Mumbai developers pay the price for not catering to budget segment
About 70% of the city’s unsold inventory is priced at 1 crore, whereas household incomes average 7.5 lakh per annum
It is always darkest before dawn, and this holds true for the Mumbai property market. The year 2015 started with a lot of hope, but the year did not play out as anticipated. The city’s residential realty market performed way below expectations, partly because of pricing.
As per records, unsold inventory in the Mumbai Metropolitan Region (MMR) stands at a massive 77,000 apartments; it will take almost 11-14 quarters to clear off this inventory against a healthy expected cycle of 4-6 quarters. Only about 3.5% of this inventory is completed or ready for possession.
It is easy to put the entire blame on slowing demand, but the reality is that an astounding 70% of the unsold inventory is priced at ₹ 1 crore and above. If we compare this to the average annual household income of a Mumbaikar, which is only approx. ₹ 7.5 lakh, we get a clearer perspective of the slowdown.
A generally accepted yardstick of affordability says that the cost of a home should not exceed about five years of combined annual household income. Anything above that breaches the affordability barrier. Also, it is the affordable housing segment that is driving most of the demand in Mumbai, and such housing must necessarily be priced either under ₹ 30 l akh or between ₹ 30-65 lakh. However, there are no projects with units priced under ₹ 30 lakh, and very few in the latter pricing segment. Mumbai’s builders are basically catering to a market segment which has no demand, so the obvious result is poor sales.
This situation cannot change over night, as t he developers started these pricier projects in response to a then thriving economy, foreseeing potentially robust demand. The economic slowdown over the past two years put paid to those projections; price-sensitive buyers have been playing the waiting game, waiting for prices to come down before they invest. However, builders cannot just reduce prices, since the cost of construction, interest rates and other financial liabilities have remained the same or even risen in the recent past.
The options are clear: either wait for the economy to grow and for buyers to be more comfortable with paying high prices, or resort to discounts and i nnovative f i nancial structuring to catalyse sales, recover investment and bring in liquidity for further projects. Most builders in Mumbai have chosen the first route, but those without deep pockets have resorted to the latter.
Given their urgency to recover costs and bring their f i nancial books i n order, Mumbai’s builders have started offering attractive schemes to woo borrowers and at some places even reduced the prices. The result basically translates into marginally reduced prices. To illustrate – the average price of a 2BHK in Mumbai was around ₹ 3 crore in 2014, and this has come down to around ₹ 2.9 crore in 2015. If we consider Mumbai Metropolitan Region (MMR), then the figures stand at ₹ 1.32 crore and ₹ 1.31 crore.
In percentage terms, there has been a price reduction to the tune of approximately 0.95% in MMR and 3.25% in Mumbai. The average persquare-foot has reduced from ₹ 13,020 to ₹ 12, 896 in MMR, while i n Mumbai i t has dropped down to ₹ 19,681 from ₹ 20,125.
Trends For 2016
These reductions may not look spectacular or attractive enough for buyers. However, things do seem to be working out in the long term:
Developers are keen to reduce their inventory level, and are offering discounts and better deals. This would definitely attract buyers and investors
Interest rates on home loans offered by banks are coming down; even if not to the expected magnitude, but still enough to give a definite advantage to home loan seekers.
Moreover, the country’s overall economic scenario is improving, and all major fundamentals point towards a 2016 that looks a lot better than 2015 in terms of economic performance. The indicators point to healthy growth and rise in sales as well as prices and profits by 2Q 2016, by which time our markets will be much more settled and gearing towards an upward trajectory.