The current scenario in the property market brings back memories of early 2000 when the environment was not encouraging for the industry, feels Srikala Bhashyam
A family friend, who booked a flat more than a couple of years ago, has been waiting for the keys to his apartment for some time now. The generally cautious investor decided to invest in the property as it was promised that it would be ready in a matter of a couple of quarters at the time of booking. It's been a year now and the target date for the handing over has proved to be a moving goal post...
In fact, in cities like Bangalore, you hear many such stories of investors waiting eternally for their property to be ready. In most cases, the projects are almost ready according to the builder, but a closer look would tell you that a number of apartment blocks are unsold.
One can't help but remember the days of early 2000-01 when similar stories were told by the builders. The difference this time is that the stakes have got bigger. You have bigger and more expensive apartments which are not ready; the home loans are bigger by a few lakhs and hence the pain for the consumer is higher. Unfortunately, the current scene is unlikely to change in a hurry as there are too many negatives in store.
High interest cost
To begin with, interest rates are refusing to cool down in the last one year. While banks have managed to temper down the hike considering the sharp rise in interest (deposit rates), the home loan rates are still below the 15 per cent mark. But with property costs having gone up substantially in the last decade, the home loan rate of 12-13 per cent is still very expensive for most borrowers.
If builders are refusing to bring down the prices for apartments/flats despite huge inventory (of unsold units), it is because of the high acquisition cost of land.
Between 2005 and 2008, there was a sharp spike in land prices and this pushed many builders to create land banks with the hope of developing units at a later date for earning handsome gains. The unprecedented financial crisis in 2008 changed the equation completely but many builders are left with vast expensive land banks at a high cost. As a result, it would be unviable for them to unload at a lower price. That is one of the reasons why you have a stubborn pricing strategy being followed by many sellers despite the liquidity crunch.
High input costs
Land is not the only culprit which has made property prices soar. The high commodity prices are equally responsible for the current state of affairs and even the recent downtrend has not helped matters much. If sources in the real estate industry are to be believed, the recent negative trend in commodity prices is a drop in the ocean considering the sharp spike in prices post-2005.
In this scenario, buyers will have to be extra cautious with their investment strategy as most (residential) units which are on offer carry the baggage of risks. Investors need to follow a simple check-list to ensure the safety of investment.
Much of the risk can be avoided if purchase is made in a fully completed project. While it may look expensive when compared with an under-construction project the latter carries the risk of time which in turn means cost. More importantly, one needs to focus on the credentials of the builder. Every tough market changes the pecking order in the industry. It is no different this time.
Keywords: real estate