Residential Real Estate Market Set To Witness Sharp Appreciation Over The Next Six Months

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If we go with the words of Jones Lang LaSalle, the leading global research firm in real estate sector; the residential real estate market in India can witness a marginal appreciation in prices in next six months.
“Over 60% of residential launches in the Top 7 cities are priced in the range of Rs 2,000-4,000 per sq ft, which meets the demand of middle-income buyers.”  Says JLL.
As the RBI has given sufficient indications of probable deductions in key rates during second half of 2012, which will improve affordability for home buyers and provide lower interest costs for developers. This will also help in increasing the demand for residential units in India.
JLL also argues that even in the present bad condition, prevailing absorption rates are at nearly 10-12%, which translate into an average absorption period of 8-10 quarters for a residential project. “This implies that at average prices, any average residential project should be sold out before construction is completed in around three years from the launch.”  Says JLL.
At the same time, with the improved cash flow the condition of developers will also improve in the near future. The new projects launches have now started to pick up, which were slow in Mumbai and NCR Real estate in the first half of the year 2011 due to approval and land acquisition issues. It should also approve cash flow for developers having large land banks during 2012.
A number of builders have acquired huge land banks on borrowed fund for which they have to pay huge interest rates, nearly 15-18%, the servicing of debts has put huge strain on their finances. In this situation, any improvement in off-take is likely to release them from the financing pressure.
In the present scenario, when the market is facing slowdown, builders are not cutting their prices as in most parts of the country despite of bad financial conditions; as they have priced their projects at nearly cost prices. According to JLL “With rising input costs, developers do not want to sell below a threshold, which does not justify their minimum replacement returns.”
If we go with the reports of slowdown in 2009, prices in some on-going projects had corrections while a large number of projects maintained stable prices. At the same time, new launches were made at highly discounted prices. Subsequently, a significant rise in absorption was observed as prices were termed ‘affordable’. Prices then increased rapidly by as much as 30-40% — mostly in newly-launched projects — across Tier I cities until end-2010, followed by slower growth in 2011, says JLL.
“This leaves home buyers with a small window of opportunity — the next six months — when home prices should witness marginal appreciation. After six months, a second wave of high appreciation is predicted. Are you geared for it?” JLL asks in the report.
However, in some of the micro markets in Mumbai and the NCR, the appreciation in prices was even sharper. In the last two years, in some of the markets like Gurgaon’s Dwarka Expressway, property prices has shown a significant appreciation as the prices have almost doubled in recent months on Dwarka Expressway Projects.
However, overall, the Indian real estate market went through a slowdown in the last one year. But, all the predictions of a hard landing for the residential property market in 2011 and 2012 have failed to come true, so far. The report says that despite slow sales, highly leveraged balance sheets, expensive finance in a high-interest-rate environment and rising input costs, developers have been able to avoid a market-wide crash.  They have been able to generate sufficient cash flow through the gradual process of price recovery, and several factors are in their favor in the near term, the report further points out.
So we can say that, the current real estate market scenario provides an opportunity for home buyers.  In the near future, when home prices should witness marginal appreciation and Indian real estate market is expecting an upward moment of market as second wave of high appreciation is predicted; this leaves a question, are you geared for it?

– Alok Kumar Upadhayay
Data Resource – Newspapers and Magzines

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