TO REACH A BETTER EQUILIBRIUM
Although the NCR market is reeling under the immense pressure of unsold inventory, things are expected to look up in the second half of 2014, with absorption rates as well as new launches likely to increase, says a Knight Frank report
The National Capital Region (NCR) witnessed a slowdown during 2013, and this downward trend continues in 2014 as well. Pressures of substantial unsold inventory and liquidity constraints have compelled developers to keep new launches in check. Similarly, on the demand side, consumer sentiment was weakened by the uncertain economic fundamentals and impending elections.
The analysis of the long-term moving average (eight quarters) of launches and absorption exhibits a plummeting trend since the last three years. Both new launches and absorption nearly halved during 2013 compared to the peak levels of 2010.
A further decline was observed in the first half of the year 2014. New launches shrunk by nearly 43% in the first half of 2014 compared to the first half in 2013, and stood at 35,500 units. Quite evidently, developers are focussing on project execution by deferring new launches. The absorption level also witnessed a 37% drop during the same period. Nearly 28,500 residential units were sold in the first half of 2014, which is a tad higher than the lowestever half yearly sales volume (26,000 in the second half of 2013) since the year 2010.
Nevertheless, the rate of decline of new launches is higher than that of sales, indicating that the NCR market is striving to reach a better equilibrium, according to Knight Frank India Real Estate Outlook report JanuaryJune 2014.
While the analysis of absorption and new launches could provide a fair idea about the traction being witnessed in the market, the impact on price cannot be understood without studying the unsold inventory available in the city.
A deep dive into the unsold inventory levels of the NCR is essential in order to comprehend the health of the market. In June 2014, nearly 1,67,000 residential units remained unsold in the NCR market, growing at a compound annual growth rate (CAGR) of 15% since the last three years.
Quarters to sell or (QTS) were calculated to detertimine the number of quarters required to sell unsold existing inventory in the market. A lower QTS indicates a healthier market. In June 2014, the QTS for the NCR market stood at 9, implying that the current unsold inventory would take more than two years to be fully absorbed.
This is undeniably high and has been inching upwards every two quarters, indicating a weakening market. In fact, the QTS of the NCR market has risen significantly from 5 in June 2012 to 9 in June 2014. The recent slowdown in project launches was needed to control further inventory pile-up.
Although the NCR market is reeling under the immense pressure of unsold inventory, it is expected to gain some momentum in the second half of 2014. Market sentiment has already seen some improvement post the elections.
The survey also re ported t hat supply- side stakeholders were quite bullish about the residential sector and expected better launches and sales volumes by the end of the year.
Sales inquiries have gone up in the past month, indicating some sort of revival.
The union Budget of 2014 has also proposed constructive measures that are likely to have a positive impact on homebuyer sentiment and give a fillip to developer activities. As per forecasts, new launches would increase by 10% to 37,000 units in the second half of 2014, compared to the second half of 2013. Absorption was forecasted to increase by 17% to 30,500 units in the second half of 2014, compared to the same period in 2013.
A lower growth in project launches compared to the sales volume was likely to have a positive impact on the mounting unsold inventory levels and QTS ratio.
Even with a recovery in the second half of 2014, the overall yearly numbers will be slightly below those of 2013. New launches and absorption for the year 2014 will stand at 72,700 units and 59,000 units, showing a decline of 24% and 17% respectively.
Despite showing signs of weakening, the NCR market has been able to hold residential prices. However, the growth in weighted average prices has dwindled significantly in the last couple of quarters. The weighted average residential asking prices in the NCR have increased by 5%,from ₹ 4,195 per sq ft in the first half of 2013 to ₹ 4,400 per sq ft in the first half of 2014.
Developers are persistent and continue to launch projects at higher prices, claiming increased input costs and higher borrowing costs. However, they have taken cues from the weakened consumer sentiment and have been offering EMI sharing schemes and freebies.
Going forward, the report forecated that prices would increase by 2% in the second half of 2014 to ₹ 4,500 per sq ft, in view of the recovery in sales volume.
The majority of the recent residential development has taken place in the peripheral micro- markets of Noida, Gurgaon, Ghaziabad and Greater Noida.
Where the Capital city of Delhi was concerned, no new supply was infused into the Delhi market since the last two years. The Delhi Development Authority’s recent approval of the land pooling policy was expected to unlock nearly 40,000 acres of land in the Delhi market. As per the policy, developers in Delhi-NCR may acquire land directly from farmers who are willing to participate in the process, wherein they get back 40 % to 60% of the developed land.