Real Estate Market-January 09 Review. Trend and Other Significant Developments
Impact of Economic Slowdown on Real Estate Sector. On the Ground Evaluation -Hyderabad .........Exclusive Ventures -Jan 2009
Market is beyond reasonable cure. Interest rate cuts, price reduction, advertising campaigns…nothing works
While the market was damp since January 2008 itself, with resultant stagnation in rates, recent months have seen fast reduction in demand. The situation is becoming grimmer per day. The builders had wished away troubles earlier, by saying that things will become okay in few months. But now the fact that this is no temporary phenomenon is being understood by most builders.
Those who understand and admit that the situation is grave, will at least be able to develop suitable action plan and protect themselves from going under. The others who refuse to believe, will dig their own grave.
Mere reduction in sft rates by couple of hundred rupees is no more going to enthuse buyers. No amount of advertising and marketing blitzkrieg is going to help. The situation is currently beyond cure by such means.
So what is wrong?
The core issue has been the too rapid increase of price with buyers unable to keep up with the rising costs of owning a property. There was boom when economy blossomed and developers brought-in a number of good quality projects, with new designs and innovative amenities.
The buyers were fascinated and started buying and as demand rose, builders jacked up rates, earning as high as 75% profit margins. By first quarter of 2008, people who could easily afford had all bought properties at incremental higher rates that the builders offered.
The stagnation set-in, since there were few people left, to buy at exaggerated rates. Most of the people who were willing and happy to contribute to the developer's demand for very large profit, had already bought. The effect of stagnation was compounded by increased availability, since scores of new projects planned earlier by developers started hitting the market.
The economic slow down had started in early 2008. By Mid 2008, situation worsened. The highly publicized collapse of a string of Financial Institutions in US, brought the fact out into the open…....that the American economy is in bad shape and all dependent countries like India, will be severely affected.
The writing on the wall was clear by the first quarter of 2008, but in their hope to make more money, developers kept on releasing new projects, even till October 2008. With the news of recession, job cuts and bank collapses spreading, buyers simply vanished.
What is the remedy?
The economy is definitely under tremendous pressure. Business is down across all segments. Jobs are under threat. There are no short cuts to solve the problem. No amount of Free Gifts, Interest Rate Cuts, Price reduction, Advertising etc are going to work.
The only cure is passage of time! The price had increased too fast which was unnatural. If price do not fall substantially, stagnation will continue till such time, the inventory of apartments get largely sold (one by one) and availability becomes low.
Hypothetically, though, its possible to improve number of new bookings by reducing price considerably. However this is not likely to happen, since most builders are unable to or do not want to do that.
Cosmetic price cuts or selling apartments 30Km away at Rs.2000/sft, or selling under 20Lakhs but at rates of Rs2600 or 2800/sft is not going to help. No one is simply going to fall for "under 20Lakhs" trick! Buyers are now smart enough to check common area percentage, common wall, specs, and the overall rate per sft to see whether he is being duped by the under 20Lakhs "Affordable" tagline.
What the buyer wants is real large reduction right in the hot suburbs."If that is not possible, then so be it!", that is the thinking of buyers right now.
So what do the builders do?
1. If a builder has around 70 % booking he can easily build and complete the entire project.
2. If the booking is lower or spread over different blocks, he HAS to talk to buyers and consolidate all bookings into one or two blocks and carry on with the project.
3. If booking is less than 50%, he need to inform the fact to buyers and try and take them long by extending delivery period by 2 or 3 years. If he has money (which is very unlikely , he should cancel bookings and return money.
OR
the builder should crash the price to no loss -no profit levels (this should be the REAL no loss -no profit level ) and sell 70% units and hold 30% for selling later. (Off course builders with less than 50% booking will not come forward to do this, though, this looks to be the most feasible option if they have to continue to build!)
4. Conserve Money! Lay off, Sell all those Mercedes and recently bought BMWs!Reduce office space to 1/4th. There is no point in spending lakhs on news paper and TV ads. The odd booking that they get will not help even to pay for office driver's salary, over the next couple of years. Wait for the basic economic condition to look up, and re-launch projects with attractive price cuts.
5. Redesign projects, make smaller apartments and sell at new VERY LOW rates if they are keen to build now! (Well.. re-design is happening but they still want rates close to Rs.3000/sft. That simply won't work!)
Post Dated Cheques are Floating all around:
The wheel has really turned! From a state of being a bunch of non respectable blokes, the buyers have suddenly become Obamas, in the eyes of Builders. The same builders who used to keep buyers waiting in the corridors of their once busy offices and give "one minute grand audience", are now begging for appointment with buyers.
