Much against the expectations of the real estate sector, this year's festive season is turning out to be somewhat disappointing for property developers as aspiring home buyers are extra cautious about investments in the backdrop of the slowing economy and unstable realty sector, hit by the short-term impact of the Real Estate Regulation Act (RERA) and the Goods & Services Tax (GST).
Capital-starved property developers, sitting on huge unsold inventories of residential real estate, had been banking heavily on this year's festive season to push sales and cut down their inventories. Their optimism stemmed from the fact that property rates have bottomed out and the home loan interest rate has touched a six-year year low of 8.35 per cent and that the enactment of RERA, which empowers and protects consumers, would boost the sentiments of home buyers.
Buoyed by all this, developers had lined up the best of bargains, with attractive deals and discounts that include free modular kitchens, free club membership, free car parking, no GST and no maintenance charges, no EMI till possession and waiver of stamp duty & registration fee. So much so that developers were quoting all-inclusive pricing and giving their track record of delivery to win the confidence of buyers.
But, unlike in the past, when prospective property buyers eagerly waited for the festive sales, this year, the charm of the season has somewhat diminished as months before its onset, developers and real estate marketing companies had been holding property festivals/shows and offering handsome bargains to liquidate their unsold inventories. This, according to the latest industry statistics,stands close to four years, with the NCR topping with an inventory of 58 months.
Also, unlike the past trend, this festive season did not have new offerings to attract home buyers as developers were focusing on completing and delivering ongoing projects rather than launching new ones. Moreover, in the backdrop of large-scale delivery defaults, home buyers are very much concerned about the safety of their investment. This is clearly reflected in the distinct trend of buyers increasingly opting for ready-to-move homes to avoid development risks. That, however, is not contributing to big sale numbers as the ready-to-move inventory is limited.
The unfavourable employment scenario is also playing spoilsport. With disposable income going down, the cautious and more discernible buyers are looking at fundamentals of property to assess the safety and viability of their investment. Home buyers are now not simply swayed by freebies as home buying has now become need/choice based and buyers are more sensible to judge if the offers are both beneficial and fit into the their scheme of things.
Today's property buyer is also aware about taking an informed decision to buy a home after clearly judging the pros and cons of buying and renting. In a slowing economy, renting makes better sense from the point of view of cost benefits. Despite the fact that property prices have stagnated/declined and home loan rates are much lower, buying is still a costlier option as the EMI is much higher than the monthly rent and, in case of construction delays, one is burdened by both rent and EMI. Also, in the current market scenario, it is not a profitable proposition for investors to buy residential property as its appreciation is too low and even rental yield is hardly half of the global yield of 5-8 percent. Moreover, the Noida controversy over the non-delivery of flats to about 100,000 home buyers, even years after the promised delivery date, has badly shaken the confidence of prospective home buyers, making them much more prudent about investing in property.
Clearly, in this backdrop of lack of transparency and fairplay in real estate transactions, the trend of household savings shifting from physical (real estate and gold) to financial assets (equity, MF) has been catching up. This trend has been more visible after demonetisation and the digitalisation of economy. This is reflected in the recent spurt in investments in the stock market and mutual funds. Equity MF inflows tripled to Rs 80,000 crore in April-September FY18, with the asset base jumping 25 per cent from Rs 5.43 lakh crore in March 2017 to Rs 6.59 lakh crore in September 2017.
Low interest rates are having a positive impact on equity investments, especially in view of low investments in fixed deposits. The equity markets have attracted a record Rs 2.15 lakh crore of cumulative investments over the past three years (FYs 15-17) and the trend continues as real estate stocks have been performing well with BSE Realty Index gaining 40.2 percent over past one year. Morgan Stanley data shows that in terms of post tax returns (CAGR) of different asset classes over the medium (five years) and long (10 years) terms, equity scores over other asset classes.It posts returns of 11 per cent and 17 per cent respectively, compared to property (8 per cent & 13.4 per cent), Gold (9 per cent & 12.9 per cent) and FDs (5.7 & 5.2 per cent).
Notwithstanding this dull scenario, there is one noticeable change this time. Unlike last year, end-users are out in large numbers to explore the market for the ready-to-move affordable and mid segments. And in the coming months, as RERA & GST settle in, affordable housing, with greater policy support from the government, will lead the recovery of residential real estate.
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