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Sep 20, 2013, 04.29 PM IST | Source: Jones Lang LaSalle

Is India's residential property mkt headed for hard landing

The residential property market in India, particularly in the Tier I cities, has remained sluggish for the past 12 months, with significantly lower sale volumes when compared to the high absorption rates of 2010.

Himadri Mayank, Senior Manager - Research & REIS, Jones Lang LaSalle India

In 1959, Charles E Lindblom, the American political scientist, published a paper in the Public Administration Review entitled The Science of 'Muddling Through'. In this, he contrasted what he called the 'root method' of decision-making with the 'branch approach'. 

The root method involves comprehensive evaluation of options in the light of defined objectives, whereas the branch method involves building up, step-by-step and by small degrees, from the current situation. Prof Lindblom claimed that the root method was, in fact, not usable for complex policy questions. His verdict was that the practical individual must follow the branch approach ' applying the science of muddling through. 

The residential property market in India, particularly in the Tier I cities, has remained sluggish for the past 12 months, with significantly lower sale volumes when compared to the high absorption rates of 2010. Home loan interest rates now seem to be at their cyclical highs (but should soon decline) and unforeseen tax levies have come at a time when the industry is facing its moment of reckoning. 

In these uncertain times, the question arises whether strategic decision-making for residential property developers to improve sales should follow the root method ' a comprehensive evaluation of options, or the branch approach ' a process of muddling through. In a multiple stakeholder environment with several large uncertainty input parameters, the branch approach seems to be the instrument of choice. 

In adverse market conditions, developers want to ascertain facts on some key issues. They consider whether they should: 

  • Lower prices in on-going projects
  • Proceed with construction
  • Launch new projects at lower prices
  • Sell non-performing assets such as land 
The 'Logic' Of Residential Property Pricing 

While others require comprehensive evaluation, determining residential property prices usually entails a trial-and-error approach. During good times, prices are invented. When the going gets tough, prices are discovered (hence the term 'price discovery'). Developers continually assess the market with trial price levels to increase sales in on-going projects. To avoid adversely signalling the market (which could lead to a downward spiral) prices in on-going projects are kept 'sticky-upward'.

In the first phase, negotiations are held behind closed doors to test the market's appetite. If sales do not recover, discounts are offered up-front on the table. If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. At this stage, the market is said to have witnessed a correction. This is fundamentally a process of 'muddling through', in which residential prices offered by developers in on-going projects rise like rockets but fall like feathers. 

However, during a slowdown, developers try to register sales by launching new projects which are different from on-going projects - and priced much lower than the market average (the price levels being decided by the root method of decision making). Since new projects have a high construction risk, the lower price is somewhat justified and avoids the signalling effect to the market. 

Trouble Ahead?

Is the Indian residential property market headed for a hard landing? During the slowdown in 2009, prices in some on-going projects witnessed corrections while a large number of projects maintained stable prices. New launches were made at highly discounted prices; subsequently, a significant rise in absorption was observed as prices were termed 'affordable'. Prices then increased rapidly by as much as 30-40% (mostly in newly-launched projects) across Indian Tier I cities until end-2010, followed by slower growth in 2011. 

However, all predictions of a hard landing for the residential property market in 2011 have failed to come true. Despite slow sales, highly leveraged balance sheets, expensive finance in a high interest rate environment and rising input costs, developers have been able to avoid a market-wide crash. They have been able to generate sufficient cash flow through the gradual process of price discovery, and several factors are in their favour in the near term.

> Over 60% of residential launches in the top seven cities (mostly in cities other than NCR and Mumbai) are priced in the range of Rs. 2000'4000 per sq ft, which meets the demand of middle-income buyers

> The RBI has given sufficient indications of probable cuts in key rates during 2H12, which will improve affordability for home buyers and provide lower interest costs for developers

> Prevailing absorption rates at nearly 10-12% translate into an average absorption period of 8-10 quarters for a residential project. This implies that at average prices, any average residential project should be sold out before construction is completed

> New project launches, slow in Mumbai and NCR during 1H11 due to approval and land acquisition issues, have started to pick up and should improve cash flows for developers with land banks during 2012

> With rising input costs, developers do not want to sell below a threshold which does not justify their minimum replacement returns 

This leaves home buyers with a small window of opportunity ' the next six months, when home prices should witness marginal appreciation. After six months, a second wave of high appreciation is predicted. Are you geared for it?

