No Hope of Revival for Struggling Real Estate Sector this Diwali

Buried under high debt and inability of the developers to complete and hand over the pending projects well beyond the commitments to the hard-pressed consumers, the troubled Indian housing sector is not witnessing any festive activity this year despite the latest cut in the policy interest rate by the Reserve Bank of India (RBI), an ASSOCHAM survey has said.  

  

Based on the data and information collected from 250 builders in the Delhi-NCR, Mumbai, Bengaluru, Chennai, Kolkata, Ahmedabad, Hyderabad, Pune, Chandigarh and Dehradun, the survey found that the demand for new projects is hard to come while new launches have come to a trickle, marked by lack of consumer confidence and cash deficit of the builders.

Under such a scenario, the demand for new launches, if at all there are, has come down by over 50-60 per cent in Delhi-NCR and Mumbai while it is lesser by about 40-45 per cent in Hyderabad and Chennai. In Bengaluru, the activity has come to a total standstill, first by the demolition drive and then by Cauvery dispute agitation, adds the recent survey. 

“Whatever market is there, it is mainly for the end-users and not for investors, sale has been increased for the smaller units (2 BHK & 3 BHK)”, reveals the survey. 

“Customers are preferably looking for ready to move in property rather than going for under construction property. But not many properties fall in this category”, adds the Secretary General D S Rawat.

The resale or secondary market is also dull this festival season, marked by drop of at least 20-25 in prices this festive season. There is very little resale happening especially in the NCR and surrounding areas. Supply is in excess with private small time builders in the unorganised sector flooding the market with units.

The unsold inventory pressure in NCR region is the highest among all other cities. The NCR residential market still has an estimated 1,70,000 units of unsold inventory which is approximately 30% of the units under construction, adds the survey. As per the survey, there are nearly 8-10 million workers engaged in building and other construction activities who face uncertain future if the sector does not revive.

The ticket price 3-bedroom, 2 BHK and single room flats has seen correction by 30% in Noida, 25% in Gurgaon and 15% in some key areas of Delhi, yet the demand stays subdued

All approvals of real estate projects must be accorded in a time bound, accountable and simplifies manner, the ASSOCHAM said suggesting that the process and status of all approvals be made on line so as to bring transparency.

The property analysts have predicted that till March next year the demand for plots, houses and flats may drop by at least 15 to 20%. The housing inventory in the NCR area is huge as a large number of projects are coming up in the peripheral areas, said Rawat. 

NRI investments in realty to go up by 35% this year: ASSOCHAM

Indian property developers are anticipating a 35% increase in enquiries from NRI-based purchasers as compared to last year with Bengaluru emerging as a top destination for NRIs to park their money in real estate, reveals the Associated Chamber of Commerce and Industry of India (ASSOCHAM) latest study.

The ASSOCHAM conducted a random survey of nearly 850 real estate developers in Delhi-NCR, Chandigarh, Mumbai, Kolkata, Bangalore, Hyderabad, Ahemdabad, Pune, Dehradun, Chennai etc. The survey reveals that interest for buying property by NRIs have increased by over 30-35% over the last year. “NRIs feel confident about the new government of India and waiting for an investment-friendly market in various fields”, adds the paper. 

D S Rawat

As per the ASSOCHAM recent findings, Bangalore is the most favourite property investment destination for NRIs followed by Ahemdabad (2nd), Pune (3rd), Chennai (4th), Goa (5th), Delhi (6th) and Dehradun (7th).

The majority of real estate developers said the NRI traffic is coming primarily from the UAE, U.S., Singapore, Australia, UK, Canada and South Africa. This year, the demand is more for the high-end property and commercial buildings.

Releasing the paper, D S Rawat, Secretary General ASSOCHAM said, “With the revival in global economy especially in the United States and Europe people are more optimistic and looking for property to invest in. The both small and big developers are focusing the NRI base in the US, UK and Asia Pacific Region this year.

As per the findings, the share of NRI sales are currently at approximately 18% and are likely to increase by 30-35% in the coming year, adds the ASSOCHAM paper.

To tap a large section of the cash-rich NRIs living overseas, developers are not just conducting 

property shows, exhibitions and opening overseas representative offices. They are also expanding their existing distribution chains and entering into strategic partnerships to encourage investors from this cash-rich segment also, adds the ASSOCHAM paper.

