Real Estate has always been a preferred
avenue of investment for Indians and will most likely continue to be so for the foreseeable future. The Indian Real Estate Market witnessed never before growth
during the major part of the last decade and it looks as though things are cooling
down. Some feel the market has it its peak while some feel there is a
correction on the cards. So, what is the Real State of the Indian Real Estate
Market?
You will find out by the end of this article.
Shall we get started??
Why this article…
Real Estate Promoters & Builders consider
the Non Resident Indians (NRIs) as a lucrative segment and am sure you don’t want
me to explain why. Anyways, it is common practice for Builders and Promoters to
visit foreign countries with sizeable NRI population (Ex: Singapore, Malaysia,
USA, etc.) and conduct road shows. I usually visit such road shows that are
held in Singapore and happened to visit one last week. After visiting the most
recent road show, something odd really struck me.
The list of promoters that participated in
the road-show were very close the same list that visited us just 3-4 months
ago. In fact, even the list of projects was the same. If projects flouted by
reputable and respectable builders haven’t been sold out for months, I started
researching for some data and statistics on the real state of our real estate
market. So, here you go…
So, What is the Current State of the Indian Real
Estate Market?
The Indian Real Estate Market is at an
all-time low. The demand for houses in most of India’s top cities are extremely
sluggish and in fact, on a year on year basis the growth or demand for homes
has come down by over 20%. Yes, you read it right – Demand is Down by 20%
But, if you thought promoters and builders
are reducing their prices to fuel the falling demand, you are definitely
mistaken because, the prices of homes have come down by less than 5%. Yes, the
prices have come down by an average of 2-3% only.
Did that Surprise You? No wonder, their
projects are still unsold and they are advertising the same projects time and
again.
Is this the state of just Existing Projects
or has it affected New-Launches too?
Actually speaking, the new launches are
affected even more because all major cities have witnessed a shocking reduction
in about 40% or more in new project launches. In the month of March 2014, I was
on the verge of booking a house in Chennai. There were about 3-4 projects that
were on the verge of being formally launched and were selling units at a special
“Pre-Launch” price. Do you want to make a guess on what is the state of those
projects now?
They are still offering the same “Pre-Launch”
price and promoting the project as “Will be launched soon!!” and we are almost
close to the end of 2014.
I can actually list down those 3-4 projects
but it wouldn’t be in my best interest because the promoters may feel I am
disparaging their project and sue me…
Did you know that, at the current rate of demand for new homes, it would take at least 2 years or more for all of the currently "In Progress" or "Completed" Residential projects to get sold out...
So, what is the reason for this Reduction in
Demand?
There are many reasons that attribute to this
reduction in demand but the 4 main reasons are as follows:
Reason 1: Affordability
The rise
in annual income of individuals isn’t going up at the same rate at which
property prices are going up. People who were earning 5 lakhs per annum 3 years
ago are making about 6-7 lakhs per annum now but properties that were worth 50
lakhs 3 years ago are worth almost 90 lakhs or more now.
Reason 2:
Lack of Strict Regulations & Corruption
The
Indian Real Estate market is poorly regulated and heavily influenced by
corruption. Builders in most cases have extra-deep pockets and buy-off or
rather pay-off regulation makers and ensure that property prices don’t come
under governmental regulations. If you try to find out the governmental
guideline selling price of land/property in any area in India, you will find
that it is much lower than the price at which builders are selling their
projects. Am I right?
Reason 3:
High Interest Rates
India is
one of those economies where interest rates are pretty high. Do you know the
average rate of home loans in developed nations is much much lower than the
rates in India? Paying 10% or more as annual interest rate is unaffordable for
most of the salaried class
Reason 4: Black Money
It is widely suspected that the phenomenal growth in the real estate market in India was fueled heavily by Black Money. If I were investing 10 crores of my black money, I wont be bothered much about having to wait for 2 or 3 years to make a 12 crore white income on the investment because that is the main purpose of the investment. If I were investing my hard earned white 10 crores I wouldn't want to wait for 3 years to make 12 crores because that's not good enough. I might as well reduce my profits by 3-5% and make 1.15 crores in one year and finish the deal. Get the picture?
So, Is
Buying Property Now – A Good Idea?
There is
no single – one size fits all answer to this question. If you are someone who needs
a house for you and your family to live in, then the answer is YES. There are
many things you must think and consider before you actually buy the house and I
had written about it in 2010. I would recommend you read this article: Buying a Home
If you
already own a home or you are in no hurry to buy a home right away, then you
could wait for a few months to see where this goes. I would recommend you read this first: Is Buying a Second Home an Investment
Most builders would've invested huge sums of money and hence would like to have some kind of returns
on their investments and this trend of “Not lowering prices” even though Demand
is Low” will come to an end soon. So, if that happens, you can take advantage
of that opportunity. Second hand property market always trades at a discount of
at least 10% in comparison to fresh property. Think of it this way, what if you
invest 50 lakhs of your hard earned money to buy a second home and there is a
correction and the value of the house goes down to 40 lakhs, what would you do?
Better Safe than Sorry…
Happy
Investing!!!