Monday, April 21, 2008

Price Cut Tsunami to Hit Indian Real Estate

The DNA describes it well, when it says, “It started out as a light breeze but the winds of change in the city’s spiraling property market are now developing in to a strong gust.”

Builders, big and small, are suddenly turning to their fixers of the real estate industry – brokers. These shunned lot are suddenly being looked upon as favored brides, in an industry that is soon about to witness the Tsunami of Price Correction.

This has never happened before, and brokers are chuckling, since 2-3% extra commission on achieving targets can pack in a healthy balance sheet.

In fact, not only is there a 2-3% extra, but a discount of 10-15% is also thrown in to the price, which the broker can pocket for himself, should he wish.

The story of last 2 years has slowly begun to sour in Mumbai. The sex is over, it is refraction time for Mumbai’s building industry.

Builders are actually addressing the bull by the tail instead of the horns, and this is why there is a veil over the price falls. The actual correction is 20-25% if you take in to account the discounts of 15%, and the waiver of stamp duty, free parking included, etc. And this is just the beginning.

Big names like Hiranandani denies there is a correction. But then, this is a builder whose promoters have denied Rs 160 crore of provident fund to employees, and were recently in the news because of a CBI investigation. You cannot take their words seriously. The sales of flats at their recent project, Hiranandani Meadows, Thane, has been relatively slow.

There are denials from Mukesh Patel of Neelkanth Developers and Sunil Mantri of Mantri Developers. Mantri said he got 2000 inquiries and has sold 50 flats already. However, even he had to come up with a discount scheme:

  • Just 5 days to save Rs 3,65,700! At Mantri Park Goregaon, 1BHK & 2 BHK apartments. Consider savings in stamp duty as additional sweetener. Rush! This offer is valid only upto [sic] April 13, 2008 or first 51 customers

Let us look at some other advertisements that belie the weakness in the housing industry:

  • Rs 300 off per sq ft only up to 20 April 2008. Lok Housing, Mumbai
  • Pay 20 percent now and 80 percent on possession. Nahar Amritshakti, Mumbai
  • Free modular kitchen, free parking, free interiors, stamp duty relief. New Delhi

Then comes the case of Orange Properties, which is a car-offer specialist: It gave Maruti SX4s to people who purchased an apartment in their Bannergatta project, and earlier the same company gave Audi A4s, each worth Rs 30 lakh, for those who booked villas in their Magnolia Brooksville project.

The collective desperation of an industry is slowly unveiling itself. Just one straw is required to break the camel's back. What will it be? The CRR rate hike -- not this one, but the balance 0.25% which has been held in abeyance for April 29, 2008 -- or the relentless surge in prices of oil, rice, wheat, pulses and metals -- in other words, soaring inflation. Or, will it be the Supreme Court coming down hard and justly on builders for violating the Private Forest Land?

Whichever it may be, the real estate industry is in for a real shock.


Amit Singh said...

your article is high on energy and low on real data. while I appreciate your greater cause of making real estate prices affordable to the masses - I dont think passionate articles alone can do it. Prices could stabilize and not really go down.

One Talent Man said...
This comment has been removed by the author.
Humblybob said...

Thanks for your comments Amit. Neither do I, but I do my bit. My personal view is neither does data help - else the US financial markets - the suckers for data guys - would not have been in such a situation, now would they?

Whether I am right or wrong, a few months will tell.

Stability is a euphemism for those invested at high prices.




Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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