ASSOCHAM findings:

According to ASSOCHAM survey, Bangalore tops in terms of investment from Non Resident Indians (NRIs) who are considering settling down in India in coming years. The major factors that drive NRIs to invest in Bangalore’s property market is the booming IT sector. It has the largest concentration of leading IT and ITeS companies. According to an estimate, there are 2,200 IT companies, over 664 MNCs, 183 biotechnology companies, and 248 BPOs operating in Bangalore.

Growing number of IT/ITES companies in Bangalore provide lucrative job opportunities to NRIs who are considering settling in India. Moreover, exponential growth in infrastructure and real estate sector also contributes positively towards influencing NRIs to invest in the property market. 

The demand has also shifted from mid-segment housing to luxury housing in Bangalore, adds the paper.

Ahemdabad (32%) has continued to be the most stable market in terms of demand and absorption of both residential and commercial spaces.  NRI’s consider Ahemdabad as a safe place to invest in, with lenient government regulations regarding property investments by Non Resident Indians.

Pune takes the 3rd place with 30.5%, whereas Chennai at 28% per cent assumes 4th position and Goa is at 5th position with 23% and Delhi with only 21% NRIs interested in investing in the capital city for property purchase, reveals the survey.

In Delhi, there has been a 21% rise in enquiries this year as opposed to last year from this segment and the majority of the queries have been for the residential segment. Catering to the growing demand among high-end segment, Delhi has also emerged the promising markets for real estate.

Economic crisis and impact on realty sector

The recovery of the Indian economy has once again come under cloud with key economic indicators like Current Account Deficit (CAD) and consumer inflation remaining above the comfort level of the Reserve Bank of India (RBI).

While CAD reached a high of 6.7% of GDP in the December 2012 quarter, consumer price index grew at 10.2% in April 2013. Both these indicators are set to deteriorate further as the Indian currency has depreciated sharply against the US Dollar

(USD) in the last one quarter.

The Indian Rupee has changed from Rs 54.4/USD in April 2013 to Rs 59/USD in June 2013 resulting in an 8.5% fall. Such a fall will make imports more expensive resulting in higher CAD and consumer inflation. The worsening macroeconomic condition is expected to delay the reduction of policy rates by the RBI thereby deferring the much-needed monetary stimulus for bringing back the domestic economy’s growth on the right track.

Real estate market has a very strong linkage with the economic growth of a country and any signs of a slowdown in the domestic economy can have a cascading effect on the health of the realty market. Among the various segments of the real estate market, office, retail and hospitality are relatively more prone to the vagaries of the macroeconomic situation as compared to the residential segment.

The primary reason behind this is the stark difference between rationales behind the purchase decision of a residential property as compared to other real estate segments. While there is an economic consideration for buying retail, hospitality or office property with the primary objective of using it for carrying out business activities, purchase decision for a residential property is generally driven by a totally different set of motives.

Factors such as affordability, proximity to the employment hub, presence of physical & social infrastructure, sentimental value attached to a locality and community consideration among others can have an overbearing impact on the buyer’s decision. Since many of these factors vary from one city to another, movement in the residential market is often divergent for each city. 

Analysis of the weighted average price trend in the   top six residential markets of the country namely Mumbai, the NCR, Bengaluru, Chennai, Hyderabad and Pune can help in understanding the varying characteristics of the residential market in each of these cities. Cities like Mumbai and Chennai, which are land locked from one side by the sea, have the highest weighted average price of Rs 5,900/sq.ft. and Rs 4,500/ sq.ft., respectively.

The unique topography of these two cities has ensured restricted supply of land resulting in high prices for residential properties here. While the weighted average price in Mumbai city is much higher at Rs 14,400/sq.ft., it goes down to Rs 5,900/sq.ft. for the entire Mumbai Metropolitan Region which also includes areas such as Thane, Navi Mumbai, Mira- Bhayandar and Vasai-Virar.

Demand for the domestic IT/ITeS industry over the last five years. Strong performance by the manufacturing, BFSI, IT/ITeS and other service sectors resulted in high demand for office space across the country during the last five years. A total of 168.5 mn.sq.ft. of office space was absorbed from 2008-2012 across six major cities namely Mumbai, National Capital Region (NCR), Bengaluru, Pune, Chennai and Hyderabad. IT/ITeS sector was the primary demand driver of office space in cities like Bengaluru, Chennai, Pune and Hyderabad accounting for more than 50% of the total absorption.

