The real estate sector in the country continues to grapple with sluggish sales and decelerating profitability. After witnessing hectic growth during the last decade, the demand for housing and office space ebbed and the outlook remains muted for the sector in the near future. Slowing of the economy to a 5% GDP growth level has put doubts in the minds of homebuyers. At the same time property sales across the country have dipped over the last year and a half because of rising property prices and due to factors such as steep home loan rates and time over-runs in real estate projects.
With the sector continuing to struggle with challenges, it was no surprise to see that most listed realty firms reported a fall in sales during the April-June quarter. For instance, DLF, the country’s largest real estate player saw sales drop by 10% on a yoy basis. Overall, profits fell sharply by 10% for the sector, due to lower sales and higher interest expense. The higher outgo on servicing of interest seems to have impacted firms like Godrej Properties whose total income from operations fell to Rs. 2.01 billion during the April-June quarter of 2013-14 from Rs. 2.26 billion in the corresponding period of the previous fiscal. In fact, ballooning debt service costs have proved to be a millstone around many developers’ neck and players like DLF have had to sell off non-core assets such as wind farms and large land banks to raise capital and repay debt.
But even as players are taking extra pains to cut down debt and prop up their balance sheet, hopes of an early rebound for the sector are still a distant glimmer. There has been no amelioration to the sector’s tepid performance in the March quarter as sales volumes in major markets like Gurgaon and Mumbai have remained low in the June quarter on account of few launches, slow approvals and subdued demand. The sector’s poor plight is reflected in the BSE realty index, which has lost 27.65% so far this year, while the benchmark Sensex index has gained 1.28%. According to data from property research firm Liases Foras, new home sales in Mumbai, Pune, Chennai and Delhi-National Capital Region show a falling trend in spite of attractive home purchase schemes. Sales in Delhi-NCR were down 13% in the June quarter from the January-March period, while that in Mumbai, Pune and Chennai were lower by 12%, 15% and 7%, respectively.
The data also shows that for the April-June period property prices have stagnated across the top markets in the country and the inventory of unsold homes has touched a new high of 669.95 million sq ft. Unsold inventory levels in most large cities have been alarming high in the June quarter. In Mumbai, unsold inventory is up from 139. 33 million sq. ft in the January-March period to 146.10 million sq. ft in the June quarter, which could take 48 months to clear. In Delhi-NCR, it is 277.31 million sq ft, which could take 38 months to reach a healthy level. Even Bangalore, which has so far been witnessing an increase in property sales, saw unsold inventory levels rise to 88.68 million sqft, from 62.56 million sqft in the previous quarter. According to a Knight and Frank research, 33,500 units were launched in the Delhi-NCR residential market alone during the second-half of 2012-13, up 6% over the first half. The market has an estimated 1,40,000 units of unsold inventory, which is approximately 27% of the units under construction.
According to Ashutosh Limaye, Head of Research at Jones Lang LaSalle, “Fewer and fewer developers can hold on to such high inventory levels. Cost of finance is becoming unaffordable. PE funds are pressurizing developers to hasten sales. The only way to improve cash flow situation is to moderate pricing.” A reduction in prices to push sales has become all the more imperative as home loans are not likely to get cheaper anytime soon what with the RBI looking intent to carry along with its liquidity tightening measures. Also, the fact that the April-September period is traditionally a lean season for realty sales seems to be weighing heavily on developers’ mind forcing many to become amenable to price cuts.
With sales refusing to perk up and inventory growing higher, real estate companies have started offering attractive discounts to lure buyers. For instance, Mumbai builder Lodha Group recently sold its entire inventory of 750 luxury apartments priced Rs.35-67.5 million in 10 days flat by offering an 18% discount to the prevailing market rate. Another Mumbai builder, Godrej Properties also sold all its 700 apartments on the day of its launching in Delhi’s upcoming real estate hotspot on the Dwarka-Manesar expressway adopting similar strategy.
Another new marketing ploy that real-estate developers are employing to clear the stock of unsold homes is to hook buyers by offering them the bait of the subvention scheme, which goes by the popular name of 20:80 scheme: Just pay 20% price of the apartment and the rest at the time of possession. No installments till possession. Under the scheme the developer allows the buyer to pay for 80% of a property’s cost only after possession as long as the buyer is ready to pay 20% upfront. The big advantage for buyers is that they need not pay the EMI for a set period or until getting possession of the property because it’s the developer who picks the interest tab. Clearly, interest subvention schemes can be a win-win for both buyers and developers, which explain its growing popularity.
As liquidity is likely to remain tight in the foreseeable future and with nary a hope for a rate cut on home loans in sight, the testing time for the sector is not about to come to an end, at least over the next few quarters. Under the circumstances, developers will need to come up with deeper price cuts, larger discounts and more attractive schemes to tap homebuyers. When markets are down, there’s no other way to work up buyer sentiment.
