The Pune residential realty market seems to continue to be plagued by an ever increasing inventory of flats for sale and the market remains in a mode of a gradual downward drift. While on the face of it, it seems that the news is bad in reality there is good news below the surface. Prices have stayed virtually stagnant over the second half of 2015 (as was the case in the first half of 2015) with an overall increase of only Rs.21 per sqr ft. representing a 0.43% increase for the past 6 months. The annual increase for 2015 has been a miniscule 0.7%. Despite all the negative news that has been emerging over the last 24 months, 2015 saw a huge increase in the total number of projects launched during the year at 1,206 new project as opposed to 758 new projects launched in 2014 this represents a whopping increase of 59%. Inventory available for sale (consisting of ready possession and under construction flats available for sale from developers) too has risen by 55% from 67,181 units in December 2014 to 104,565 units in December 2015. The available inventory for sale now stands at 34.29% of the total number of flats being developed in December 2015 as compared to 27.94 % in December 2014. The silver lining however is that sales numbers over the past 3 periods of 6 months (H2 2014, H1 2015 & H2 2015) have been extremely stable at about 44,000 units for each half year. The annual off take in 2015 has been 88,815 units down only 11% from 2014 where 98,968 units were sold. This indicates that a large number of home buyers continue to believe that where there is a need to buy a home this is the right time to do so. The good news though lies in the fact that people’s affordability has risen over the past 24 months. While average home prices having increased only 6% over the last 24 months, for the most part salaries have on average risen over 20% for the same period. This coupled with lower inflation as well as lower interest rates has provided prospective home buyers with industry.
The trigger awaited is the switch in sentiment since affordability has already seen an improvement. The primary reason prices continue to be anchored down is the increase in the total supply of projects and number of homes in the market. The total inventory (gross supply i.e. all homes under construction as well as ready projects with over more than 5% inventory for sale) has increased from 240,432 homes over 2,683 projects 12 months ago to 304,905 homes across 3,312 projects. A net addition of 65,325 homes across 629 additional projects. This increase of gross inventory of 26.81% is significant. While the gross stock has risen 27.17% in the past 12 months, the inventory for sale (inventory with developers for sale) has shown a steep jump from 67,181 homes a year ago up to a record 104,565 homes at present. This 55.65% jump in inventory for sale is the concern area. Clearly there will be some projects and locations that will not find favour amongst home buyers and these projects will find it extremely difficult to achieve financial closure. As a result, there is a potential for some projects being grounded and stuck mid-way till the market sees a substantial turn around. The overall stress is visible in the percentage of inventory available for sale which has crept up over the past few years with the last 12 months showing the greatest jump of 6% increase taking inventory available for sale up to 34.29% The half yearly price increase trend continues to be virtually flat. As stated in our last report, the expectations of a sharp price correction do not seem to be materializing. However, there has been a real reduction in average prices if one were to factor in inflation. When assessing the prices on a simple average basis, the overall market has a price increase of 0.69% over the past 12 months. The average price for the overall market is currently Rs. 5,096 per sf.
On assessing the inventory for sale by price point over the past 2½ years, there is a major jump in inventory for sale across all price points, significantly though, the largest jump in both percentage terms as well as absolute terms is in the budget segment where the total inventory for sale has risen 239% from 18,109 units to 43,396 units. This segment constitutes 41.5% of the total inventory for sale in unit terms.
ASSESSMENT OF SALES OFFTAKE
INVENTORY FOR SALE VALUE AND SQUARE FEETThe gross value of the inventory for sale stands at Rs. 55,323 crores. (See Fig 4)
SUB MARKETS WITH MAXIMUM NEW STOCK ADDED
CONCLUSIONWhile the big picture shows a challenging scenario, the fact is that the market has expanded in terms of supply and at the same time, while sales numbers haven’t increased proportionately, they continue to happen at a steady pace. This impact of increased purchase options for a reduced set of customers has led developers to see a double impact in terms of individual project sales, however, given the fact that sales continue, barring a few stray cases, unless something drastic is done to bring down input costs (cost of land, cost of approvals, time of approvals, material costs), we believe prices will not see any significant correction. Given how much the government relies on stamp duty and VAT from the residential housing sector, it is time the government looked at boosting revenues from the housing sector by focusing on generating volumes at lower tax rates rather than excessively burdening home buyers with increased tax rates. A stamp duty rebate for stamp duty paid between now and 1st April 2016 for example could kick start the home buying cycle and move people who are on the fence to the buying side. Faster sales, increased momentum and a higher GDP growth rate after all is in the interest of the entire economy including the home buyers who will end up building their equity in their homes sooner rather than paying rent. On a different note there has been tremendous talk about the real estate regulatory act being passed by the central government, however this did not fructify in 2015. All indications are that 2016 will be the year the act is passed. There are a large number of conditions in the Act that transfer the risk of development as well as market conditions such as price volatility, construction delays, infrastructure development etc., currently being borne by the home buyer to the developer. While home buyers are understandably delighted by the opportunity for the risk to be eliminated from their side, it is natural for developers to price the related costs as well as this risk into their sale price thereby leading to an upward pressure in prices. Timing the market to perfection is next to impossible – therefore those looking to purchase a home would be well advised to go out and strike a deal for their dream home now. Given that all indicators show reduced interest rates in the near future, a floating rate mortgage would be advisable at the present time. It is however highly advisable for home buyers to conduct adequate due diligence when purchasing their homes. Getting a “great deal” is of no use if the money that a customer pays to a developer does not go towards construction at the site and instead goes to debt repayment or other outstanding liabilities. Therefore the single biggest thing to look for today is developer track record and the work progress at the project the customer is looking to purchase.
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