Real estate markets across India are getting hammered. There's no doubt about that considering the economic slowdown, rising interest rates, delays in project approvals and piling unsold inventory.
While residential unit absorption numbers in January-March in the national capital region (NCR) and Mumbai metropolitan region (MMR) plunged over 50 percent, Bangalore has escaped relatively unhurt, and witnessed a drop in absorption by just 18 percent, said a report by research firm PropEquity.
Going by the report's logic, Bangalore is performing better than other Indian markets as price spikes have been more reasonable and there is better execution of projects. "According to data culled by PropEquity, Bangalore has seen a rise of 18 percent in home prices since the first quarter of 2009. In comparison, other markets such as Chennai, NCR and Mumbai have seen increase of 22 percent, 48 percent and 26 percent, respectively," said a report in the Business Standard today.
Why is Bangalore the exception? Here are some reasons.
Bangalore witnessed a massive price correction during India's boom period
The reason why prices have not shot up in Bangalore the way they did in NCR or Mumbai is because India's IT capital saw a price correction for three consecutive years between 2008 and the second quarter of 2011, whereas they were at the peak in 2009-2010 in Mumbai due to the sudden surge in demand.
"Between 2009-2011, there was a correction in Bangalore even at the project level because sales were not good enough," Pankaj Kapoor, MD at property consulting firm Liasas Foras, told Firstpost. In Mumbai, however 2009 and 2010 was the boom period for home sales.
Land cost is not part of construction, so builders are relaxed
Secondly, the Bangalore market is a joint venture market. This means that the developer doesn't invest much in developing a property here as the land cost is relatively cheap. Moreover, the land owner becomes the joint partner, so the burden on the builder is considerably lower. In Mumbai, high property prices are supported by higher prices of land which reduces the ability of developers to cut prices, a Citi report pointed out. Moreover, property developers involve equity investors in a project from the start. They promise a specific return on investment to that investor, which makes the cutting of home prices even more tough.
"The high cost of land is a major hassle for developers in big cities. They are shelling out huge amounts for acquiring land, which has resulted in price increase of properties," Kapoor said.
Surge in demand only occurred because of affordable projects after a lull of 2 years
Third, the sudden surge in Bangalore properties only occurred in the last quarter of FY11-12 due to launches in the mid-income segment by large realty companies such as Sobha Developers and Prestige Estates Projects. "Since the projects were launched in the affordable housing segment, the developers got a good response during the pre-launch period," said Kapoor.
Sobha clocked in sales of 2.77 million sq ft in FY11, translating to Rs 1,130 crore in terms of value, while Prestige w itnessed sales of 1.8 million sq ft in volume terms and Rs 1,380 crore. These launches enjoyed strong absorption as fiscal years 2009 and 2010 were dull years in terms of new launches, said a report by SBI Capital.
Against this, the Mumbai market, which saw high demand and supply till F11, witnessed a dull period after that. While the initial part of reduction in demand was due to unaffordability, the later part was due to lack of new launches due to slow pace of government approvals, the SBI Capital report added.
The Mumbai and Bangalore property markets are different
Fourth, property prices vary depending on the economic profile and demographic patterns of a city. Bangalore, which is often called a paradise for retirement, essentially consisted of independent houses. It is only in the last 10 years that the city witnessed a population explosion and that too because of the IT boom. And it was this demand that led to a rise in residential flats in the city. Mumbai, on the other hand, has always been the financial capital of India where the weighted price per square foot is Rs 10,000 against Rs 4,000 in Bangalore, another industry expert pointed out. Also nobody ever wants to cut prices in Mumbai.
The developers who have bought expensive land over the last two to three years will obviously not cut prices because they do not have much room to do so. On the other hand, those that bought it in the pre-2005 period can cut prices but won't do so just to drive prices higher and create more speculative demand.
Bangalore property market is based on actual end-user demand and therefore is not a bubble
And lastly, Bangalore is a market for end-users. Due to stable business scenario in Bangalore and de-growing business scenario in Mumbai, investor confidence is more towards Bangalore-based companies. This is why capital values for residential properties in the city are expected to either remain stable or record marginal growth, said Ashutosh Limaye, Head of Research, India, at Jones Lang Lasalle, in a recent report.
Mumbai, on the other hand is completely investor-driven, be it institutional or high net worth individuals. This is why developers bet on the upward movement in property prices. Over the last six to seven years, Mumbai prices have only appreciated- all thanks to the builder-political nexus and the strong element of black money in transactions. This has strengthened the belief that any unsold inventory can always be sold at higher prices in future.