A home, in an altered landscape

In the new age of demonetisation, builders will lure buyers with add-on features and attractive loan schemes but a price correction is unlikely. By Nandhini Sundar

End of 2016 saw an altered landscape, with demonetisation coming in and cash dealings taking a backseat. Predictions of sluggish market, especially for the real estate sector, did the rounds, altering the scene to a buyers’ market with many visualising mounting inventories in the ensuing months. Then came the home loan schemes, with interest rates dipping, the scene for borrowing becoming attractive in the perceived buyers’ market.

The question then arose. Will developers offer special incentives to mop up this new group of buyers waiting to invest? After all, the scene faced appeared to be two sided: easier access to funds, yet others facing a fund crunch. Will the current scenario translate into special discounts, slashing of rates in the coming months to shore up the real estate market?

Interestingly a few developers have come up with attractive schemes to lure those customers waiting to invest in the residential segment. While these do not involve reduction in selling price, the payment schedule has been structured to make it easier as well as attractive for the prospective buyer.

Provident Housing, a subsidiary of the Puravankara Group, recently came up with an attractive financial plan for its ready-to-move-in homes.

EMI holiday

In partnership with leading home loan providers, the Group offers a 36-month EMI holiday to customers, enabling them to move into their apartment by paying merely Rs. 9,999 per month, equivalent to the average rental they may be paying otherwise every month. “The objective is to enable them to own their residence without altering their monthly financial outflow”, says Ashish Puravankara, Managing Director, Puravankara Projects.

The Mantri Group is offering similar incentives to make it attractive for customers to invest by coming up with a proposition of 5: 20: 75 whereby a down payment to the tune of 5 per cent of total cost of the unit would be made on booking, along with 20 per cent of the cost sourced from bank loan. The rest 75 per cent is to be paid only on possession of the unit.

Uniform pricing

Says Puravankara, “There is very little headroom for offering price cuts as construction cost forms 65 per cent of the selling price.” Stating that demand is impacted not by lack of affordability but presence of positive sentiment, he contended that demonetisation would eliminate wrongful practices and usher in uniform pricing because of the common methodology that all developers would need to adopt. With interest cost proving to be a primary factor for both buyers and developers, Puravankara averred that a reduction in borrowing cost could impact pricing positively.

Concurring that pricing cannot see a downward movement, Suresh Hari, Secretary, CREDAI, says, “Even after demonetisation, cement and steel prices have increased by 25 to 30 per cent, pushing up construction cost. As for excess capacity, it is customary for builders to hold 10 to 15 per cent as stock and this currently may be around 20 per cent which is not too high. The key factor is the cost of borrowing, both for customer and builder. The excess liquidity currently in the banks will have to find its way into the economy and this will positively impact real estate sector.”

According to Mr. Hari, the higher cost of input will further push up holding cost and together with RERA, bring in transparency in operations, permitting only those who comply with best practices in the industry to survive. “Smaller players may be eliminated as the sector will see greater consolidation.” As for demonetisation and cash flow, he added, “Cash component is part of secondary market where resale prevails. Organised builders cannot operate in cash.”

Commenting on the expectations of price reductions and incentives to decrease inventory, Irfan Razack, CMD, Prestige Group, says, “In general only 30 to 40 per cent of the stock is sold at the launch of a project by developers, with rest held on to take care of cost overruns as well as the advantage of price increase on project completion. Given cost plus pricing and thin profit margins, price reduction is not a viable option, except in certain micro-markets where prices have reached abnormal levels.”

Given the need to comply with the conditions of RERA, hurried launches in the future will be unlikely as approvals have to be in place and projects registered, averred Mr. Razack. “A slowdown in launches and existing inventories getting liquidated during the intervening period can see prices being pushed up.”

Concurring that builders are working on thin margins and ruling out major price reductions, Farook Mahmood, CMD, Silverline Realty, adds, “The current scenario of lower sales is more due to uncertainty attached with outsourcing in the U.S. and the ensuing job scenario here. If this clears, the scenario will alter, especially with home loans becoming more attractive. In cases of inventory pile-up, there still will not be a major price correction but rather some add-ons to offload it, while keeping average pricing more or less the same.” He predicts a better market in the coming months with RERA and GST featuring and “the worst now behind us.”