight of the small builders? Many have of them have started slashing prices as they simply afford to give offers and most of them borrow money from private lenders at exorbitant interest rates. With interest rates spiking up further, it is only expected to keep buyers away further.
Builders who earlier had the holding power are now on thin ice and most cities across India have started witnessing a marginal fall in prices. According to National Housing Bank residential index, the prices have shown a declining trend in 22 out of 26 cities in the Q1FY14 v/s Q4FY13. There has been marginal correction in Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune. Yet, the price cut is still not deep enough to entice buyers.
Yes, we are presently living in a realty bubble where a shanty or filthy shack also costs anywhere above Rs.20 lakhs. Buying a home is out of reach of majority of the Indians today. Affordable houses are not affordable to most. So the moment prices come down, there is so much pent up demand that people will rush in to buy.
Yet, it would be right to wish for the realty bubble to burst. Today, a person earning Rs.25,000 to 30,000 per month, cannot help but buy a 1 BHK for anywhere starting Rs.50 lakhs and he ends up paying a EMI of around Rs.25,000 to 30,000 per month. Thus what does he earn and what can he save? By building castles in the air, we are trying to show a landscape which does not exist.
Pressure has increased on builders after the RBI turned down the demand of banks to restructure stressed realty loans without providing for potential losses. This leaves little alternative with builders as banks will now increase pressure to recover loans and this in turn means, that builders will have to bring down prices to push sales.
Banks are also in a bind. They have to classify restructured loan of a real estate company as bad loan the moment it is reworked. The total real estate bad loans, net of provisions of all commercial banks has consistently been rising and in terms of exposure to realty sector, SBI is the top bank, followed by ICICI Bank, Axis Bank, PNB, IDBI Bank, Bank of Baroda, Stanchart, HDFC Bank, Bank of India and Union Bank of India.
There is no doubt that the pressure is mounting and we can only wait and watch, hoping for prices to crash so that the dream home becomes a reality. There is talk of prices correcting by almost 40-50% in the next six months. Well, if that happens, maybe your dream home might become a reality. So keep patience, do not get enticed by any of these offers – nothing in life comes for free. Wait and you will get a much lower price.