Looks like the long standing stalemate between buyers and builders is finally turning in the former's favour.
The year 2012 saw absorption levels drop by more than 50 percent from their peak in 2007, with three quarters worth of inventory lying unsold, indicating that developers may finally be open to negotiate on prices.
According to a research report by real estate research firm Knight Frank, 83,000 units remained unsold in 2012 and absorption levels dropped by more than 62 percent from their heydays in 2007.
"Increasing inventories coupled with stagnating absorption numbers continued to squeeze the market and put pressure on price levels in 2012," said Samanthak Das, Director Research at Knight Frank.
Due to the unaffordable realty prices, buyers either postponed purchase decisions or have moved further away from the Central Business Districts to find apartments that fit their budgets. This shift has prompted cash-strapped realtors to also initiate a flurry of construction activity in the peripheral suburbs.
"Developers are looking to tap into the largest chunk of buyers looking for apartments priced up to Rs 75 lakh as an estimated 64% of units under construction today are targeted at this price bracket," said Das.
An estimated 62% of the total units under construction are now concentrated in Thane, Navi Mumbai and the Peripheral Central and Western Suburbs compared to 57% in 2011.The Peripheral Central Suburbs saw a huge spurt in launches in 2012 as its market share jumped from 8% in 2011 to 15% in 2012.
Developers are hard pressed to maintain their net profit margins as rising interest and other input costs such as land and labour in addition to the ever increasing raw material costs of steel and cement continue to constrain their balance sheets, which is why they have the number of units launched in the affordable segment ( Rs 25 lakh to Rs 50 lakh) has seen a spurt from 29% in 2011 to 36% in 2012.
According to the report, the central suburban corridor from Sion in the Central Suburbs up to Badlapur in the Peripheral Central Suburbs saw the maximum number of launches in 2012 and consequently had the highest unsold inventory levels too. And 2012 is not going to be any better because at least 35 percent of the planned launches for this year are again in micro-markets. This will only put more pressure on unsold inventory levels and the current prices.
In the table below you can see that unsold inventories are highest in the apartments launched in the Rs 3 crore and above price bracket against 39 percent for the overall market.
Also, the peripheral markets attract a lot of investor interest due to the lower ticket sizes and the promise of superior returns. The investors, who make up approximately 25% - 30% of the market demand have not only been offloading its real estate holdings but also cancelling bookings in a scenario where developers are hard pressed to even service their debt obligations.
Despite investor interest waning. prices have not really corrected in the peripheral suburbs, but have declined close to 10 percent in prime locations like Parel, Lower Parel and Mahalaxmi, which experienced the highest inventory levels.
"This can be explained by the lower ticket sizes of apartments on offer in micro-markets of Thane, Navi Mumbai and peripheral suburbs of Central and Western Mumbai, which find much more takers than their more premium counterparts," said Das.
In other words, the highly leveraged builders are in a better position to liquidate highly priced inventory in the premium segment because they will get a sizeable upfront payment as against the under-construction launches in the suburbs which are priced the Rs 75 lakh to Rs 1 crore bracket.
However, the fact that realty prices are finally showing some sign of weakness suggests that a correction is warranted this year.
"The increase in inventories coupled with stagnating absorption levels are bound to put further pressure on prices," said Das.