Economy Aug 7, 2012
By Ramesh Nair
Despite buyers' expectations of a likely fall in city property prices, the possibility seems unlikely as developers continue to hold on to prices across sub-markets on the back of the Development Control Regulation amendment. This policy, along with the increase in construction costs, has led to greater pressure on developer margins.
Post the new DCR, the saleable areas are expected to reduce and carpet areas are likely to increase. It is interesting to note that while there have, in fact, been marginal price increases across many projects in Mumbai Metropolitan Region (MMR), registration data reflects that absorption levels have also increased.
Speculations on the increased launches because of faster approval leading to increased sales volumes have not panned out. The market stands firm on its message to developers- demand will only increase significantly if the new launches are priced lower.
Policy & Pricing
Though more projects are expected to be approved on the back of the Chief Minister's assurances, the fact that capital itself is tight will continue to be a detriment to project launches. We are looking at a classic Mexican standoff between policy and opportunity.
At the same time, residential developments are now eligible for 35 percent more fungible floor space index (FSI)-which can be bought at 60% of the Ready Reckoner rate- while commercial developers are eligible for only 20% more fungible FSI (and need to pay 100% of the Ready Reckoner rates.) This will mean that in the short-to-medium term, there will be more residential launches as compared to commercial launches.
The debt levels of many large developers active in Mumbai and Navi Mumbai have reduced marginally. Ideally, this should encourage them to consider launching new projects. However, the new regulations now in effect will mean that developers will have to re-work the specifications of their upcoming as well as on-going but unapproved projects. This will probably lead to project delays and further cash crunch for developers.
Developers who are offering sizeable discounts are doing so only for a few units, with the intention of averting immediate cash flow pressures. This should not be interpreted as a price reduction across the board. Developers who have procured land through joint ventures are holding on to prices.
Although many developers have marked up their prices, some have retained the base price as they adopt creative marketing strategies such as an inclusion of common areas (flower beds, decks, balconies etc.) to the saleable area (leading to lower efficiencies). Innovative marketing initiatives such as flexible payment plans are apparently now here to stay, and these may ensure steady sales even in difficult times. Developers have started marketing discounts more aggressively, offering various freebies, flexible payment plans and financing options such as 80:20 schemes.
Appreciation & Correction
While the premium areas of Mumbai will record slow growth in capital values, the suburban markets are likely to see some appreciation over the next nine months. The mid-end and affordable housing segments in Thane and Navi Mumbai will see healthy appreciation in capital values from a low base in the short term, primarily as a result of the on-going and upcoming infrastructure initiatives. That said, markets in the peripheries where developers are launching projects of more than 300-400 units will probably correct.
With demand for rental housing remaining strong, rents across most sub-markets are expected to increase in tandem with capital values over the coming quarters of 2012, resulting in stability of yields.
Advice To Developers
For now, Mumbai developers would be advised to focus on end users rather than investors. During times of price stagnation and tight liquidity, cash flows from investors get delayed as they are not able to churn. This leads to slow-down of construction, which eventually impacts disbursals from housing finance companies that have construction-linked payment plans.
Also investors compete with developers when prices go down or remain stagnant. Developers focusing only on luxury properties should reduce unit sizes to increase affordability. They are also advised to concentrate on their core asset classes - this is not a good time for diversification.
Ramesh Nair is the Managing Director at property research firm Jones Lang LaSalle India
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