Don’t wait for real estate prices to fall further

real estate

The real estate sector has been witnessing a slowdown since 2013. Since developers are focusing on offloading their existing inventory, there have been few project launches in the recent past.  With demand on the decline, land prices have also taken a hit. A recent report from Ambit Capital says that land, and hence apartment, prices may soften further in 2018-20 due to the activities of the real estate regulator and the National Company Law Tribunal (NCLT). For end users, this raises a question: Should they wait for prices to soften or should they purchase apartments at the prices and discounts available now?


According to the Ambit report, real estate regulators in the states are pro-consumer and are quick to hand out punishments to developers on consumers complaints. This has made developers even more reluctant to launch projects. They want to wait and watch for some time before they launch their next project. If at all they launch them, they are doing so with conservative deadlines, which they are reasonably sure of a meeting, so as to avoid the fines and other punishments that the regulator could mete out. These longer timelines have, however, reduced developers’ internal rates of return (IRR) on projects, which have shrunk from the low twenties to the mid-teens. At such levels of IRR, developers can’t afford to buy land parcels in advance and sit on them. They have to complete one project, sell it, and then buy land for the next project.
The activities of NCLT could also lead to land becoming cheaper, says the report. About 60 companies are already in the bankruptcy process. As many of them are wound up, their land, some of it prime, will come into the market. As supply increases at a time when demand is not strong, it could lead to land prices tumbling further. In 2019-20, developers could launch projects at lower prices using such land.


Real estate experts don’t fully agree with the conclusions of the report. “The NCLT process can be long-drawn. Also, not too many parcels of land may come into the market due to this process, so the impact on prices may be limited to some pockets,” says Saurabh Shatdhal, managing director, developer and investor services, India, Cushman & Wakefield.


Experts say that even if land prices come down, apartment prices may not necessarily fall. “Developers’ development costs have risen. There is also little scope for using money gathered for one project to finish another, due to RERA rules. These days a lot of the finance that developers get from institutions is debt, which has to be serviced. Developers are also able to sell their projects only when they are nearing completion, which means their carry cost has increased,” says Shatdhal. Adds Ankur Dhawan, chief investment officer, “Even if land prices fall, developers may choose to enjoy higher margins rather than pass on the benefits to buyers.” He adds that only grade A developers are in a position to buy land today, and they are not likely to lower apartment prices since their projects still evoke a good response.
Real estate experts are of the view that end-users should go ahead and buy apartments at the current prices. Today, they can even hope to negotiate a discount of around 15 per cent with developers. They should do the due diligence on the developer and preferably buy from a tier one developer who has a track record of timely delivery and quality offerings. “If you buy from a tier two developer, make sure that he is RERA registered. This will at least ensure that the project is delivered on time,” says Dhawan.


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