Delhi, India (PressExposure) October 22, 2009 -- Real estate Developers will continue to launch affordable housing projects as this is one way to raise resources to service their accumulated debt, says Prabhakar Sinha
The real estate market may witness an oversupply like condition in the affordable property segment of residential real estate making prices range-bound in times to come.
Though the global financial crisis affected property developers badly, it brought cheer to the middleclass end users as property builders were forced to bring down their property 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 real estate affordable housing in residential real estate in the country. This helped revive realty market and instilled a new confidence among property developers and end users, according to Samir Jasuja, founder CEO of Prop Equity Research.
In order to bring down prices to drive sales, real estate developers cut the rate by lowering specifications and also by reducing the size of property 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 real estate developers even sold their entire realty projects in only a couple of days. This is mainly because real estate developers could successfully convey the impression to property buyers that availability of affordable apartments at prices at which they offered would not last long. This made the realty buyers queue up to buy these affordable apartments.
But as demand rose sharply in this realty category, more and more realty developers launched affordable apartments in the affordable segments and supply increased manifold. According to Jasuja, this realty 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 affordable 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 affordable 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 realty 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 realty, where it is only 25%. As sales in affordable range of apartments picked up, many property 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 realty projects in this affordable housing category resulting in an oversupply in the market, Jasuja says.
Interestingly, as demand picked up and number of transactions increased, many realty developers revised prices upwards, by around 10%. However, property consultants feel price hike is more cosmetic in nature as property developers are giving discounts over quoted prices. Some real estate 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 affordable housing category.
Falling absorption velocity coupled with an oversupply in this affordable housing category [http://www.zameen-zaidad.com/investment-portfolio.aspx] has now resulted in an inventory pile up. As cost of carrying inventory in real estate sector is very high, real estate developers will resort to price correction at the cost of profits.
But realtors argue the prices are at rock bottom. In most of the areas of NCR, realty developers are selling apartments at 30% to 50% discount to the average price of affordable 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 real estate project itself. However, bankers and property consultants feel that most realty developers are under a huge debt. They need funds to service their debt. As they are not able to raise funds through equity-sell, they have no choice but to launch new real estate projects for the purpose. Therefore, the supply of affordable housings will continue.
As affordable housing is witnessing sales, realty developers are launching them. If the economy revives, demand for affordable housings will further increase. In fact, the requirement of housings in this segment is huge. If the economic growth picks up, the sentiments would improve and influence people to buy houses flats apartments. Besides, a better economic environment enhances financial security. This will also result in an increase in transactions. The prices, however, will remain under pressure for some more time.