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Real estate prices may not appreciate soon

Gaurav Dua

After the dream run in the early 1990s, real estate prices have been on a downward spiral for nearly seven years now.

Any hope of an early revival led by the much hyped boom in the IT industry also turned out to be short-lived. Property prices in both commercial as well as residential segments continue to stagger along, with no significant trigger to stimulate any major upturn.

Amid the gloomy scenario, the unprecedented level of activity in the middle income group residential housing market has stood out as the only saviour. The sharp drop in real estate prices and availability of loans at cheaper rates have fuelled the demand for residential property in the range of Rs 1-2 million, especially in metros like Mumbai and Delhi.

But it hasn't made things easier for the real estate developers. The overhang of excess supply has forced the developers to offer additional features and a better 'value-for-money' proposition to the consumers. Gone are the days when flats used to be sold at the planning stage itself.

With the gradual fading away of major distortion factors like scarcity and unreliability of property market information, consumers are much more aware and demanding today.

"Developers are operating on more realistic margins now. The focus has shifted on generating volumes rather than fleecing the customer," points out Anuj Puri, managing director, Chesterton Meghraj International Property Consultants.

Despite the robust demand in quality residential housing segment, property prices have remained more or less stagnant, if not fallen considerably in the last two years.

"The real estate market is in a consolidation phase after the sharp fall between 1996 and 1998. Prices are expected to remain more or less stable over the next few years which could be followed by a sustained growth," opines Puri.

However, there are others who are still quite bearish on the property outlook. "There are no significant triggers to generate demand. We believe the prices will continue to decline, though at a much slower pace in the next few years," says Tariq Vaidya, head-advisory services at Knight Frank, an international real estate consulting company.

Some of the large domestic brokers feel that the prices could further soften by as much as five to ten per cent over the next two years.

"There are many newly built buildings with unsold flats in almost all the major towns. Chennai and Bangalore which largely depended on the software industry will be the worst hit," points out Ashok Narang of broking firm L Lashmandas & Company.

That's also because most of the new entrants in the fast-growing IT-enabled services segment are flocking towards Mumbai and Delhi (outskirts like Noida and Gurgaon) due to better infrastructure and availability of skilled manpower.

The situation is worse for the commercial property segment. "Difficult economic conditions have resulted in several companies cutting down on their space requirements or have moved towards the suburbs which is reflected in the real estate prices," explains V Harikirshna, associate director with Jones Lang Lasalle which specialises in commercial property market.

Moreover, industry experts point out that the property prices are still higher than the prevailing rate in 1993 or early 1994.

So, while the prices have declined drastically, it is not that quality property is available at throwaway prices. In fact, experts argue that there is scope for further rationalisation in real estate prices in the near future.

"Overall open market prices are still far higher than they need to be, especially in prime south Mumbai locations," feels Puri.

Can FDI trigger a revival?

Foreign direct investment is often touted as one of the factors that could lead to significant investment in real estate which, in turn, will result in the much awaited upturn in the prices.

The logic is simple: the return on real estate in developed markets such as US and Europe are in the range of four to five per cent as compared to over 12 per cent in metro cities of India. So this should definitely attract lot of attention from foreign investors.

But real estate consultants argue that the unrealistic guidelines coupled with the associated risk like rupee depreciation and geo-political risk in the country make it an unattractive option for foreign investors.

"Rupee depreciates in the range of four to five per cent per annum plus foreign investors account for at least another three per cent as the country risk shaves off all the advantage," points out Knight Frank's Vaidya.

Apart from this, according to the guidelines, the minimum area to be developed by a company has to be 100 acres. That is not going to be easy. Plus the minimum capitalisation norm is $10 million for a wholly owned subsidiary and $5 million for joint ventures with Indian partners is also seen as an hindrance.

Other issues

Archaic laws like Urban Land Ceiling Regulation Act (that limits the amount of land holdings) is seen as one of the major hurdles for development of prime land in big cities.

Though the central government has already repealed this law in 2000, some of the state governments like Maharashtra, Punjab, Gujarat, Uttar Pradesh and others, have not followed the lead.

Apart from this, high stamp and registration duties, unclear title of land and obsolete rental laws have adversely impacted the growth of the real estate industry in the country.

Ray of hope

Notwithstanding the issues, like any other cyclical industry, the real estate market has its ups and downs. The cycle varies anywhere between eight to 15 years.

For instance, London property markets revived in 1987 after a slump of almost 12 years. On the other hand, property prices in Hong Kong are still sliding down, despite continuous downturn since the past 11 years. Thus, on an average, there is a spike after every 10-12 years.

Moreover, the present contribution of the housing construction industry in India is relatively small as compared to other developing or developed nations.

"Housing sector contributes to only one per cent of India's GDP, while the figure is as high as three to six per cent in other developing countries," points out Naresh Malkani, managing director at Indiaproperties.com, a leading online real estate website.

So if some of the macro-economic and sector specific issues are resolved, it could be happy days for the real estate market.

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