Buyers hesitant to take the plunge
The Hindu Business Line
A weak sentiment and constant negative commentary have aggravated the problems of affordability and high mortgage rates in real estate, according to Motilal Oswal Financial Services Ltd.
A report by the company, based on an interaction with international property consultants, states that buyers are shying away from new projects and those under construction if delivery times are more than a year away. They feel that prices could drop further in the medium term and they are not sure if the developers would have the ability to stick to schedules. So presales, an important source of funds for developers to meet construction cost, is under threat.
List prices are no longer relevant as developers with projects in the pipeline and those that have been announced offer discounts of 30-50 per cent on listed price. They do not lower prices officially because they do not believe this would attract more buyers but would only aggravate the situation by making people wait for a further cut. A few leading developers such as Orbit Corporation and Oberoi Construction have dropped list prices, according to the report.
Property consultants felt that the outlook for real estate companies has worsened in the last few months along with their financial condition and were hesitant to give estimates of the possible time for recovery. But it is possible that the residential businesses could stabilise by March 2009 with some deals happening then.
The residential real estate prices are likely to realign with the present market situation by then and stimulate demand from end-users.
The property consultants expect demand to start improving first in Mumbai, Bangalore, Hyderabad, Delhi as the pent-up demand is higher in these cities. This will be followed by strong Tier II and Tier III cities such as Ahmedabad. However, any significant improvement in demand is not expected in the next few quarters.
Financial year 2009 is likely to be one of consolidation with industry leaders differentiated from peers. Developers with staying power will utilise this consolidation phase to emerge stronger and position themselves in an advantageous manner to capitalise on the growth phase post-consolidation. Focus should be on companies with high visibility on monetisation of assets over the next 3-5 years; low leverage and robust financials; and strong execution track record.
Tier II/III cities hold potential
Pension funds can exploit the relatively stable realty markets in India to park their funds, according to Jones Lang LaSalle Meghraj.
A report by the international property consultants says that with $20 trillion in assets, pension funds worldwide are the largest category of any investments. These can look at realty investments in India where the market is less volatile and property consistently priced making it an ideal investment option for prudent investors.
India’s Tier II and III cities rank higher than those of China’s, indicating less diversity in transparency within India. This is a reassuring factor for investors seeking to enter India’s secondary and tertiary cities.
The levels of transparency in Tier II cities are only marginally below Tier I cities. In the Asia-Pacific region investors may find greater reassurance in investing in smaller cities in India than in other countries.
According to the international property consultant, of the total domestic and foreign investment of $6 billion announced in India in the first half of 2008, over 63 per cent is in Tier I cities and 33 per cent in Tier II cities and the balance in smaller location. In 2007, Tier I cities accounted for over 95 per cent of the total investments.
In Tier III cities there have been investments in IT parks and SEZs in Nagpur, Kochi and Jaipur; retail in Ahmedabad and Chandigarh; hotels in Goa and Jaipur; and mixed development in Indore and Visakhapatnam. — Our Bureau