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06 October 2010

Up in the air

While the sale of premium housing is on the gravy train, speculation of a bubble burst has done much to dampen the cheer. - Financial Chronicle

Vertigo seems to be afflicting residential realty prices, especially in the premium housing space as a sharp rise in prices across pockets has raised fears of another bubble in the making. And while that may be paranoia of the recent past playing on in investors’ minds, caution may not necessarily be thrown to the winds, according to both developers and sector watchers.

“Yes, it is a fact that prices have gone up considerably, but it’s not an all India phenomenon – it’s largely confined to Mumbai and Delhi NCR,” said Anshuman Magazine, chairman and managing director of real estate consultancy CB Richard Ellis. According to him, a bubble formation looks unlikely, given that prices in certain pockets have already seen a correction. “In certain places such as Mumbai, there has been a dip in sales,” he added.

That, however, hasn’t stopped developers from testing the waters. Delhi-based BPTP, which had to surrender its prized 95-acre plot in Noida, Delhi NCR that was bought for Rs 5006 crore in 2008 due to a fund crunch, has recently launched a premium farmhouse, Amstoria in Delhi NCR’s Gurgaon region with the starting price being Rs 2.31 crore and going upto Rs 10 crore.

India’s largest realtor by market value, DLF, has reactivated its plans for developing premium segment housing after the economic slowdown.

“There is still some shortage of luxury housing in India, I do not expect prices to fall, but they will stabilise in the short run as there is still demand for it at current prices. Developers are launching several mid-income housing projects and one or two luxury projects, so in that way prices will stabilise only... it is purely about demand and supply... I do not think there is bubble in the making as demand still exists,” said Rajeev Talwar, managing director, DLF Developers.

His observations are, however, challenged by Pujit Aggarwal, CEO and MD of Mumbai-based Orbit Corporation. “Prices did increase too rapidly in 2010, but now, considering the supply coming in, we will see more rational pricing,” he said. Already, in certain pockets of Mumbai, such as central Mumbai, a 20 per cent correction can be expected on the back of fresh supply coming into the market.

Part of the reason for the correction has been the price resistance coming into play even in the premium segment. “While there is a huge offtake for premium offerings in the Rs 3-4 crore bracket, anything above that meets with stiff resistance. Also, when one speaks of the price rise in the premium segment, it has to be seen that most of the demand in this segment came for ready-to-move-in apartments, so prices rocketed. But as more supply comes into the market, prices will come down,” said Aggarwal. Even then, buyers should not expect a free fall, according to him. “Prices will probably bottom out at Rs 15,000 per sq ft – below that they will not fall,” he added.

Much of the price correction, as is evident, will depend on the supply coming in. “In areas such as south Mumbai or certain parts of Delhi and Gurgaon, there’s not too much of new construction happening, so consequently whatever supply comes in, it is absorbed,” said Ajoy Veer Kapoor, founder and managing director of Saffron Asset Advisors. Pointing to the example of central Mumbai’s Parel region, Kapoor said while there is a substantial supply coming up and there is a fair demand for housing there, the absorption in such areas will be at an appropriate price point. “Certain parts of Mumbai and Delhi are overvalued and will see some correction. However, the real estate market in India is strong and has depth,” he said.

Kapoor’s contention that the premium housing price rise is largely a Mumbai and Delhi NCR centric phenomenon is not without basis. In Kolkata, for instance, the demand for high income group housing – apartments above 2,000 sq ft – is very low, with consumers being bullish on apartments in the ticket size of 900-1,500 sq ft. “In Kolkata, for one, the craze and demand is highly focused on the upgraded flats of the MIG segment, which are priced upto Rs 30 lakh. Therefore, the developers are also focusing on this segment. So, the bubble in the premium residential category, which may exist in some other parts of the country, is not here,” said Ritwik Das, director of Kolkata-based realty developer, Bluechip Projects.

However, according to Mayank Saksena, associate director at Jones Lang LaSalle Meghraj, it really is a catch-22 situation for premium housing in Kolkata. “Unlike other metros, Mumbai in particular, in Kolkata the premium residential segment has always been under-served for more reasons than one. No one expected this segment to grow. But now, some premium or super premium projects are coming up targeting the HNI segment,” he said.

It’s pretty much a similar situation across other metros outside of the country’s political and financial capitals, Delhi and Mumbai. For instance, in India’s silicon city Bangalore that is home to much

of the country’s new age wealth, demand for premium housing still outstrips supply. “The number of premium segment projects is far lesser compared with those in the mid segment. Also, premium segment projects are launched after thorough research. In the southern region, I think demand and supply balance is intact, and I don’t see any problem happening,” said Suresh Hari, CEO of Bangalore-based Vishal Builders.

Banks and financial institutions for their part, are exercising caution while lending to this segment, though, as Saksena of JLLM says, financing for such projects, both at a consumer and developer level, will be on a case by case basis. “The supply is still low and there is enough demand and whenever there is low supply and growing demand, banks always find that to be a good market. I don’t think banks have any reason to be scared of... at least not in Kolkata,” Saksena said.

Moreover, as against mid-income housing, financing for premium housing is fraught with high risks for the lenders. “Usually, banks restrict their loans for such premium and luxury segment accommodation to 60 per cent of the house value, compared to upto 85 per cent financing for lower value housing as in case of default, resale of such premium properties is not easy. Hence, banks and financial institutions are being cautious while lending to this sector,” said CS Jain, head of personal banking, IDBI Bank.

He, in fact, pointed out an interesting trend in premium housing – that most of these projects are coming up within the main city, rather than on the outskirts. It’s a view reinforced by the trend of many developers buying land in their primary cities. So, for example, Mumbai developers would stick to developing projects only in and around Mumbai. Magazine, of CB Richard Ellis, however, cautions that a steep rise in interest rates could have a significant impact on demand and absorption. “If interest rates are hiked by two per cent or more, we could see a slow down in absorption,” he said.

Investors and real estate focused funds also don’t seem to be in a rush to put in their money into premium residential projects. Kapoor, of Saffron Asset Advisors, for instance, said they haven’t invested in a project for the last seven months. “We will stick to investing prudently and are seeking valuations at present. There is no investment imminent,” he disclosed.

There, of course, are concerns that certain micro markets could see a spillover effect of the rapid rise in the premium housing segment on to other segments, notably the mid-income group housing. “There is a bubble in premium segment in Mumbai, which in my view would not trickle down to mid class segment, since both are two different verticals. In south, there is a balance between demand and supply, as of now. However, in Delhi, there is a bubble emerging in mid class segment, while the premium segment is seeing a slowdown in demand,” said Sankey Prasad, chairman and MD, Synergy Property Development Services.

While agreeing that micro-markets have seen a significant price rise, in many cases prices are still higher than their peak in 2008, Magazine said that one also needs to factor in the improvement in the general economic climate within the country. “There is a return of the end user and long-term investor in the market and the reason for that is that India did not witness as many job losses as other developed economies. Plus, people have got salary increments and the stock markets are again seeing an inflow from FIIs. So people are sitting on a sizeable chunk of money, looking to invest and real estate is the first choice for many .

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