 

However, demand in Mumbai and the NCR was driven by a relatively diverse set of sectors as a large number of occupiers prefer to locate their corporate offices here.

No more mala-mall for India

Over 55% of the malls in Delhi-NCR region are vacant partly due to economic slowdown, poor designing, lack of robust revenue generation model and located in unattracted location, reveals the Associated Chamber of Commerce and Industry of India (ASSOCHAM) recent survey.

As per ASSOCHAM estimates, the total rate of vacancy in malls in Delhi-NCR is 55%, while in Mumbai it is 52% followed by Ahmedabad (51%), Chennai (50%), Hyderabad (48%), Bangalore (45%) etc. The position in the nearby town of these locations is much disturbing. 

ASSOCHAM conducted a random survey of all the shopping malls in Delhi-NCR, Mumbai, Kolkata, Bangalore, Hyderabad, Ahmedabad, Pune, Dehradun, Chennai etc between October and December 2012. The survey found that many upcoming malls have significantly been delayed and withdrawn due to lukewarm response from retailers. They will also face manifold hike in construction cost.

Commenting on the malls scenario, ASSOHAM Secretary General D S Rawat said that vacancy levels are due to poor location, poor design and poor parking facilities while some are operating at 60% occupancy others are struggling at less than 20% occupancy. The occupiers are finding difficult to manage economically.

The survey also highlighted some of the challenges the industry is facing, which include inadequate infrastructure, unavailability of retail space, multiple taxes, lack of clarity in policies and shortage of experts in areas such as supply chain and store management. Now, they are shifting from lease/rentals models to revenue sharing models and this is encouraging large number of branding showrooms to open shops in malls.

“Biggest shopping mall can feel like a pretty lonely place, majority of retailers said that they are holding back on new store openings and focusing on existing stores,” adds the survey. 

The sharpest decline in mall rental values are also recorded high in Delhi-NCR by 60%, while Mumbai also dropped by 58% in rentals followed by Ahmedabad (55%), Chennai (54%), Hyderabad (52%), Bangalore (49%), Kolkata (45%), Pune (42%) and Dehradun (40%), points the ASSOCHAM survey.

Nearly 82% of the retailers said that they are shutting down some of stores in areas where rentals are too high, and with the slowdown in consumption complicating things further, point out the survey.

Nationally, the vacant rates of shopping malls are 55% and will likely rise to 70% by 2015, according to the ASSOCHM analysis. More than 90 percent of shopping in India is still done at unorganised one-off shops, adds the survey.

Sunil Kumar Dhaiya, Co-Chairperson of ASSOCHAM Real Estate committee also specialising in malls said that the real estate prices and construction costs are rising but the retail business is not growing enough to absorb this. There are just not enough footfalls.

Retail rents are down 60-65% from peaks in 2010 and that's especially painful for developers, when servicing loans is expensive at 12-13 percent interest," said Rawat.

Nearly 76% of the shop owner’s said that increasing rents will not work because at the end of the day it has to be affordable for retailers to do business and the fate of the retail realty segment is intertwined with the retail industry.

The retail sector is forecast to grow rapidly, but mall rentals and valuations are not rising in of most markets, added Rawat.

According to the ASSOCHAM estimates, rental values of malls remained stagnant across Delhi-NCR, Ahemdabad, Mumbai, Pune, Chennai and Kolkata in the October-December 2012 quarter. However, certain micro markets in Ludhiana, Indore witnessed a growth over the quarter in the range of 10-15%.

There are approximately 1,200 shopping malls in India, the growth in the retail sector has driven a mall building boom across the country, with the total number of malls expected to increase to 1,500 by 2015 from 1,200 in 2012," added the ASSOCHAM report.

The malaise of high vacant malls can be seen in micro markets, such as Ghaziabad, Noida and Gurgaon, where retail has not picked up. Clubbing this with the fact that spending was really low, the demand for malls is likely to remain dull for the coming next 2013, commented Rawat.

The survey adds demand for mall space across most micro markets remained slow because of lack of fresh supply, conservative approaches from retailers and overall slowdown in consumer demand. Slowdown in retail demand in many micro markets has led to rental values either remaining stable or correcting marginally in the range of 10 to 15% over the previous quarter.