The cumulative 175 basis point rate cut that has accrued since 2014 is finally getting transmitted to end users. You can now avail a home loan at 9.25 per cent per annum — 1 per cent lower than what you would have had to pay a year ago. On a 20-year loan of Rs 50 lakh, this represents an EMI drop of close to Rs 3,300 and total interest savings of nearly Rs 8 lakh. The recent demonetisation, coupled with the fact that retail inflation just came in at an encouraging 14 months low, has increased the likelihood of a further 50 bps rate cut in FY17.
Here’s the problem: the demand for real estate in the NCR region has remained doggedly sluggish since 2012. The previous bull market had triggered off a vicious cycle that has the industry reeling even half a decade later. Indiscriminate price rises had propelled realty prices to irrational highs, rendering them unaffordable. Demand subsequently took a nosedive; leading to stockpiles of unsold units and throwing developers into a tizzy. Bungled project timelines and cancellations of new projects ensued.
Devina Ghildial, managing director, South Asia, RICS, observes that residential launches, sales, and price appreciation in the NCR are at lower levels compared to even the previous year. “Land values, coupled with issues related to project clearances and cost of capital are major factors that have continued to add stress in the market,” notes Ghildial.
A slow market is not necessarily a bad time to deploy your money. However, this decision must be taken in the light of two consequential questions: will leveraging pay off as a long-term investment (10 years or so), and what’s the medium-term outlook (3-5 years) for real estate in an area like the NCR? Let’s consider both. It’s estimated that 23,000 units of residential real estate were sold in the NCR in the first half of 2016; down 8 per cent compared to the corresponding period in 2015. Project delays and elongated gestation periods have finally got the better of home buyers, who are now displaying a distinct preference for ready-to-move-in projects, or for projects that are nearing completion. As an asset class, real estate is having to jump through many more hoops before it finds a place in the NCR homebuyers’ portfolio.
An ASSOCHAM report published earlier this year pointed out that reduced prices and interest rates notwithstanding, demand for residential properties in the NCR actually declined by 25-30 per cent over the past year. What’s more; the levels of unsold inventory at over 200,000 units are staggering!
The only locations that have witnessed any semblance of a healthy demand in 2016 are the relatively affordable Greater Noida and Noida Extension areas, courtesy the upcoming Noida-Greater Noida Expressway, and select locations in Gurgaon, driven primarily by the fact that a larger number of projects are already in the final stages of completion.
Coupling the unsold inventory numbers with the average sales tempo for the past eight quarters yields an important statistic called the QTS (quarters to sell). A lower QTS is the outcome of higher demand, and is therefore a reliable indicator of a healthy market. Divide 200,000 unsold units by an average demand of 50,000 units per annum and you arrive at a QTS of 16; implying that it’ll take another four years for the NCR region to clear out unsold inventory alone. Greater Noida and Ghaziabad, at 15-odd, have the best QTS numbers. Gurgaon and Noida are in the 20-22 range, whereas Faridabad’s QTS, at 32, is out there in the orbit.
Real estate developers, fearing having to mandatorily register their non-completed properties under the Real Estate Regulatory Authority in 2017, are now engaged in a collective scramble to complete their under-construction projects rather than launching new projects. That’s not a bad thing when you consider how pointless it would be to add new units at a time when we’re still four years away from clearing up existing inventory. Thus, the next few months are likely to witness several pending projects getting completed, leading to improvements in sentiment and buyer confidence. In the meantime, developers too seem to have at long last yielded to the resistance; having slashed prices over the past few months.
There are numerous push-and-pull factors in play in the NCR real estate market at the moment. The slowing down of new project launches and the shift of focus to completing existing projects should, over time, help reduce levels of unsold inventory and bring the overall QTS number down to a healthier range. Further rate cuts coupled with the gradual breakdown of price resistance from developers are likely to act as demand catalysts. Demonetisation will have a limited impact on the primary sales segment in the NCR, as most deals are transparent and loan-driven, not cash-driven.
All these factors will lead to an equilibrium between demand and supply at some point in the future. Unfortunately, that so-called ‘point of equilibrium’ is still a few years away; implying that things could get worse before they improve. “It will be a while before we see an uptick in sales, as investors and end-users continue to be fence sitters,” notes Ghildial of RICS.
Let’s come back to the question at hand: should you leverage yourself at an assumed interest rate of 9 per cent and invest in an affordable, ready-to-move-in project in, say Greater Noida or Noida Extension for a 10-year horizon? An example will help put your decision in perspective.
Let’s assume that the deal in question is worth Rs 60 lakh. You pay Rs 12 Lakh as a down payment and finance the remaining Rs 48 lakh at 9 per cent per annum for 20 years (an EMI of Rs 43,187). At the end of 10 years, you’d have paid roughly Rs 64 lakh (as down payment, principal and interest). The outstanding balance on your loan will be Rs 34 lakh. Given the glut of unsold units and the short-term liquidity squeeze created by the demonetisation, real estate prices are likely to remain suppressed for the next 3-4 years. “Prices will remain at the existing levels or correct further in extended suburbs due to lack of buyer interest despite affordable prices,” predicts Amit Bhagat, MD & CEO, ASK Property Investment Advisors.
Saurabh Mehrotra, national director, Advisory Services, Knight Frank (India) is of the view that once the dust settles, a return of end-user confidence will in fact spur the NCR real estate market ahead. “Completion of long delayed infrastructure projects, improvement of delivery by the developers, strict enforcement of real estate regulations and price normalisation will help improve confidence, and lead to the reversal of the bear phase over the next few years,” he says. After a three-year lull, let’s assume that the NCR property market witnesses a stellar turnaround; posting similar returns as it did during the last bull run for the next seven years (Residex — the NHB Housing Price Index indicates that Delhi/NCR witnessed an average price rise of 14.3 per cent per annum during the bullish phase of 2007-12, so let’s maintain that as a benchmark).
Under this reasonable set of assumptions, your property will be worth Rs 1.53 crore in 2026, representing a sub-10 per cent IRR (internal rate of return) before taxes. For higher QTS areas such as Faridabad, these numbers may in fact be turn out to be significantly lower. That too, when the decision framework is based on what are essentially optimistic assumptions: policy success, the achievement of an equilibrium, followed by a sustained turnaround. From a financial planning standpoint, a decade-long investment for such a mediocre rate of return is at the expense of reason.
Given the multitude of variables and the complexity of today’s scenario, prospective homebuyers in the NCR would be well-advised to play the wait and watch game. “A further downturn in prices could adversely affect the sector, as developers might be left dealing with non-performing assets,” cautions Ghildial. Park your money in debt funds for the moment and watch how the dynamics play out; you’re likely to discover significantly more lucrative entry points soon enough. If, however you choose to go ahead and invest immediately, you need to be selective. “Investors should look at location revaluation opportunities supported by infrastructure completions, and cherry pick projects in advanced stages of completion”, advises Mehrotra.
