The momentary uncertain economic scenario, slowdown in export-driven industries, high interest rates and lacklustre credit growth in the real estate markets have raised the question of a slowdown in real estate market in India.
Historically, real estate development in India has been highly fragmented. The nascent growth in our realty market, aided by copious flows of private equity, is helping the real estate development process get organised with increasing corporate and institutional participation.
These developments, coupled with healthy economic growth indicators and a new-found comfort in this sector triggered a lot of activity and capital appreciation in the sector over the past few years. While the overall activity in the market remains healthy, the past 12-18 months have seen some degree of rationalisation in residential prices.
Even though this might be a result of increased interest rates, decreased holding power of speculative investors and sudden flush of supply in some suburban areas, there is probably a case to admit that if not a slowdown, the marginal rate of growth certainly seems to have come down significantly as compared to the past few years.
Contrary to the above, the commercial and retail sectors continue to demonstrate record absorption and bullish price movement. One may however argue that significant supply on account of SEZs and other new projects may bring about some due rationalisation in prices in these sectors over the next few years.
If at all there is a slowdown, it will be a mild one given the demand indicators across sectors and the attractiveness of India as an investment destination. Also, a slowdown will be the best thing to happen for the long-term potential and growth of this market.
Some form of rationalisation and stability in prices will not only give the much needed cooling effect, it will also provide for some cyclical price patterns, which in the long term will be able to give a more stable and positive outlook.
Over the long term, the demand for commercial, retail and residential segments remains strong as ever on the back of stupendous economic performance, notwithstanding the global uncertainties on account of the subprime crisis, potential US slowdown and a weakening dollar.
There is no denying the fact that there have been corrections in property prices in both primary and secondary markets over the last couple of months.
But all such corrections have taken place only in certain pockets that were already overpriced. Going forward, affordability has to be a key criteria, and a correction is unavoidable in all projects, launched at prices the salaried middle class cannot afford.
Prior to August 2007, in Gurgaon and NCR, prices were soaring high, particularly in residential, because of short supply and concentration of the market by a few major players. Nothing was available for less than Rs 4,500/sq ft.
Also, the new projects were launched at Rs 6,000-7,000/sq ft depriving the common man, especially the middle class, of affordable housing. As a result end-users were not able to access the available housing. There ensued a slump and there were virtually no buyers.
Houses can easily be made available with international world class amenities for between Rs 2,500-3,500/sq ft. In case a builder adopts a rational pricing strategy, projects will surely meet with unprecedented success. The past six months in the Gurgaon property market amply highlight this fact. All projects in this price range are sold out just in a matter of days. What is even better is the fact that most buyers are actual users.
All that is needed for developers to ensure a price scenario justifiable for both their companies as well as consumers, is to operate on reasonable margins which is possible only when we start measuring ourselves not with money, but with quality, delivery, and affordable pricing.
There is an inevitable need for constructing, preserving, and rehabilitating more affordable housing units. At the same time we must also urge the government to look into the matter with immediate concern and provide struggling families and individuals with an affordable place to live.
Keeping in view the above scenario, developers should collectively work to promote a model of economic development that does not leave thousands without their dream home. The government must specifically focus on low and middle income housing development and direct the private sector towards this by making certain incentive-based policies and regulations.
Source: Economic Times