Slow sales and a glut of properties are set to hamper the residential real estate market in Mumbai, India, and prices could fall by a further 30% according to analysts at Bonanza Properties.
The glut is likely to extend into 2013 as steady streams of new developments are launched on the market; Developers who bought land at high prices now have to bring prices down.
The overall sentiments of the market and the consistent rate of new project launches in Mumbai give a clear indication of an impending oversupply by 2012. A lot of developers in the most severely affected locations are currently open to closing sales at lower rates.
Prices for commercial properties slumped in the Indian city in 2009 and many developers switched from offices to residential in the hope of keeping profits high. But now this sector is slumping too.
Over the past 12 to 14 months, developers from Mumbai and Delhi started focusing on their home markets and launching a substantial number of residential projects. Land was bought at expensive rates and if sales continue to remain dull for longer, there would be as much as 15 to 25% correction.
Total recent residential sales about 65% of flats in Delhi and 35% in Mumbai have gone to speculators. These flats are also expected to roll back into the market.
Analysts tracking the prices and unsold flat inventory levels said the fall would continue for a longer period and prices would remain stagnant for some time because the industry hiked prices in a hurry to make quick profits soon after revival of the sector.
For Mumbai, expect a further correction of up to 35%. There may be a case that you could see 25% correction in the next two quarters by the year 2012.
As the economy shows signs of decreasing GDP growth rate, the Indian real estate industry faces its own share of concerns. Real estate developers are reeling under high debt and FDI inflows have also slowed down. The recent increase in home loan interest rates is expected to dampen the sales even further. Amidst these macroeconomic conditions, Indian real estate asset classes across the prime cities of India have seen mixed sentiments.
Commercial Real Estate
In 2012, several IT companies are looking to pre-lease office space to take advantage of the favorable commercial terms currently being proposed by commercial office space developers. Demand is expected to remain stable. However, the office space supply is expected to outweigh demand in most prime cities of India. Corporate expansions are likely to decrease due to the uncertainties in the global economic situation, which will have an impact on business budgets for next year.
Retail Real Estate
In 2012, enquiries for quality retail space are likely to remain robust as major Indian retailers are seeking to implement their expansion plans in the prime cities as well as select Tier II and Tier III cities. FDI in multi brand real estate, when finally permitted, is expected to catalyze a lot of demand from international retailers. That said, international luxury brands will restrict their growth plans to Mumbai, Delhi and Bangalore.
Residential Real Estate
Because of the prevailing uncertainties on the global market and the likelihood of further interest rate hikes by the RBI in the early part of 2012, sentiments on the residential market will remain cautious over the short term. The absorption rate – meaning the ratio of sales over inventory in the market – is likely to be low, and the incidence of new launches will decline. Rise in capital values will be marginal because of low sales.
Project-specific price increases can be expected across all sub-markets – this pertains specially to projects that are being delivered or are nearing completion. The mid-end and affordable housing segments will record healthy appreciation in capital values in the short term from a low base. We expect these trends to continue during 4Q11 and 1H12.
Meanwhile, residential developers will continue to tackle the current liquidity crunch due to high interest rates and slow sales. We will see a slowdown in construction activity for the time being. However, as demand improves, improving sales will benefit developers who will focus on execution of their on-going project portfolios.
(This guest post is written by Naveen Perla, who is Director of real estate portal Bonanza properties, that facilitates Real Estate services in India)