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Realty firms slash margins to cut inventory

Timsy Jaipuria, The Financial Express

June 21, 2011

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With home sales slowing down in the wake of rising interest rates, developers are lowering inventories by selling at lower margins ranging between 3% and 10%.

Out of every 10 unsolicited commercial message a mobile subscriber gets a day, almost nine are from real estate developers or property brokers. Real estate analysts said developers, particularly the smaller ones, are easing their huge inventories by selling at a thin margin of 3% and the only way they can make up for their losses is by a higher volume of sales.

During boom time, margins range between 30 and 50%. The slowdown in sales is best understood by the country's top two real estate players — DLF and Unitech — which recently stated that slower sales are leading to a build-up of inventory, which may see some price correction, leading to margin pressures.

Things are not going to change in the near future and analysts feel property prices will undergo further correction by 10-15% in the next six to seven months due to further monetary tightening.

A recent research report on Unitech said margins would continue to remain under pressure. “We believe that cost overruns will impact margins over the next two quarters. Margins should start improving as revenue contribution of old projects decline,” it said.

However, the lowering of margins by realtors has had a positive effect on clearing piled up inventories. Gurgaon has seen the highest decline in inventory during the last two quarters despite a slew of launches, a JP Morgan note observed.

Similar is the case with Noida and Greater Noida, which have seen unsold inventory over the last eight-nine months slowly getting absorbed with launches being high in select areas and categories.

The JP Morgan note also adds that unsold inventory stands at eight months in Mumbai; while in Chennai and Bangalore it is 11-12 months.

KPMG governance, risk and compliance services (real estate vertical), manager Manish Karsija said, “In the recent past, there has been growth in demand for residential properties. There have been new launches in Noida, which have seen significant positive response from customers.

In Gurgaon, absorption has been remarkable as against the other markets.

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