Old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector during the third quarter, says the real estate rating and research agency

The third quarter of FY2012-13 saw the residential realty sector slipping into a lull once again. The market did not seem to be enamoured by the festive spirit and the astounding performance of the second quarter proved to be just a flash in the pan, says Liases Foras in a research note.

“Weakness in India’s macroeconomic scenario continued as the Index of Industrial Production (IIP) growth for November fell to a four-month low and current account deficit as a percentage of GDP stood at an unsustainable level of 5.4% for second quarter of FY13. The residential real estate market also mirrored the negative sentiment and witnessed a lacklustre performance in the December quarter of FY13. The old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector in the third quarter,” the report said.

Prices continue to edge higher in Q3

According to Liases Foras, the price of existing supply remains at an elevated level across most of the six major cities, the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bengaluru, Chennai, Hyderabad and Pune on an annual as well as sequential basis. This had a cascading effect on the demand and inventory pile-up. Sales in terms of volume and value slipped in most of the cities due to which time required to clear the stock at the existing absorption pace showed a significant rise.

NCR witnessed an uptrend in prices with Faridabad and North Delhi showing 23% and 21% sequential gain. However, the pace of price increase slowed in Q3 2012-13 as against the previous quarter. Bengaluru saw a whopping 10% surge in prices on account of mushrooming IT companies and availability of superior range of products. Moreover, execution of projects at a faster pace has also impacted the upward movement of prices, the report said.
 

Apparently, MMR is inching towards normalcy as prices have moved southward after three long quarters. Even as the remaining suburbs recorded a 2%-3% quarterly price rise, it is likely that the long due correction could see the light of the day, as the 3% sequential price drop in the Island City could have a rippling effect on the prices across other locations in the city. However, effects of a sudden rise in Ready Reckoner rates in Mumbai, since 1 January 2013, cannot be completely ruled out.

Sales declined marginally except in Mumbai and Hyderabad

In terms of composition NCR, MMR and Bengaluru contribute more that 50% of the total sales in India's residential realty sector. Although, the trend rolled over this quarter, the sales contribution saw a marginal decline across most of the major six cities with an exception of MMR and Hyderabad. NCR, Bengaluru and Chennai lost their respective chunks in the pie both in terms of volume as well as value. On the flipside, MMR, in terms of volume, garnered a market share of 17% compared to 13% in the previous quarter, whereas in terms of business turnover, the region contributed 30% of the sales as against 24% recorded in the September quarter. Treading on the same lines, Hyderabad witnessed an increase in contribution in volume sales and business turnover.

The pace of offtake also slowed across the cities. Chennai witnessed a significant decline in the sales velocity to 1.38% in the Q3 from 2.08% in the previous quarter. In Q3 FY 2012-13, Bengaluru outdid Pune to show the fastest pace of sale across the nation. Sales movement was the slowest in MMR, while Hyderabad saw slight acceleration in its velocity, the report said.
 

Liases Foras said it is interesting to observe that the market is following a spiral movement, whereas the efficient markets like Pune and Bengaluru are slipping into the inefficient territory. Perceived inefficient markets like Hyderabad and MMR are moving into the efficient zone.

“While, price still remains at elevated levels, new properties being launched at lower price points are a welcome move and generate prospects of moving towards efficiency in the long run. Moreover, announcements made in the Union Budget 2013-14 are also likely to have repercussions on the market and the prevailing sentiment,” the Liases Foras report said.