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Property rates
  • Residential
  • commercial
Mumbai
Capital Values Rate/Sq ft (INR)
Aajiwali
3000 - 5000
Ambernath
3000 - 5000
Badlapur
1000 - 3000
Bhandup (West)
11000 - 13000
Chembur (East)
15000 - 17000
Chembur (West)
11000 - 14000
Dombivali (East)
4000 - 6000
Ghatkopar
13000 - 15000
Heeranandani Gardens Estate - Powai
25000 - 30000
Hiranandani Gardens Estate - Powai
25000 - 30000
Kalyan (East)
2000 - 4000
Kalyan( West)
3000 - 5000
Karjat
1000 - 3000
Khandala
8000 - 10000
Kharegaon
5000 - 7000
King Circle
17000 - 28000
LBS Marg
12000 - 15000
Lonavala
3000 - 5000
Mulund (East)
11000 - 14000
Mulund (West)
11000 - 14000
Mumbai Nasik Highway
3000 - 6000
Powai
15000 - 17000
Senapati Bhagath Singh Road
3000 - 5000
Sion (East)
18000 - 21000
Sion (West)
17000 - 22000
Tilak Nagar
12000 - 22000
Ulhasnagar
3000 - 5000
Vikhroli
11000 - 14000
4 Bunglows
17000 - 28000
7 Bunglows
13000 - 23000
Chandivali
10000 - 15000
Malad (East)
12000 - 14000
Versova
21000 - 24000
Airoli
4000 - 8000
Belapur
6000 - 9000
Ghansoli
6000 - 8000
Kalamboli
4000 - 9000
Kamothe
4000 - 6000
Nerul
7000 - 10000
Palm Beach Road
12000 - 15000
Panvel
3000 - 6000
Sanpada
8000 - 10000
Sea Woods
8000 - 10000
Ulwe
3000 - 6000
Uran
3000 - 6000
Vashi
9000 - 12000
Altamount Road
62000 - 72000
Breach Candy
62000 - 74000
Chowpathy
48000 - 58000
Colaba
42000 - 46000
Cuffe Parade
67000 - 69000
Dadar(East)
32000 - 34000
Dadar(West)
29000 - 32000
Lower Parel
32000 - 34000
Mahalaxmi
38000 - 40000
Malabar Hills
68000 - 75000
Mumbai Central
23000 - 34000
Napean Sea Road
66000 - 74000
Parel
26000 - 34000
Prabhadevi
37000 - 39000
Tardeo
41000 - 49000
Worli
36000 - 41000
Andheri (West)
18000 - 20000
Andheri(East)
15000 - 17000
Bevarly Park
5000 - 7000
Bhayander (East)
5000 - 6000
Bhayander (West)
3000 - 5000
Boisar
1000 - 3000
Borivali (East)
11000 - 13000
Borivali (West)
10000 - 14000
Dahisar
4000 - 8000
Goregaon (East)
13000 - 17000
Goregaon (West)
12000 - 14000
Kandivali (East)
12000 - 14000
Kandiwali (West)
11000 - 12000
Malad(West)
9000 - 14000
Mira Road
5000 - 7000
Naigaon
1000 - 4000
Nala Sopara (Eastt)
3000 - 5000
Nalasopara (West)
3000 - 5000
Poonam Nagar
6000 - 8000
Shanti Nagar
7000 - 9000
Shrishti
6000 - 9000
Vasai Road
1200 - 4000
Virar
1000 - 3000
Note: Price trend are based on asking rate and not necessarily on the transaction date
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