Despite apartments being unaffordable for a large section of buyers, most realty experts do not expect prices to crash any time soon.
In 2008 , no one would have imagined that real estate prices could crash by 50 percent and correct 70 percent, by as early as beginning 2012. This despite, millions of houses lying vacant.
The situation today is similar to that of 2008 with developers facing funding shortages, and hopes of a further price correction forcing buyers to postpone their purchase decisions.
However, unlike the past, this time around, developers are playing it smart. By cutting supply and postponing new launches, the developers ensured that property prices do not crash. In FY12, launches declined 40% to Rs 1,000 crore but prices rose 10-20% in the past two years as a shortage helped builders to hold on to or raise prices.
In fiscal 2012, supply reduced after the state government clamped down on releasing development rights for redevelopment schemes and slum rehabilitation projects. But this ended up impacting developers favorably.
Given the festival season and expected decline in home loan rates, analysts are expecting a pick-up in demand and revival in pre-sales (sales during the launch period when the project is in the under-construction phase and delivery is only handed three to four years later), which means that there are few chances of a price correction happening any time soon.
This is best explained by Sandipan Pan, analyst at Motilal Oswal. He argues that in the new projects which have been launched, very few flats are available on ready possession. "Delays in completion and fewer delivery schedules in FY13-14 suggest no immediate price correction, as pressure on developers to sell existing projects is that much lower."
Relationship between interest rates and presales
A research report by KimEng highlights that in Financial year 2008, presales peaked because interest rates were low. The situation reversed in FY09 with presales crashing due to rise in interest rates. In FY12 too, rising interest rates resulted in decline in presales. "From FY13, the interest rate cycle has reversed, which will trigger recovery in presales." ( See chart below)
For financial year 2013, Kim Eng forecast presales to rise 25 percent to Rs 11,700 crore because launches have been managed smartly until now. "We expect prices to remain stable as there will be plenty of supply from all developers initially."
Mahindra Lifespace Developers, for example, has a strong pipeline of 10 housing projects this festive season, while Sobha Developers is planning to launch seven projects and is likely to pre-sell at least 50 percent of this in the second half of FY12.
Moreover, a few developers started selling assets, investments in other businesses and land parcels to raise funds. This helped them to keep new debt low and its deb to equity ratio (the proportion of equity and debt the company is using to finance its assets) in check. This corporate fiscal management has lead to less hasty and pressurised decision-making.
Developers have also reduced land bank accumulation and development of office/retail complexes to cut cash flow shortfalls, which means the new debt requirement to fund project expansion plans is falling. ( See chart below)
Hence the risks of bankruptcy have diminished as balance sheets are no more overleveraged.
Even Parikshit Kandpal, real estate analyst at Karvy Broking, expects the correction only to be in the form of a 'time correction' i.e. where sellers take longer to find buyers or one where prices come down slightly over a couple of years.
Updated Date: Dec 20, 2014 14:05 PM