Indian Real Estate Developers Resort to Freebies and Discounts to Woo Elusive Buyers
The global credit crunch and the subprime mess is finally beginning to have an impact on the Real Estate Industry in India, which until now has been experiencing an unprecedented boom due to the explosion of the pent up demand for housing in India. Easy availability of credit, along with the booming Indian economy and the stock exchange as well as the influx of overseas funds in recent times had led to a situation in which demand had easily outstripped supply, and this situation was further aggravated by the scarcity of developed land. In such a situation, developers ruled the roost and were able to command whatever prices they wanted, as there seemed to be ready buyers at every price band. This has led to sky-high seemingly unaffordable property prices in many areas of the country.
In November 2007, Citibank sold an apartment in the posh NCPA building located in South Mumbai’s Nariman Point area to a London-based non-resident Indian for a cool Rs.34 crore ($8.5 million) which works out to a rate of over Rs. 97,000($2431) a sq foot. This deal had set the property market in South Mumbai on fire as developers subsequently pushed up prices of off plan luxury developments in South Mumbai to hold out for prices which ranged from Rs.40,000($1002)- Rs one lakh ($2505)a square foot.
Investor sentiment affected
At these rates, the property prices per square foot in South Mumbai are equal to if not higher than the prices in prime areas of New York City like the Upper East side, where new luxury developments like the Georgica and the Brompton are currently retailing at $1400-$1500 a square foot. However the scenario has changed somewhat in the past four months as the market sentiment has been badly affected following the massive drop in the Bombay Stock Exchange in January 2008. The Stock Market continues to be volatile until today and the pervading market sentiment has also affected the relatively insulated sector of ultra-luxury developments. Projects like Orbit Arya at the tony Nepeansea Road in South Mumbai where apartments are priced at Rs.62,000($1531)per square foot have not recorded a single sale in recent months.
Liquidity Crunch
The Stock Market volatility has not only affected the sentiment but it also affected the availability of liquidity as well. It was this liquidity crunch in the market that led Dubai-based Indian development group Emaar MGF to withdraw its planned IPO in February 2008. The group had initially proposed to mop up Rs.6500 crores ($1.3 billion) with their issue at which shares were initially offered at Rs. 610-690 ($15-$17) but these prices were then twice revised down to Rs.530-630 ($13-$15). However the group then decided to cancel their IPO in order to wait for a time when investor confidence was restored in the market. Recent rumors in the market have indicated a further cash strain at the company as it was recently forced to roll over its short term borrowings from mutual funds.
It is not only Emaar MGF which has been affected by these adverse market conditions but many small developers and medium builders who had hoped to mop up liquidity in a booming IPO market in order to pay for their expensive plots have now been forced to borrow funds from aggressive non banking finance companies at untenable high interest rates in order to remain viable, as banks have seemingly shut their doors to builders. Large developers like Omaxe and DLF who had managed to raise funds through successful IPO’s in 2007 have deeper pockets and are relatively unaffected until today.
Rise in the prices of materials
To further add to the developer’s woes, the prices of steel and cement have also increased greatly during the last year. This has led to a huge increase in cost of construction, as a result of which developers in cities like Pune have decided to increase the per-square foot charge for residential properties by between Rs.50 ($1.25) and Rs 400($10.0251) from the end of April in order to cope with the increased costs of materials and the heavy taxation that has been imposed on them by the Pune Municipal Corporation.
The Promoters and Builders Association of Pune (PBAP) has also appealed to the Central Government to intervene and curb the rises in prices of cement and steel. The developers feel that the high prices of these commodities have given them no choice but to increase the price of their properties. However they also fear that at such high prices soon, nobody will want to buy a flat in Pune, as there is a growing resentment amongst the middle class and this will lead to a slump in the real estate sector. This sentiment has been echoed in a recent report conducted by the Macquire Research that predicts that cities like Gurgaon, Noida and Pune prices in the coming here are expected to fall by 5-15% as these markets are overheated and supply has outstripped demand.
Builders trying to drum up sales with freebies
In the suburbs of Mumbai medium sized developers like Mantri, Lok, and Nahar have started offering discounts and sweeteners ranging from stamp duty relief, free modular kitchens, free interiors free top of the line laptops and free parking to attract reticent buyers to their already launched projects. This scenario is also been replicated in Delhi and in Bangalore as well. In Bangalore, the marketing arm of the Magnolia group called Orange Properties has for the last six months been offering fantastic discounts to attract buyers.
Some of their recent offers promised a Maruti SX4 car free with every 1500 sq ft booked at one of their projects located in Bannerghatta in Bangalore. These apartments are priced at approximately Rs.42 Lakhs ($105,000) and a Maruti SX4 retails currently for 6-8 lakh ($15000-$20,000) so the offer represents a substantial discount. The group had also previously offered an Audio A4 worth 30 lakhs ($75000) to every buyer of a villa at their Magnolia Brooksville project and a ½ kg of gold for buyers of flats at their Hinduja Lake Front Estate project.
Real estate analysts believe that these discounts are just the first step towards a more visible price correction, so if you have been feeling priced out of the Indian real estate market and you have a fairly long investment horizon, you might want to keep an eye on the developments in the Indian Real Estate sector for the next few months which may offer you the chance to buy a property at a discounted price in a premier city.
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You must have noticed the various kinds of discounts that many developers are offering to persuade buyers. Most of them are just marketing gimmicks. In actual there is no reduction in the real value of the flat. There may be various expenses that the buyer is forced to incur during the possession of such discounted properties.In Thane, a developer was apparently offering a car with each sale. The promotions also claimed home loan interest rates at 8 per cent through two cooperative banks. The customers later found that the car was a bumper prize. Worse, the 8 per cent interest rate was only for the first few months!
No Developer offers discount below the base cost, which includes the cost of land and construction. However, developers do offer value-additions and incentives to prospective buyers to speed up the willingness to buy. When looked at closely, these incentives do not have any significant monetary value. It’s observed in a falling real estate market, small developers start with such practices before going for distress sale. It’s also noticed that most of these practices are adopted by Dubai-based developers. For luxury apartments in the Middle East, developers tie up with car companies or offer other such discounts. Most of the products bundled with the house are either phased out or in the process being phased out.Such offers are from smaller realtors only. The bigger ones have sufficient holding power to await the natural progression of the property cycle.According to me a simple rate cut, perhaps, makes more sense than goodies.For more view- realtydigest.blogspot.com
Comment by realtyrider — May 5, 2008 @ 2:01 pm