Property Price Outlook – 2016

Will apartment and property prices go up, stay stable, or fall in 2016? I am hit by this question regularly and increasingly as we approach a New Year. Through 2015, property developers and investors sitting on plenty of real estate have been hoping feverishly for sales and prices to recover. Those who want to buy on the other hand, have been demanding more discounts and cheaper homes, and are still not convinced that they should take the plunge.

Quite a log jam.

So I got the MD & CEOs of India’s most credible corporate houses in real estate together for a crystal ball-gazing debate on property prices in 2016 – Anita Arjundas of Mahindra Life Space Developers, Brotin Banerjee of Tata Housing and Pirojsha Godrej of Godrej Properties. Watch the entire show here.

My first big question, with sales slowing down  to levels I’ve personally not witnessed since starting The Property Show four years ago, will prices not come under more pressure in 2016? The answer was a categorical NO.

“Prices will not come down further. The industry itself has already said that prices have come down by 15% in the past year. Obviously, for some developers the cut could have been more, given the level of desperation there may exist. But, I think that we are really looking at the bottom of the barrel as far as the prices going down is concerned. If you look, the construction costs haven’t come down. Yes, the steel and cement prices may have come down but labour costs have gone up, statutory dues have gone up and I don’t see any significant reduction in land pricing happening” argued Brotin Banerjee, the CEO who refuses to sugar coat anything.

Anita Arjundas, a business head who always presents her point with the most soft-spoken clarity, added “Look at data in terms of promotions, offers, and the fact that almost all projects today are launched on payment linked plans. So you pay 20% now, 80% on possession – that’s straight discounting. Prices have definitely corrected at a project to project level by 10 – 15% and even where they have remained flat all through 2015, there is time discounting.”

“There are well-understood pressures on the demand side but I think the supply pressures on the cost and project approvals are less understood. So however a developer chooses to respond to the current situation, the question you need to ask is, how will a fresh round of supply get created? Because no developer is going to launch projects at a lower price to lose money” summed up the unassuming and straightforward Pirojsha Godrej.

But what about the unsold apartments across the country which have been hitting headlines? PropEquity data puts that number to an accumulated stock of 7 lakh units by September 2015.

Majority of the unsold inventory, Anita Arjundas countered, is in projects which have been lying idle. “It is important to see is where that inventory is located, What stage of construction and execution it is in? Many of the projects have done no construction for the last three to four years and have been sitting there as almost idle projects. Therefore, there is a complete stop both in terms of sales and construction on those projects. Having said that, sales have slowed down and inventory levels are higher that what the industry is comfortable with. ”

On unsold inventory, Projsha Godrej added, “There has been a mispricing and a misdesign of a product in many places, and I continue to believe that the products which are appropriately priced in locations people want to be in and are brought to market by developers people trust are really not seeing any dramatic slowdown.”

My take –  the worst-affected pockets across India such Greater Noida, Ghaziabad, Mumbai, Navi Mumbai and Chennai, where sales velocity has dropped to a level that it will take 36 months and more for all existing stock to be cleared, will  continue to struggle. But even in these real estate markets and others, credible developers with a delivery track record will continue to command a pricing premium. Tata, Godrej, Mahindra, ATS, Prestige, Sobha Projects are priced 10-15% higher in any market and they are selling, albeit slower than before.

Many developers who have been lax and taken the buyer for granted have realized that fixing their business is the only way to win the buyer back.  The focus has shifted from launching new projects to delivering existing ones. And the numbers say so too. New project launches have halved in 2015 vis-a-vis 2014.

That’s also the beauty of a slowdown. Complacency vanishes. There’s a rethink on the product.

All three honchos agreed that the industry has to reprice the product and offer more amenities in the same cost to keep the buying momentum.  With no room to cut prices further, shrinking the size may be the only way to keep projects affordable.  “If smaller apartments is what we have to build to ensure and ensure better housing stock for the country, so be it. There is nothing wrong in building smaller size apartments,” said Pirojsha Godrej.

My next big question for 2016: Will Indian property markets start recovering at some point in the year?

Pirojsha Godrej’s assessment: “I’d be lying if I said I knew when that turnaround will happen, but I think it will happen sooner than people think, and I am confident it will be sharper than people expect. Because there is no doubt in any of our minds that there is going to be tremendous demand for Indian real estate and this is going to be a multi-decade-long road story.”

He strengthened his argument with the following logic: “India today still only has 30 to 35 % population living in cities; that is dramatically going to increase over the next few decades. Indian income is continually growing, it may not grow as fast as all of us want but 7-8 % GDP growth is nothing to scoff at and when countries go through this kind of growth stage, real estate is a sector that always benefits disproportionately. So if you look at say Japan after World War 11, or if you look at China over last couple of decades, the scale of this sector is something where we are nowhere near approaching. Big Chinese developers for example sell 100-150 million sq. ft. in a single year. I think if you ask all of us, (even if) we combine our sales for the entire history of our organization, we might not get there.”

So here’s what I think: cut through the noise and get the deal you want on property in 2016. Because I agree with the view that when the turnaround comes, it will be much sharper than anyone expects.
Happy New Year.

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