Are We Really Heading for a Crash?
QUOTE TO BREAK COPY
“Mumbai as a city will always remain buoyant and in times to come if infrastructure shapes up, such as the coastal road, Metro III, Trans-harbour link connecting Sewri to Navi Mumbai, Navi Mumbai Airport and a lot of other bridges to ease traffic, then we are back in the game.”
Before blindly believing reports that a market crash in Mumbai is imminent, it is wise to understand the dynamics of the current situation.
With the rupee being at its weakest in August, it’s a good idea to take advantage of the reduction in prices and the fall in the rupee, which can together make the price attractive by anywhere from 10 to 15 per cent.
It is important to ascertain the reasons behind the current market conditions in Mumbai and not give in to the speculative stories about the market crashing which are rife in the city, says Sandeep Sadh
The real estate market in Mumbai is ripe with news that the markets are artificial and there is an over-supply in the offing. Some research reports suggest that 200,000 apartments are available and some reports say the markets will fall by 50 per cent. Another suggests that the number of launches has reduced in the Mumbai market, but one should understand the reason for this as well. Just because launches have not happened, it does not mean that there is an issue with the developers; it could also be a stalemate. I was at a Confederation of Indian Industry (CII) real estate conclave in July and every panel of developers unanimously blamed the government for delayed permissions and approvals.
Let us analyze the stories here and understand once and for all where the markets are headed.
Monsoon months are known to be weak in real estate transactions and these added speculative stories without any proper understanding of the real estate markets dampen the spirits, just because of the vested interest of a few stake holders.
To analyze the real estate market in Mumbai, let us break this article into numerous segments, which talk about various aspects of the real estate market and then towards the end, come to some consensus as to which way we are going. Is the fall staring in our faces, or is it stagnation, or will they rise contrary to all reports?
1) Ready Possession Flats in Mumbai
One of the most important factors in a price correction or dip in the real estate market in any geography is the ready possession stock or unsold inventory in a project/building.
This ready possession stock is from the primary market, which refers to the leftover unsold stock with developers and builders. In any mature market, if the developer is left with up to 10 to 20 percent unsold inventory, it is quite standard.
The primary reason for this is that after the project reaches its top slab the sales plummet as the payment due is almost 90 percent nearly and completion of the project takes another year or more. If the buyer gets in at this stage, he has to pay an additional service tax, now at 4.20 percent of the consideration value, plus Value-Added Tax (VAT) of one percent. If he waits till possession, he does not have to pay this once the Occupation Certificate (OC) is received and the straightaway saves 5.20 percent on the cost.
Also, the inventory available at this stage is either the higher floors or the lower floors which have not been sold due to views, higher floor rise or Vastu factors. This inventory gets absorbed over a period of time as there are many people who only want ready possession homes; then they compare it to the secondary market and only if the deal is sweet enough is it done.
In Mumbai, the leftover stock that is available with the Occupation Certificate (OC), is close to 600 buildings, where there is residual inventory available across Mumbai, Thane and Navi Mumbai. Why we are saying it is 600 odd buildings is because of these buildings, where the stock is leftover, is the stock that is available to the developers for multiple reasons. One such reason is that most of these buildings started construction anywhere between 2009 and 2012 and many of them were stopped because of the new Development Control Regulations (DCR) which came up in 2011 – 12. So sales were stalled earlier as well due to this.
Synopsis: Very few flats are available in each building with developers and this can be absorbed within a span of six to 12 months. Negotiations do happen very strongly on these properties and developers could cut back 10 to 20 per cent on the prices depending on demand and supply and their personal financial liquidity need.
2) Under-Construction Properties
This we can refer to as Stock in Trade as well and it cannot be qualified negatively as unsold inventory. There is a stark difference between these two understandings. When a building is launched, the developer sets up his sales targets at the time of the pre-launch, launch, post launch and sales strategies till possession depending on his holding power, market conditions, product, segment and averaging out of prices.
It would be absolutely unfair to treat this as a weak point that the developer has unsold inventory, and this should be only be classified as Stock in Trade. Sales continue to happen based on various 20:80 schemes or 10:90:10 schemes. Of course, many developers face a crisis in the mid-life of the project when they ask for 40 to 50 per cent payment due after showing work done till Level 3 or 5 and hence, this is the time the financial schemes play an important role to straighten the sales graph, which could be going down at this stage.