For the builders, it's a new experience. From being mighty cash kings they are reduced to giving post dated cheques of 6 months validity, for even 1 Lakh refund. In a few months, there is definite possibility that several cheques would bounce and few MDs and Chairmen could be found cooling their heels behind the cold confines of local police stations. If the builder is liable to refund as per terms of agreement, and is unable to do so, and if you are fully convinced that he can not pay soon, insist on post dated cheques.
Bouncing of cheque is a serious offence with punishment of 2 years in jail and double the bounced amount, as fine. The lower courts have been asked by Supreme Court to deal with bounced cheque cases, swiftly. There have been several instances recently, where prominent persons have been arrested even for bouncing few lakhs of rupees.
All those who have collected Post Dated cheques should strictly deposit the cheques in time. If a cheque bounces, give written notice to company informing that cheque has bounced with copy of bank notice and demand payment within 7 days and if payment is not received, inform that case will be filed. Engage lawyer and immediately file complaint.
Ensure that you have a bank account in India for depositing cheque. The bank should have your latest address. Bank will by routine send bounced cheque to address given at time of account opening. The last thing a buyer would want is non delivery of a bounced cheque! This is very important. Go ahead and update bank records.
Brace yourself for Delays.
Except projects with more than 75% booking, others will not be able to deliver property in time. Well.. we have to appreciate the physical situation on the ground and agree to this reality. Such delay will be natural and one has to go with this delay. Canceling in such projects will be absolutely foolish. Money simply will not be there to refund. One should hold on and wait for delivery.
Several projects with meager bookings will be forced to slow down or completely close down operations, till bookings improve. The cash flow will be insufficient, to continue building at fast pace.
There are few projects with external funding. But the funding will only be a percentage of total costs. So they would start off with fanfare and then simply cool off after building few floors.
One should be very careful in booking in newly launched large projects till situation improves. Whether its DLF, Unitech or Indu or whoever, there is every likelihood that the money would get stuck.
Impact of Fraud committed by Raju and Family
The gigantic fraud, said to be in the range go Rs.10000 core and more committed by Mr. Raju and his family members has shaken the confidence of home buyers. The fact that they systematically defrauded a public limited company of cash and used it to buy land in the name of benami companies which later sold the same land to Maytas Properties and Maytas Infra is throwing up questions of trust.
The question that everybody asks is .. "If Mr. Raju could have easily robbed people of thousands of crores, can we believe and trust others in Hyderabad?" …. We need to appreciate the fact that the concern is absolutely valid. It would be surprising if such questions are not raised.
All business dealings with Hyderabad based companies have been affected. Not just real estate, due to the negative vibes created by Rajus of Satyam. It will take time for people to get used to the fact that Satyam was an exception and get on with their lives and business.
[NOTE: Incidentally, if you have knowingly or unknowingly bought land or any properties from one of the Satyam scam related entities (
click to see Partial list of 275 Fraud Companies), it would be advisable to seek legal opinion and ensure that suitable action is taken to protect your interests. Ideally all holdings should be sold off to others, who are okay to take risk. If not, go by lawyers opinion. Our Panel Lawyer is ready to assist. The Minimum Fee is Rs.2500 and is payable directly to lawyer. ]
Timing the Market. Booking in Good Reliable Projects
There will be opportunities to buy good properties at attractive rates in the market. Look out for them. It many not be possible for individuals to exactly time the market and hit at the lowest ebb to buy an apartment or villa. Instead negotiate and settle at the best rates and ask for price protection clause in Sale Agreement. If the builder is forced to reduce the rate below your price, later, he should automatically re-adjust your sale price too.
Be fair. Do not blame builders after having acted unfairly.
Just because market is down, one should not suddenly turn into Mr. Hyde. Ups and downs are part of life. Its a natural force that balances the economy. It would be absolutely unfair to turn mean and cancel bookings, just because market is down! Projects can be built only with bookings and cancellations should be avoided unless one faces job loss and an uncertain future. Its definitely wrong to cancel bookings in a project which is already approved or where work has commenced.
If you are aggrieved that the builder is selling at lower price than your booking rate, then you could sit down and negotiate with builder, and attempt to bring price down.
The Outlook
As discussed above, there is no immediate cure for the situation. Real Estate is as much part of the economy as any other sector. Unless the country shakes off the impact of slowdown and business and industry flourish, with possibility of job addition and not reduction, we can not expect a turn around. The business/ industry turn around can not be expected to happen, unless US and Europe comes out of recession.
So we are in for a long haul, may be an year or more..........
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