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How research reports mask the (grim) realities of real estate

Reports by real estate consultants and analysts are typically euphoric, but they gloss over actual events, including that several transactions that were hanging were concluded due to the recent stamp duty in Maharashtra.

The stamp duty cut is the trigger, but seeing it in isolation is being blinkered. Several types of transactions are underway.

The stamp duty cut is the trigger, but seeing it in isolation is being blinkered. Several types of transactions are underway.

There has been a flurry of bullish and ultra-bullish research reports on the real estate sector in recent months. As a well-wisher of the Mumbai real estate industry, I normally share the ones to builders that have something encouraging and insightful.

By the start of December 2020, the remarks by developers were along the lines of “It’s nice to read such good things. But unfortunately, as an industry participant I am not feeling it”. In the last two weeks the euphoria in select brokerage reports reached such a crescendo that one of them folded up and replied: “Yeh bahut jyaada ho gaya. But it makes me feel better.”

It is hard to blame analysts of stock brokerages. Liquidity and markets are in such an unstoppable mood that it makes little sense to bring caution into the picture.

Besides there is hard data to give rise to optimism—the property registration data in Mumbai. Registrations zoomed between September and December, with the tally rising over 100 percent in comparison to last year.

December 2020 was the best month Mumbai has had in terms of registration ever. The record tally of 19,584 in December allowed CY20 to end at an honourable 65,000 registrations.


Frequent readers of this column will know my position on the structural issues that plague Mumbai real estate. Hence, I have myself been surprised to an extent with the registration data number.

To understand the phenomenon, I decided to visit registration offices as well as intensify my interactions with brokers. It didn’t take long to figure out the ground reality that was driving the surge in registrations.

The stamp duty cut is the trigger, but seeing it in isolation is being blinkered. Several types of transactions are underway, but three deserve a mention:

Builder sales: I am often accused of being unfair to the industry, but developers deserve credit for waking up to the market reality and slashing prices. Stamp duty is helping in closing transactions, but it will be churlish to deny that developers have created their own fate by giving attractive deals. With a coordinated effort, many fence sitters have been converted into homebuyers.

Resale transactions: Resale transactions are traditionally 2/3rd of the market. With the price aggression shown by developers in recent months the proportion of resale deals may have reduced but will still be a dominant one as there is price correction across the board. Investors are exiting while end-users are upgrading.

Letter of Allotment to Registration: It is no secret that many buyers prefer buying apartments via a ‘letter of allotment’ with a developer. Registration is thereafter done closer to possession to ensure capital is not blocked at an earlier stage. With the stamp duty cut many old sales have been registered now. It is tough to ascertain how large is this audience in the overall scheme of things, but I would hazard a guess that it would be around 15-20 percent of registrations.

Additionally, there is the phenomenon of buyers cancelling their earlier deal with the developer and then re-registering again at the lower stamp duty of today. It is tough to determine how widespread this is – but the stamp duty cut has certainly brought in newer ways of doing transactions.

Reality in Realty

Here is the problem. While registrations are down only marginally due to the above factors, according to Knight Frank, sales are actually down 20 percent despite developers launching price cuts at a magnitude that has been unparalleled in at least a decade. Given the shrinkage of homes and price cuts, it is likely that overall sales value in 2020 would be down 25 percent.

In comparison to 2018, the decline is even sharper. This in an environment where every stakeholder has thrown the kitchen sink to attract sales.

COVID-19 did create a washout and semi-washout for five months in the year, but that has been compensated with the time-bound stamp duty forcing buyers to close transactions.

Plenty of Challenges

The challenge for the industry has been in the inflated cost structure of real estate projects that makes it bereft of any meaningful absorption. Homebuyers are reluctant to believe this – but at today’s depressed prices it will be a small minority of developers who are making a meaningful profit.

Fortunately, there has been an FSI premium cut announced by the Maharashtra government. It is the last arrow in the quiver to revive Mumbai real estate.

That will likely lead to a meaningful cost reduction for developers – some part of it that may be passed on to the homebuyer. Builders should keep the aggression going on and push to attract demand. The engine and momentum need to be sustained.

It will be a tragedy for Mumbai real estate if after everything starting to fall in place for them – developers go back to the old ways and play in the hope that it will succeed in future. It won’t. And even the most euphoric research report will not make them feel better.
Vishal Bhargava is a real estate enthusiast who views and reviews new projects, when not busy with his newstoon platform Snapnews. The views are personal.

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