Changing the current rates to negative for any developer is an impossible task as he cannot do so because of his last achieved sales, the sales targets and the averaging out. Hence, financial schemes further work well keeping in mind the interest of the old investor or the home buyer and current buyer. Each buyer can buy a property at a different price point with some benefit or the other — either it could be the launch price or the upfront payment or the structured financial scheme overall.
The cycle of under-construction properties runs anywhere between two to five years of sales and the maximum sales we see is in the pre-launch and launch. Hence, the market today is more in favour of pre-launches than actual sales. In Mumbai Metropolitan Region (Mumbai, Thane and Navi Mumbai) the challenge developers are facing is micro-market competition. In each market, there are a few branded players with good projects and with state-of-the-art amenities and prices are really competitive.
As per an estimate there are more than 1,500 under-construction buildings /complexes in the Mumbai Metropolitan Region and they are slated for possession from 2016 to 2020.
Coming to the important question – will the correction happen here? The answer is that depending on the micro-market, developer’s financial condition and sales strategy, the markets could go in any direction.
It is important to understand that before the market falls sharply as mentioned in various reports, they go through a certain phase, which is known as ‘Stagnation’. If this stagnation lasts for more than six months, the fall is imminent. The silver lining is that if you look at the chart below you will see enough demand in the market.
The market is currently in a price mis-match situation. If the market drops, say, even by 20 per cent, there will be awesome traction, as it will align with demand and the supply will get absorbed in no time, and the market will be bouncing back.
If you also read in between the lines, if no launches have happened in the past few months, it is good for the market for the time being, as with no new inventory building up, the old one will get absorbed first. There cannot be a day when you are in the market and there is nothing there; even supermarkets and local convenience stores are filled with their own inventories for sale at any point, which again confirms the stock in trade theory.
Synopsis: If in certain micro markets, there is much availability and less absorption, those micro markets stand a chance to be corrected at any time and it is healthy for all parties concerned. Any price decrease will bring back the traction in the micro markets and will result in price increase in times to come.
3) New Launches
Launches are the catalyst of sales in any developer’s office today. Most pre-launches seen in the current property market are happening at less than 20 to 40 per cent of the current market price of an equivalent ready possession property. The main focus of the home buyer remains here today, as this is where investors can make money, the home buyer can pay over a period of three to five years in a staggered payment plan and this market cannot correct more than what it is offering in any case.
People speak about cycles in the economy and so on, but the cycles are really short and in the current market and stock market situation in India, the money markets are tight as families are more inclined towards consolidation, new business avenues and start-ups. A few years ago, the commercial real estate inventory was, for example, 30 million sq. ft of available space in Mumbai alone. Come 2015, the inventory is now available in single digit figures.
Mumbai as a city will always remain buoyant and in times to come if infrastructure shapes up, such as the Coastal Road, Metro III, Trans-harbour link connecting Sewri to Navi Mumbai, Navi Mumbai Airport and a lot of other bridges to ease traffic, then we are back in the game.
The new launches were stalled due to the new Development Plan Rules 2034 wherein the Maharashtra government mapped the city wrong (they even called the Reliance Convention Centre at Bandra-Kurla Complex a pond!) due to which the new developments are stalled awaiting their Intimation of Disapproval (IOD) and Commencement Certificate (CC).
Mumbai markets have been performing decently over the past four years and yes, a small 10 to 20 per cent reduction in certain micro-markets in under- construction projects can bring the required traction back.
Investors need to feel comfortable about the returns and even if they get better than bank rates, they are a happier lot compared to the stock market which plummets on the Greece financial collapse or the China Yuan going down.
Non-Resident Indians (NRIs) contribute a great deal to Indian real estate and with the rupee being all-time weak in August, it’s a good idea to take advantage of the reduction in prices and the fall in the rupee, which can together make the price attractive by anywhere from 10 to 15 per cent.
Synposis – The Pre Launch segment in the real estate market always comes at a price, which is lower than the existing market price, the developers will not lower the price or even launch the project if the timing is not right and the price is not attractive enough to draw people to invest or buy. Also, each location in Mumbai has a different outlook, coupled with a Developer, if any Top Developer launches any good project with correct rates and aligns himself with the buyers expectation, then he can see a thunderous response to his project contrary to the market conditions which may have a weak outlook.