There was a time when trading malpractices were common in the stock market. There was no independent regulatory body to govern intermediaries such as brokers, sub-brokers and depositories. There was no regulator to protect the rights of investors either. Frauds were common. In 1991/92, the Rs 5,000-crore Harshad Mehta scam came to light, exposing the loopholes in Bombay Stock Exchange systems, triggering one of the steepest market falls that lasted for two years. In 1992, the Securities Exchange Board of India was set up. Stock markets have been much more orderly since then.
Similarly, in the years leading up to the 2008 stock market crash, those who wanted to invest for a short duration were led up the garden path by agents and made to put money in unit-linked insurance plans or Ulips. They were not told about the cost structure of Ulips that enriched agents at the expense of investors. The latter not only made heavy losses on the principal but also had to pay heavy penalties while surrendering their policies. Finally, the insurance regulator, the Insurance Regulatory and Development Authority of India, intervened by capping the various fees and charges. Thanks to its intervention, the new-generation Ulips are much more customer friendly.
The real estate sector is in a somewhat similar crisis. Builders, both big and small, are financially stretched and unable to deliver projects on time. The delays range from a few quarters to years. Disputes abound. Those fortunate enough to get possession say they are not getting what they were promised - including the total area - at the time of sale. Then there are complaints about builders overcharging for certain facilities. People have, as a result, stopped trusting developers - this has led to a sharp drop in demand/prices as well as the number of launches. Most investors who have bought a house in the past few years have lost money.
Things could, however, change drastically in the next few years, due to many reasons. First, to make property builders and agents more accountable, Parliament has passed the Real Estate Regulatory Authority (RERA) Bill, which seeks to address most of the problems faced by buyers through state-level regulatory bodies and appellate tribunals that have to be set up by April 30, 2017. State-level regulatory authorities will be required to decide on builder-buyer disputes with 60 days; appellate tribunals will get another 60 days after that to address disputes over the former's decisions. The law also mandates developers to keep 70 per cent project money in an escrow account so that it is used only for the project for which it has been raised. This means they will not be able to siphon off funds to other projects, the biggest reason for project delays. Also, promoters have been barred from changing a project's design without the consent of buyers. The Act also has a uniform definition for apartment area, another big reason for builder-buyer disputes. Besides, builders have been made liable for structural defects in buildings up to five years from the earlier period of two years.
Another shot in the arm for the sector can be the rollout of the Goods and Services Tax (GST) that the government plans to implement by April 2017. Under GST, all indirect taxes will be subsumed in GST. This will reduce the paperwork of developers and bring down their compliance costs. While experts say GST will have no impact on the resale market, where there are no indirect taxes, under-construction properties are, however, likely to become costlier as some states have not yet introduced value-added tax (which will be replaced by GST). Another factor that may revive demand is good monsoon. If farm output rises and lowers food inflation, there will be a possibility of a cut in interest rates, giving a boost to demand.
We bring you a round-up of the sector so that you can take an informed decision about whether to buy a house this festival season.
Inventory Overhang
There was a time when, if you were living in a metro city, you heard about a project launch every other day. Of late, the euphoria has fizzled out. Sales have slowed drastically and inventory of developers is at record levels. Till last year, reports were putting the overhang in major cities at 60 months. This means it will take 60 months for properties in the area to be sold assuming the current rate of absorption.
But recent numbers indicate that things have started changing for the better. According to real estate advisor PropTiger, in the first quarter of the financial year, the inventory overhang was 35 months. In the last quarter of the previous financial year, it was 38 months. Experts say this could indicate further improvement in the coming quarters.
However, trends vary across segments. The government's support and robust demand have ensured least inventory in the affordable housing segment. Rahul Purohit, Principal Partner, Square Yards, says, "There are certain micro markets where supply is high and prices are flat. On the other hand, there are markets and asset classes where demand is outstripping supply." Take Bengaluru where, he says, there is an inventory overhang in the high-end segment but not in the mid-budget segment.
New Launches
After years of slowdown, there has been a slight rise in new launches across the country. According to the PropTiger report, the number of launches in the top nine cities rose 14 per cent to 41,000 units in the first quarter of the financial year from 36,000 units in the last quarter of the previous financial year.
The rise could be attributed to the recent government sops for affordable housing projects - more than 50 per cent launches were in this segment. A Cushman & Wakefield report on the residential market says launches in the affordable housing segment saw a massive surge of close to 100 per cent in the first half of 2016 compared to the same time last year. High-end launches fell 29 per cent during the period.
