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Realty bites as sales fail to pick up on rising interest

Shubhra Tandon, Mumbai, The Financial Express

April 02, 2012


Home buyers continued to fight shy of making new purchases in the 11 months of fiscal year 2011 as high interest rates weighed and a hope of fall in prices dominated decision-making.

The properties registered with the directorate-general of registrations (DGR) fell 21% to 67,792 in the 11 months from 85,331 in the same period last year. Push to fresh sales were driven by discounts offered to buyers. "Wherever the developers are ready to provide discounts, sales are happening, but where they are adamant on pricing, sales have dipped," says Om Ahuja, chief executive officer (residential services), Jones Lang LaSalle India.

Builders offer discounts anywhere between 5% and 20%, depending on the firm commitment from buyers.

"The sales have dropped in Delhi and Mumbai over the last one year with prices going up very sharply, coupled with the rise in interest rates," says Anshuman Magazine, chairman and managing director, CB Richard Ellis India.

"Going forward, the absorptions for prime properties will slow down in areas like south Mumbai, south Delhi, central Delhi and some of the suburban areas like Gurgaon and Noida," he said.

The supply of new homes was also subdued as the companies refrained from launching new projects, as developers remained cash-strapped throughout the year. Banks and financial institutions curtailed lending after a series of alleged scams by certain real estate developers.

The Reserve Bank of India (RBI) raised interest rates 13 times in 22 months between March 2010 and December 2011 and made home buying expensive. This led to at least a 200 basis points hike in the interest rates for home loan borrowers.

"Going forward too, the sales will happen for only those properties where the prices are competitive," says Magazine of CBRE. In Mumbai, change in development control rules (DCR) or guidelines that govern the realty market also led to a slowdown in the supply of new residences.

However, with developers now proposing new projects under the revised DCR rules, fresh supply of homes is expected to improve. "Post the clarity emerging on the new DCR rules in January, the city continues to witness increased action on the launches front," says Kejal Mehta, research analyst (institutional securities), Prabhudas Lilladher, a domestic Indian brokerage.

"Developers are submitting revised project plans to the municipality to take advantage of new fungible FSI (floor space index), which is affecting execution at these projects". FSI is the ratio between the built-up area allowed and the plot area available.

In the new DCR announced in January 2012 for Mumbai, flower beds, balconies, terraces and other areas, which were free of FSI calculations till now, will now form a part of that calculation against a premium levied from builders.

According to the new rules, developers will be allowed to develop 35% of the plot area over and above the permissible FSI for residential projects and 20% for commercial projects, the Brihanmumbai Municipal Corporation (BMC) had decided earlier in the year.

"Till the time the new DCR comes into effect, which would take at least three months, the project execution is expected to be affected till then, "acting as a further dampener to sales," Mehta of Prabhudas Lilladher said.