Are you investing in real estate? Unsold housing may trigger price cuts!

If the sales pitch for real estate has suddenly gone up, as have the discounts, don’t think it is the generosity of the builders driving this kind of sales.

Poor sales in newly developing areas and a dip in demand from homebuyers is leading to an inventory pile up. This in addition to regular launches of projects in the past six months has added to the inventory of unsold flats across key regions such as Delhi-National Capital Region (NCR) and Mumbai Metropolitan Region (MMR) and Chennai too. A report released on 15 June by PropEquity Analytics Pvt. Ltd, a Gurgaon-based research firm, corroborates that home sales across NCR and MMR dropped by at least 50% in the January-March 2012 period compared with the corresponding period a year ago. The current scenario will help homebuyers as the huge inventory may lead to a drop in prices in the near future in some regions. Except for Mumbai, where inventory has actually fallen, in NCR, Bangalore, Chennai and Kolkata, inventory levels have begun to creep up.

Analysts say that corrected prices may be offered in the form of certain easy payment schemes and discounts, and offers may vary from region to region. “If the current economic uncertainty across the globe and in the domestic market remains the way it is, prices are bound to correct. But the correction will come in the form of discounts or through some schemes in the new launches,” says Gaurav Pandey, head-research and consulting, PropEquity Analytics.

Early signs of correction

The PropEquity report adds that there could be a “stage 1” price correction in the range of 5-20%, especially in the newly developing areas of NCR and MMR. Explaining the expected correction, Samantak Das, national head–research, Knight Frank India, an international property consultant firm, says, “Rates are stagnant at present in most markets. Price correction will depend on how long the developers can hold. However, there is pressure on developers due to high debt and increased supply in certain markets. Thus, they may not bring down the marked price or the quoted price but instead offer freebies, discounts and some easy payment schemes to generate sales.” This may give you a chance to bargain hard on the quoted rates.

While the trend has just begun in Mumbai with some developers offering freebies, NCR developers are already offering discounts. “This trend may continue going forward,” says Ashutosh Limaye, head research, Jones Lang LaSalle India, an international property consultant firm.

So homebuyers may soon encounter terms such as “easy EMIs”, “early discounts”, “limited offers” and “all inclusive price”. Also freebies such as free modular kitchen and free car parking may be offered. Homebuyers may see offers such as 20-80 schemes, wherein 20% of the cost has to be paid upfront and 80% upon possession or after two years, whichever is earlier. Developers give this kind of offers primarily during early stages of any project launch. “This ensures a healthy absorption rate throughout the year for developers,” says Limaye.

Resale market may follow trend in primary market

The secondary market (resale market) may simply follow trend in the primary market (new launch). “Generally, prices of properties up for resale are benchmarked to new launches. If prices of new launches will fall or offer discounts, resale market will witness a gradual drop in absorption leading to an increase in inventory,” says Pandey. This may lead to softening of prices in the secondary market.

The market reaction

While prices in metros may fall, tier II cities such as Indore and Jaipur may continue to witness growth in prices. In Mumbai, a surge in supply in Navi Mumbai along with a slow recovery in sales in most parts of Greater Mumbai is expected to lead to a situation where the residential market might continue to remain buyer-friendly in the near term. In Delhi-NCR, prices could see a longer stagnancy phase as oversupply has resulted in projects recording low sales volumes, thus limiting capital value growth. Property prices in other important markets such as Bangalore and Chennai may witness stagnancy due to an oversupply situation, says Limaye.

What it means for you

If you are a prospective buyer, enter the market only when you get a good bargain with discounts. Also make sure the developer has all the necessary approvals in place. “Buyers should invest in projects which are at an advanced stage of construction. Real estate investments should always be done for a long-term horizon,” says Pandey. However, if you are already invested in a project, do not exit unless the developer stops construction at the site.