While some regions have recovered sharply, others are struggling to get back on track. According to a Knight Frank report, the National Capital Region, or NCR, saw the sharpest drop in new launches (41 per cent) on a year-on-year basis, followed by Chennai and Pune at 36 per cent and 32 per cent, respectively. The Mumbai Metropolitan Region market, however, sprang a surprise with new launches registering 29 per cent year-on-year growth in the first half of 2016 compared to the same period last
Price Outlook
Low prices and improvement in sentiment have led to some pick-up in sales too. According to a PropTiger report, sales saw a quarter-on-quarter increase of 8 per cent in the first quarter of the current financial year, compared with a decline of 3 per cent in the last quarter of the previous financial year. In absolute terms, sales in top nine cities increased from 51,500 to 55,550 units.
The report says the trend was primarily driven by Bengaluru, Pune and Mumbai, which together accounted for 61 per cent sales across these top nine cities. Mumbai contributed the most, accounting for 23 per sales, both in current and previous quarters. Bengaluru's share fell from 23 per cent to 19 per cent during the period.
Ahmedabad and Hyderabad saw highest quarterly sales in the past eight quarters. Prices, too, increased. While Hyderabad saw the highest annual price appreciation of 8 per cent, in Ahmedabad, prices rose 7 per cent on average.
However, North India did not see a revival. According to a report by Knight Frank, prices in the NCR market fell for the first time (4 per cent year-on-year dip) in the first half of 2016.
Good time to buy?
Property prices are not expected to go below the current levels. Still, the answer to the above question depends on whether you want to buy for personal use or as an investment.
Personal use: Fence sitters need to note that prices are unlikely to fall from here, say experts. Properties are available at a discount, and for end users, there cannot be a better time to buy. Home loan rates, too, are at reasonable levels. The Reserve Bank of India, or RBI, has cut the repo rate by 150 basis points, or bps, since the start of 2015. Banks, too, have reduced interest rates by 60-70 bps since then. Though the full rate cut transmission has not happened, one can expect a further cut of 20-25 bps in the near future.
Amit Oberoi, National Director, Knowledge Systems at Colliers India, a real estate consultant, says, "Today, one can get good prices, and I believe the market will turn around in a year's time. We are already seeing minor improvements. Sales are picking up, new launches are limited and, thus, the inventory overhang has dipped a bit. One should, however, do proper due diligence on the project and the developer."
There has been a change in another trend too. Earlier, more people were going for under-construction houses at the launch stage due to lower prices. This did not work as years of project delays and legal complications negated the impact of such savings. Now, people have shifted their preference towards projects that will be delivered in a short span of, say, an year. Customers have little faith in builders and are avoiding under-construction properties.
Realising the drift, builders, too, have started making efforts to finish projects on time. Data reveal that average delivery of projects as a percentage of under-construction stock increased nearly four times to 9 per cent in the first quarter of this financial year. The trend has been more pronounced in the affordable segment, which saw a six-fold increase to 12 per cent during the period.
Investors: During the real estate boom between 2004/05 and 2010/11, those who bought houses as an investment earned huge returns. But one should not expect very high returns in the current scenario. Sahil Kapoor, Executive Director, RE/MAX India, a real estate broking company, says, "Those who are looking to turn a quick profit should not invest in property. Though prices are expected to go up from around 2017, there will not be any sharp increase. For end users, though, it is the best time to buy."
Still, if one wants to invest, it is essential to do an in-depth research on the area where the property is located. "One should understand and acknowledge the heterogeneous nature of the Indian real estate industry. Market dynamics fluctuate even within a city with certain areas approaching saturation and others showcasing bullishness and attracting investors in huge numbers," says Purohit of Square Yards.
If there are few investment opportunities in your city, you can always buy property in other cities. "The first quarter of FY'17 has started on a positive note for residential markets. Investors should look at cross-city investments for investment opportunities," says Sunil Mishra, Chief Business Officer, PropTiger.
Discounts and Freebies
The upcoming festive season is likely to see a slew of schemes and offers from builders and lenders to attract buyers. At present, developers are offering huge discounts to lure both end-users and investors. Discounts of 10-15 per cent are common at this stage. Some developers are also offering free parking, maintenance charges for a few years, besides club membership, as deal sweeteners. Negotiate with the builder for freebies/discounts before buying a house this festive season.
Schemes in the Market
There are many schemes in the market that help you buy a house through part payments. Some builders have also launched interest subvention schemes under which they pay interest on the loan till possession or for a certain period. Schemes such as 5: 95, 20:80, 10:80:10 or 8:92 are also common. Under these, you are required to pay just 5-20 per cent money upfront to the developer and the rest on possession. However, the buyer can run into a problem if the project is delayed. Any delayed payment or default to the bank by the builder will impact his credit history.
There are other schemes too. For example, some builders have launched low interest rate plans where they pay a part of the interest on the EMI. Assured return schemes offer guaranteed rentals either until possession or after possession. But you need to be vigilant here as there is no guarantee and the builder can default. Moreover, houses under these schemes are generally more expensive than houses sold under regular schemes. Check what suits you best before going for an attractively-packaged scheme.
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