Slow demand fails to check property prices in Mumbai

Published on by 7bighagroup

Mumbai: Despite a sustained sluggishness in demand, property prices in Mumbai, India’s largest real estate market, do not seem to relent. Experts say a reason for this is the financing structure of real estate projects, where many developers, especially unlisted ones, resort to discounted selling to speculators during the soft launch of a project. This, experts say, helps these developers avoid the discipline of interest payments to the banks.


According to a Macquarie report, selling to speculators helps developers raise finance for construction activity against a guaranteed return to the speculator. This return then reflects in the official launch price. For example, if the assured return is 25%, the official launch price of the units would be R100 for end users against a soft launch price of R80 (for speculators who get in early).

To ensure that this investor base is not alienated, price cuts would be the last resort for a developer, explains the report. Also, these discounted sellings lead to a shadow inventory build up of around 10-15% with the speculators, adds the report.

“Of course, there is a part of the inventory that is sold to investors for raising money to fund construction. This has become more visible after banks are more cautious and have increased the scrutiny procedure before lending to the developers,” Samantak Das, national head (research), Knight Frank India told FE.

Property sales registration numbers of last five months point towards sluggish demand. In May 5,287 sales registrations were done, which was 6% up from April’s 4,973 registrations.

But April numbers were 16% lower than March registrations of 5,852. In February, 4,716 properties were registered, which were lower by 7% compared to January’s 5,085 registrations.

On the supply side, Macquarie says volumes are down 70% from the run rates seen in late 2009 and inventory levels are around 25%.

But the prices of residential properties in Mumbai have been rising. For instance, according to CB Richard Ellis’ analysis, in May 2011, catalogue rates in south Mumbai’s Nariman Point area ranged between R85,000 and R88,000 per square feet, which grew almost three fold from rates in 2009 of R32,000 to R45,000. In Lower Parel, rates grew almost 100% to R22,000 to R32,000 against R11,000 and R25,000 in 2009.

Explains Akshay Kulkarni, executive director – India, (residential services), Cushman & Wakefield, “Developers employ different measures in managing their inventory to ensure maximum benefit. One such method is to make sales to investors upfront which gives the developers cash flow for construction activity. This inventory is then re-sold into the market at a premium that of a completed project thus giving the developer as well as the investor due returns for the investments made.”

Referring to the high price levels of existing inventory, Samir Jasuja, chief executive officer, PropEquity says, “Since the developers have already sold 70%-80% inventory in the existing projects, they are hoping that things will pick up again. Also, there is enough buffer, because in one to 1.5 years, prices escalated 25%-30% on the back of buoyancy in the stock markets, rising incomes and substantial confidence in the economy.”

Kulkarni of Cushman & Wakefield added, “There is a certain threshold below which a development will not be saleable. This is largely because any project includes the cost and development of land, the project cost (escalating cost of steel, sand, cement and labour, among others) and also servicing of the money raised through various investment sources,” he said.

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