Saturday, November 29, 2014

The Current State of Real Estate Market in India

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!!!

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