Realty market sluggish in Mumbai, worrying in NCR, but steady in the south
Moneylife Digital Team 04 July 2011

According to an interaction Motilal Oswal Securities analysts had with real estate agents, sales volumes in Mumbai are weak and they are plummeting in the NCR. However, they are largely stable in Bengaluru and Chennai, with a limited impact on increasing mortgage rates

The real estate sector is going through a rough phase with a decline in demand, and an increase in inventory and interest rates, which has affected the sales volume. However, according to a brokerage, while sales volumes are declining in the western and northern regions of the country, it has remained steady in the southern market, especially in the metros.

From an interaction Motilal Oswal Securities (MOSL) analysts had with real estate agents, they found that sales volumes in Mumbai are weak and plummeting in the National Capital Region, but they are largely stable in Bengaluru and Chennai, with a limited impact on the increasing mortgage rates.



The brokerage said in a report that although prices have not appreciated in Mumbai, there is no meaningful sign of rationalisation either. "Residential sales volumes in Mumbai continue to be weak and have declined 20%-25% year-on-year (y-o-y). A sharp price appreciation after the 2008 peak has taken a toll on volumes. Prices have stayed flat over the past six months, with no meaningful sign of rationalisation," the brokerage said.

Delays in obtaining approvals, slow execution and low investor demand have impacted absolute volumes in Mumbai. "Ongoing price-volume dynamics in all Mumbai's micro-markets are similar, with four primary characteristics such as a slowdown in transactions and piling up of inventory, cautious investor activity, tightening lending rates and no real sign of broad-based price rationalisation," the report said.

MOSL said real estate agents did not expect broad-based price moderation in Mumbai, although they felt an 8% to 10% correction was possible in specific micro-markets. Specific developers, facing a tight cash flow situation, may be willing to offer certain price discounts, it said.

On the trend in Mumbai's real estate market over the next six months, MOSL said, "While sales are likely to be muted in the immediate six months, volumes should improve with de-freezing of approval delays and traction in launches. Affordable housing projects on the outskirts of Mumbai would gain momentum, with a trend-reversal in mortgage rates. Improving macro factors, salary increases and better liquidity could slowly accelerate demand in the city."

The brokerage said that over the past couple of months, sales volumes in the National Capital Region (NCR) have been hit by lower drive from investors, worsening affordability and expectations of price moderation. Strong demand had resulted in a steady 30%-60% price appreciation across properties in Gurgaon. However, a huge supply pipeline had kept prices relatively flat in Noida, the brokerage said.

"Our interaction suggests a possible price moderation of 5%-10% over the next six-nine months in Gurgaon and prices in Noida are likely to remain flat. In the NCR, demand is likely to be steady for under construction and ready property over the next couple of quarters along with a natural uptick in capital values," MOSL said.

For commercial properties in the NCR, leasing has been showing steady signs of recovery and rental value has remained stable. The demand has been led mainly by IT/ITES and banking, financial services and insurance (BFSI), followed by other sectors, the brokerage said.

Bengaluru residential market, however, has been steady. Over the past 12 months, sales volumes in Bengaluru grew 50% to 70% y-o-y due to traction in new launches and affordable pricing. According to MOSL, market stability in Bengaluru is also attributable to higher demand contribution of about 60% to 70% from end-users and around 15% to 20% from long-term investors, while participation by speculators was minimal at about 5%.

Rising mortgage rates have had minor impact on recent volumes in Bengaluru. However, better affordability would ensure momentum in mid-income projects and city-centric luxury projects are expected to witness continued response. In the backdrop of new launches, sales volumes in the metro are likely to grow by 30% over the next 12 months. "While robust supply could put pressure on pricing, our real estate agents expect 10%-15% appreciation as prices are still below their peaks," MOSL said.

Further south, the Chennai realty market also witnessed a seasonal decline in sales volumes over the past two months. MOSL said, "The agents we interacted with attribute this mainly to the holiday season (people going for vacations) rather than an ongoing macro concern. Tightening interest rates could be the secondary factor. The overall supply scenario in Chennai is under control and below the prevailing demand level."

To achieve greater customer attention and faster monetization, the brokerage said it expected real estate developers to sharpen focus on product positioning, unit cost affordability and execution certainty, and that Bengaluru-based projects are likely to derive benefits of a stable market, with steady volumes.

"Developers with a strong execution track record and superior product positioning would continue to draw end-users. With several operational and legal headwinds impacting the execution of projects, we expect qualitative factors such as a hassle-free land bank, approvals being in place, readily executable projects and developers' goodwill of on-time delivery to play a significant role," MOSL added.

Anuj Puri, chairman and country head, Jones Lang LaSalle India, argues that "Purchasing activity has already dropped visibly during the last tranche of interest rate hikes, and we will see a further drop in buyer interest now. As for developers coming down on their prices to counter the negative effects of this hike, a lot will depend on the financial ability of individual developers to hold on to their current pricing and risk losing sales till the situation improves. Developers with enough capital base are less likely to relent on their pricing, than smaller developers with an urgent need to sell their stock."

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