Beware of small builders
Residential market likely to remain subdued after RBI keeps rates unchanged Compromising on developer credentials can prove to be a very expensive mistake for the buyer
During its fifth bi-monthl y monetary policy review this month, the Central Bank kept key policy rates unchanged, as was widely expected by industry analysts. Explaining its rationale behind the policy stance, the Reserve Bank of India (RBI) clarified that while retail inflation had decelerated sharply, there was still uncertainty about a favourable base effect and the full impact of a deficient monsoon on food prices.
After a better than expected growth of 5.7% during the April–June quarter, India’s GDP growth slowed down to 5.3% during July–September, mainly due to sluggishness in manufacturing growth and a slowdown in agricultural output. The quarter-on-quarter deceleration in economic growth came amid a time when India’s consumer price inflation for October fell to a historic low of 5.52% (even below the Central Bank’s target of 6% for 2016).
Despite the disappointing GDP figures, recent months have seen indications of an economic recovery. Manufacturing PMI in November reached a two-year high, with improvements reported across all major sectors. The office leasing market has also picked up in all major cities.
In contrast, the residential market continues to suffer from fading demand due to cautious buyer sentiment, elevated prices and high interest rates. The lack of any substantial improvement in housing sales, even during the Diwali festive season — traditionally a busy period for the housing sector — reflects the current subdued market.
What does it mean for real estate? At a j uncture when housing sales across most major cities saw a drop and retail inflation dropped to a historic low, the decision to hold on to key interest rates may be viewed as a lost opportunity to trigger a revival across the country’s flagging residential markets.
The residential sector would have significantly benefitted from a rate cut, contributing towards reducing borrowing costs while increasing develop- er liquidity and boosting buyer affordability. It would also have encouraged potential homebuyers to enter the market, reviving declining residential sales and effecting an increase in transaction volumes across leading cities.
Housing demand continued to remain subdued in recent months, resulting in a number of developers deferring new l aunches. They focused on completing existing projects and delayed new l aunches owing to rising unsold inventory. Housing sales remained muted even during the fest ive season, as a cautious buyer sentiment rode over discounts and attractive marketing offers. This is perhaps a signal that prevailing high property prices and high interest rates may have prolonged the stagnation in the residential market.
The festive period of September–October saw new mid-end property launches at Kandivali, Malad, and Thane in Mumbai; the micro-markets of Off-Hennur Road, Yelahanka Main Road, and Sarjapur Road in Bangalore; and the peripheral markets of Kharadi, Wagholi and Kothrud Annex in Pune.
Most new project launches during October– November in the mid- end and high- end
segments were concentrated in micro-markets such as the Greater Noida Expressway in Noida, Mulund/ Andheri in Mumbai, Whitefield and Mysore Road in Bangalore and New Town and Rajpur in Kolkata.
In ter ms of project sizes, most of the new launches in Pune and Chennai were smallsized ( lesser than 250 units), while a couple of large- sized developments (500–1,400 units) were launched in Bangalore, Mumbai and Kolkata. Restrained housing demand, coupled with supply pressures, led to stable property prices across most housing markets across the country. Capital values remained largely stable in recent months due to existing
levels of unsold inventory.
The paring of interest rates alone, however, will not be sufficient to stimulate demand. Other major challenges include the numerous bureaucratic hurdles that have led to a huge backlog of stalled investment projects, which have yet to be fully addressed by the new government. While the lack of action by the RBI does appear to be a lost opportunity, it is anticipated that the sustained deceleration in inflation will prompt a round of monetary easing in early 2015, a move that would be an important and much needed first step towards boosting the residential market.
Th e d a i l y p ap e r s a r e replete with complaints by buyers who had been led astray or otherwise victimised by fly-by-night developers who specialise in launching small one- of f projects and then wash their hands off the project. In a market environment where the exists a high degree of customer awareness with regards to most products, how can this continue to happen?
Property buyers are primarily attracted to projects by fly-bynight developers because of the low rates being quoted. What they do not realise is that these savings often come with huge potential losses in the future.
Many small- time builders have no core expertise in real estate development whatsoever - often, they are moneylenders, local politicos, uneducated farmers or even property brokers seeking to make a quick buck off unsuspecting buyers. Such developers are not interested in becoming established market players, and therefore have no stake in earning a reputation for transparency and wholesome business practices.
Such developers make their profits by using sub-standard construction materials, acquiring and building on plots with flawed or incomplete titles, circumventing or ignoring applicable development laws and neglecting to obtain all the necessary building permissions. They also accept ‘black money’ as part of their transactions, contributing to the opaqueness of the market and short-changing the government on stamp duty and registration revenues, say real estate experts.
Likewise, scores of home buyers continue to be misguided by small-time property brokers who operate in tiny segments of the larger market and have no scruples about sell- ing them inferior products on the primary or resale market. Untold numbers of buyers who avail of the services of such brokers find themselves holding properties whose defects come to light only after the transaction is over.
It is surprising that in an age where Indian consumers are highly attuned to the value that established brands bring to the table in the retail sector, a large number of Indians still patronize unscrupulous bitplayers when it comes to buying a home. We can only hope for a wholesome market environment where transparency directly benefits consumers if consumers themselves refuse to patronise operatives whose businesses thrive on concealment and false information rather than ethics and transparency.