‘Price drop in Mumbai inevitable’

The residential real-estate market in Mumbai stagnated in 2011-2012, as buyers put off purchases on hopes of a drop in prices in the near future.

According to Knight Frank Research’s study of the residential market for June, the wait could pay off.

Stalemate

The stagnant prices now suggest a stalemate between buyers and sellers, but “market indicators strongly hint at an imminent inflection point.” Project approvals, which were delayed in 2011, have started following the change to the Development Control Regulations early this year. But they will continue to be subdued against the backdrop of the economic uncertainty.

The build-up in inventory with a 37 per cent increase in interest costs over the previous year for the realty sector and a 28 per cent drop in net profits may drive developers to bring down pricing to cut inventory. “Hence, we believe that a price correction is warranted in the medium term,” said the study by the property consultant.

The study of projects with sales potential of more than Rs 3 crore a house in Mumbai Metropolitan Region shows sales have dropped by about a third to an estimated 45,000 units during the year. Compared to the 2007 peak, the sales are down by over 60 per cent.

Such a drop in absorption should have sparked a correction in prices. But a simultaneous supply crunch due to delay in approvals by the authorities balanced the market.

Over 55,000 housing units were launched in 2011-2012, which is about 40 per cent lower than the 92,000 units launched in the previous year.

Supply was also constrained during the year as developers delayed project launches in the hopes of selling off existing stocks to ease pressure on prices.

Rising interest rates, soaring input costs including land, labour and construction material have limited developers’ option to cut prices, according to the study, as they were hard-pressed to maintain their current operating margins of 30-35 per cent.

Land cost

Land cost is the biggest factor limiting a reduction in product prices and joint development and redevelopment are in vogue.

The core residential market in Mumbai is steadily shifting north of the Mumbai Metropolitan Region as people move away from the central business districts to buy a home that fits their budget. Nearly three-fourths of the total residential units under construction is concentrated in the northern fringes.

Developers are tapping the largest chunk of buyers looking for apartments priced up to Rs 75 lakh and more than half the projects under construction are in this price bracket.

Unsold residential stock in Mumbai is estimated at about 80,000 units, about 37 per cent of the total residential supply under construction. South and Central Mumbai, which only offer products at the premium end, have the highest vacancy levels. The Navi Mumbai, peripheral western suburbs and Thane micro-markets have seen comparatively higher number of projects launched in the previous two quarters causing vacancy levels to jump.

Nearly half the planned launches next year will also be on these markets, which will come under pressure on vacancy levels and prices prevailing there. Vacancy levels are as high as 48 per cent for units launched in the Rs 2 crore and above price bracket as compared with 37 per cent overall in Mumbai.

As prices in premium micro-markets tend to be more volatile as compared with peripheral suburban micro-markets, prices in South and Central Mumbai locations such as Parel, Lower Parel and Mahalaxmi, have declined by about 10 per cent over the previous three quarters while prices in Navi Mumbai, Thane and the peripheral suburbs of Central and Western Mumbai have been stable or marginally increased.

Developers in a bid to liquidate their higher-priced inventory have been more open to negotiation in the premium segment, reducing prices up to a maximum of 25 per cent for the sake of a sizeable upfront payment. The number of cancellations is on the rise in the last few quarters indicating the investors’ worry.

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