The unsold inventory of homes in the Mumbai Metropolitan Region (MMR) hit a new high as launches outpaced sales in India’s most expensive housing market. The number of new units available for sale reached almost 340,000 units on September 30, according to data computed by real estate intelligence platform Liases Foras. This number is almost 5x the annual sales of developers in the region.
More than a third of this unsold stock is located in Mumbai city, with the rest in locations such as Thane, Panvel, Navi Mumbai and other extended suburbs. Spurred by an FSI discount offered by the municipal corporation, developers in Mumbai went into overdrive in signing new projects. Approvals for new projects last year rose 5x in comparison to a normal year. Those approvals are now seeing conversion on the ground as builders launched projects in a flurry during the festive season.
From the limited sample size I have evaluated over the last three months, it is clear that developers are very focused on keeping affordability and the ticket size in check. That’s reflected in the pricing of the inventory.
In Mumbai, 30 percent of the inventory is priced below Rs 1 crore, while 70 percent is less than Rs 2 crore. Contrary to the view held by many commentators that larger homes have been all the rage since COVID-19, 75 percent of the inventory comprises 2BHK units and smaller configurations.
What does this mean for the broader market?
Vibrant: Notwithstanding the deceptive numbers showcased by the property registration data, it’s undeniable that aggression from developers has dropped sharply over the past six months. With inventory at record levels along with the expectation of more launches in the coming quarter, developers will once again move into top gear to attract buyers.
Sales cycle extension will put pressure on the debt meter: Numerous launches are having an impact on the typical cycle for sales closure as buyers evaluate multiple options. With most mid-level and lower-rung developers borrowing money to make their large pre-launch payments, a modest extension in the sales cycle is going to hurt the finances of projects disproportionately. A key determinant in managing the sales cycle will be the velocity of construction progress.
Prices: The common expectation in the industry is that ‘home prices will not rise but will not fall either.’ That may sound as a modest expectation, but I suspect the market is underestimating the wave and depth of supply that is coming in. We are entering a phase where a majority of undifferentiated projects will need to make their prices very aggressive to lure customers. In my view, 80 percent of the projects will have lower prices in 12 months compared to the prices today.
Stalled projects: This is the most contentious part of the phase. On the one hand is the argument that regulatory scrutiny and developer evolution will ensure that the number of stalled projects will be negligible. On the other hand is the view of the cynics, who believe stalled projects are just a matter of time as the environment deteriorates, making developers abandon projects. I am tilting more towards the optimistic side, wherein I see developers compromising on pricing (and quality) instead of abandoning projects.
Due Diligence: There is no sure-shot formula in judging the fate of an under-construction project. Even taking a bet on seemingly strong and heavyweight builders has disappointed enough buyers by now. The easy way adopted by developers is to provide a distant date for project completion (one project has set its completion date in 2036) on RERA to have adequate buffer for delays. Yet diligence across multiple factors — not just price — will be of critical importance.
On June 18, I wrote that the perfect storm is round the corner for Mumbai real estate. The storm has not yet fully arrived. But it is very much in sight. The industry should brace for a challenging year.
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