Monday, May 09, 2011

Builders resorting to distress sale?

In another report appearing in Times of India, Alka Shukla paints a not so rosy picture for the real estate industry.
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But here’s the catch – you can avail of the sale offer only if you make a bulk buy of not less than 10,000 sq ft area
Alka.Shukla timesgroup.com

Hiral Shah, who has been scouting new residential projects in Kandivali to buy a house, got two rude shocks. “No one is quoting less than Rs 1.2 crore for a 1,000 sq ft house in Kandivali! And surprisingly, I also discovered that almost half the flats I saw in the two new projects were vacant,” said Shah.
 

As if echoing his find, a recent survey by property research firm Liases Foras has revealed that there are 80,000 houses lying unsold in new projects across the city.
 

Even as developers maintain that sales are brisk, crevices are beginning to show up, and one indication of this is that some developers are resorting to distress sales – disposing of homes by offering as much as 40-50 per cent discount. Zen Towers in Tardeo is a case study. Set to complete in December this year, you can buy space for Rs 15,000 per sq feet as opposed to the market rate of Rs 25,000.
 

But here’s the catch: you must make a bulk buy of at least 10,000 square feet.
 

“The market is over-heated, and with a price correction being anticipated, investments are drying up. Though big builders can hold on, it is the small players who have started to feel the pinch, and are creating distressed assets even as market sentiment is positive,” said Atul Khekade, partner, Netz Realty, a property consultancy firm that has sensed opportunity here.
 

It has created a pool of 30 such distressed assets in South and Central Mumbai and is marketing them to NRIs and High Networth Individuals.
 

Experts say only about 10,000-12,000 units have been selling in each quarter this year, as against 21,000 between April-June last year. No wonder pressure is building up.
 

If a 22-storey tower in South Mumbai’s Nagpada area is available at Rs 8,000 per sq feet – as against the market rate of Rs 15,000 per sq feet – provided 10,000 sq ft is bought, another project in Andheri (W) is selling for Rs 10,500 per sq feet, almost 30 per cent lower than the market rate even if you buy just 5,000 sq ft.
 

A builder, who is selling bulk stock at 40 per cent discount, said on condition of anonymity, “As big builders go on increasing rates for their projects, the average market rate is pushed up. They get funding through FDIs or big private equity firms. But when rates reach a brink, even investors who fund small projects like mine become wary. One Gujarati investor group that had promised to pump some money into my project backed out. Now I am desperate.”
 

Real estate analysts speculate the cracks could widen. Pankaj Kapoor, Managing Director, Liases Foras said, “Creation of distressed assets is an indication that the residential market will undergo a correction, which could be to the tune of 25 per cent in the short term. This is not just because property prices are unrealistic, but also because a chunk of flats are being traded by investors instead of being bought by actual users.”

No demand for houses, but prices hit an all-time high

In a report appearing in Times of India of today (9th May 2011), it has been estimated that real estate prices may drop between 15 to 40% in the coming months. This is due to high unsold inventory and prices being out of reach of most buyers.
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The laws of demand and supply do not apply to your city’s real estate scenario. With 93,000 under-construction and ready for-possession homes still unsold, the ‘weighted average’ cost of a flat is at its peak, according to a finding put out by property research firm Liases Foras. 

On an average, the cost of a flat in Greater Mumbai (area under BMC limits) is pegged at Rs 2.18 crore. That’s a 436 per cent rise compared to 2005 prices. Since then, the graph has steadily moved northward but for a brief dip during the economic meltdown in 2008 (see info graphic).
COMMON MAN’S WOE
And this upward swing in cost has pushed the middle class to the fringes. A basic principle of lending institutions says that the cost of your house cannot exceed five times your annual salary. In 2005, to buy a home, your annual income should have been Rs 8 lakh. At today’s prices, your annual income has to be Rs 43 lakh.
    “Five years back, Rs 8 lakh per annum had a higher purchasing power than today. And it was not too difficult for one’s family income to be in the range of Rs 5-10 lakh,” said a market observer.
    “Today, even if individual incomes fall in that range, very few family incomes are in the Rs 40-lakh range,” he said.
    Managing Director of Liases Foras, Pankaj Kapoor, points out at a pricesale pattern, not particularly to Greater Mumbai but in the entire Mumbai Metropolitan Region that includes Greater Mumbai, Thane city and Navi Mumbai.
    “When prices fell, sales picked up. Like, when the per-sq-foot weighted average price in the metro region fell from Rs 8,100 in 2008 to Rs 5,300 in 2009, sales improved from 9 million sq feet to 20 million sq feet,” said Kapoor.
    “The rate today is Rs 9,235 per sq ft. Even if you factor in inflationary costs, prices will have to be in the range of Rs 6,000 per sq ft to increase market efficiency.”
PRICES LIKELY TO DROP?
With home sales already low, and if the current pace of sales continues, it will take 35 months for the current stock of unsold homes to find buyers, feel realty experts.
    And, they opine that this situation will only bring down the market further.
    “While an overall correction of 35 per cent is required to improve sales, South and Central Mumbai will need a correction to the tune of 40 per cent,” said Kapoor.
    Though not all realty experts may agree on that, the general sense is that prices will correct by at least 15 per cent in the next six months.

Tuesday, May 03, 2011

Actual Property Rates in Thane

In a recent exhibition held under the aegis of MCHI (Maharashtra Chamber of Housing Industry) at Thane, I happened to visit quite a few stalls.

One of the projects exhibited there was from Puranik Builders. The brochure listed a building named 'Houston' which has 2 BHK and 3BHK flats. The area for a 3BHK flat as mentioned in their brochure is 748 square feet carpet. The rate they are quoting is 4695/- per square feet with an escalation of 25 per floor.

When I called to check what was the saleable area (euphemism for super built up area, including all open spaces) they told me that the area was 1160 square feet.

So in effect you are paying 54,50,000 for a flat of carpet area of 748 square feet. That works out to a real rate of 7281/- per square feet. Given that the land cost (FSI in Thane) is around 2000/- and construction cost for tower around 1200/- the builder is making a clean profit of 30,00,000 per flat.

No wonder builders are holding on to their stock and not selling at reduced prices.

Current stock of unsold property in Bombay (Mumbai) stands at more than 1,00,000 units. Taking an average price of just 50,00,000 per flat, the total unsold stock now is worth 50,000 Crore. Th interest burden on builders calculated at just 1% per month (commercial loans are between 12 to 15% per annum) translates to an interest outgo of 500 Crores per month.

Update:

Like I wrote about the exhibition, Times of India carried a report on the failure of the exhibition to generate interest.

Read the article here

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