Data from property websites suggests a deep slowdown in large cities. Even rental yields to rise from 2% to 4%, prices will go down 50%! argues Ambit Research
With banks pulling back lending to developers and fear of Black Money Bill looming large among speculators the real estate market across India is witnessing sharp drop in transactions and new launch volumes in contrast with the Reserve Bank of India (RBI)' Housing Price Index, says a research report.
In addition, rental yields in property markets in India have remained extremely low as compared to its other Asian peers. Ambit Capital, in a note says, “Mumbai has a rental yield of close to 2% (this is gross of tax and maintenance charges) whilst the lending rate hovers around 10%. The difference between lending rates and rental yields is one of the highest in India. Even if one assumes that buyers are willing to live with only 5% rental yields as they might have an extremely bullish view of capital gains arising from real estate in India, this would imply halving of real estate prices in Mumbai.”
"We are seeing a broad-based real estate pullback, with prices correcting in most tier -1 and tier-2 cities alongside sharp drops in transaction and new launch volumes. The drivers for this slowdown are a mix of supply-side factors and demand-side factors. The result is not just a drop in demand for building materials and challenges for lenders with big mortgage, LAP and housing finance books, but also a generalised slowdown in GDP growth, as the sector which drives 50% of India’s capex and 30% of its jobs conks off," the research note added.
Whilst the RBI’s Housing Price Index suggests that prices have moderated on a pan-India basis, data from property websites suggests a deeper slowdown in India’s large cities, with prices falling by 7-18% YoY. "Alongside this, we are also seeing a significant drop in transaction volumes," Ambit Capital said, adding, "our visits to five property registration offices in Mumbai suggest a sharp drop in the registration of new residential properties and data from property valuers in Maharashtra and Tamil Nadu suggest that transaction volumes have fallen by 10-15% per annum for three consecutive years now. Also, new launch volumes are down 40-80% on a pan-India level."
According to Ambit Capital, here is a combination of supply-side and demand-side factors trigger the slide...
(a) RBI data suggests that the banking system seems to have turned the tap off for property developers over the past year. This has in turn made developers either stop construction or cut prices.
(b) The National Democratic Alliance (NDA) government has cut subsidies sharply (down 9% in FY16) and is shifting subsidies to Direct Benefit Transfer. As a result, the ability of the politician-and-builder to pilfer subsidies to fund real estate construction has been checked and
(c) The knowledge that there is many years’ worth of unsold real estate inventory in most of India’s tier-1 and tier -2 cities is causing investors to hold back further purchases.
(a) The draconian Black Money Bill went live on 1st July and has made HNW families reluctant to invest in Real Estate.
(b) The 8% point gap between the gross rental yield and bank base rate highlights the unattractiveness of real estate for investors, and
(c) Key state governments (Maharashtra, West Bengal, Delhi) have hiked “ready reckoner” rates sharply this year and thus prevented prices from dropping to a market clearing level.
Real estate accounts for half of India’s capital formation and 30% of its job creation. With the sector on the slide, GDP growth is under pressure, directly, because of the drop in investment, and, indirectly, through pressure on wages.
The slowdown in the construction sector is not only visible through the drop in new launches but also through a sharp decline in cement production on a pan-India basis. Data released by the Office of the Economic Adviser, the Ministry of Finance, suggests that cement production has dropped significantly in recent months.
According to Ambit Capital, with sluggish demand not only have new launches fallen (see the exhibit above), but real estate inventory has also started piling up in major cities across India (see the exhibit below). Data from property research houses suggest that regions like Mumbai and Delhi would take as much as 11-14 quarters to clear the existing inventory (see the exhibit below). Real estate brokers say that the time taken to clear the inventories in a healthy real estate market should be around four to six quarters, it added.
Alongside the drop in transactions volumes, we are also seeing real estate prices correcting. "In Delhi, our meetings with businessmen who live in south Delhi suggest that prices in this prime part of Delhi are down 20-25% over the past year and transaction volumes have fallen sharply. In the smaller cities, the situation seems to be worse, with our contacts in Jaipur, Rajkot and Lucknow also pointing to a 15-20% YoY correction and sellers saying that it is hard to receive bids for properties that they have put up for sale," the report said.
According to Ambit Capital, with land acquisition in rural India having come to a standstill over the past 18 months (probably due the Land Acquisition Bill that was passed on 4 September 2013), a powerful mode of wealth generation has been stopped in its tracks. As land prices have stagnated in rural India over the past 12 months, the “wealth effect” that rising land prices had created over the past decade seems to have ebbed away, it added.
"Whilst stated prices, which the real estate agents quote, remain elevated, transaction prices have already fallen by 10-15%, and real estate brokers are saying that a further correction is a must for inventory liquidation. Discounts have increased significantly in the secondary transactions market and distressed real estate liquidation by lenders, who have not been repaid by developers, is becoming increasingly common," Ambit Capital concluded.