India’s property market faces a worrying rise in unsold inventory, after a spectacular house price boom over the past three years. Sales in India´s top eight cities fell by 4% in June 2015 compared to June 2014, with unsold inventory rising 18% during the same period, according to property research firm Liases Foras. 2015 ended with lower new launches and sales volumes, at 240,360 and 261,260 units, respectively, across the top eight cities.
According to Knight Frank, unsold inventory has now reached:
- 206,000 units in the National Capital Region (NCR)
- 181,000 in Mumbai
- 100,000 in Bengaluru
- 63,000 in Pune
- 41,000 in Ahmedabad
- 36,000 in Chennai
- 36,000 in Kolkata
- 31,000 in Hyderabad
Growth in the Reserve Bank of India’s nationwide housing price index slowed to 13.7% (8.7% inflation-adjusted) during the quarter ended September 2015 compared to the same period in 2014 – down from a 17.5% rise in Q1 2015 and 14.5% in Q2 2015.
All major cities, with the exception of Chennai and Bengaluru, exhibited slowing momentum:
- Prices in Delhi rose 21.9% (16.5% inflation-adjusted) year-on-year in Q3 2015, slower than the first and second quarters’ 26.5% and 22.7%, respectively.
- In Mumbai, house price rises weakened to 10.8% (5.8% inflation-adjusted) from 11.0% in Q1 and 11.1% in Q2.
- In Ahmedabad, growth slowed to 7.4% (2.6% inflation-adjusted) from 9.2% in Q1 and 7.4% in Q2.
- In Kolkata, growth was 7.1% (2.3% inflation-adjusted), down from 32.4% in Q1 and 19.1% in Q2.
- Prices in Kochi even fell by 7.2% (-11.3% inflation-adjusted)
- Bangalore price rises, on the other hand, have been gaining momentum from 10.0% in Q1 and 15.5% in Q2 to 19.1% (13.8% inflation-adjusted) in Q3.
- Price growth in Chennai is also impressive at 12.4% (7.4% inflation-adjusted) in Q3, up from 4.9% in Q1 and 3.8% in Q2.
“While stated prices remain elevated, transaction prices have already fallen by 10-15%,” said Saurabh Mukherjea, CEO of institutional equities Ambit Capital. “Discounts have increased significantly in the secondary market and distress sales are becoming increasingly common.” Developers operating in Mumbai and Delhi, where prices are the highest, will particularly experience more pressure on sales and cash flow, according to Moody’s. Based on Ambit Capital’s research, it will take around 11-14 quarters to clear the inventory in these areas.
Pankaj Kapoor, managing director of Liases Foras, points out that demand for real estate has been stagnating because during the last decade property prices have risen strongly, while salaries have not kept pace. Houses have become unaffordable, so sales aren’t picking up. Sanjay Dutt of Cushman & Wakefield says the situation may take two more years to stabilize, with the green shoots becoming visible after a year.
Although the Reserve Bank of India (RBI) implemented monetary easing during the first half of 2015, this has not yet had a significant impact on the mortgage market. Bank lending to the real estate sector rose by just 7.5% during the year to May 2015, against overall bank lending growth of 8.5%.
Nonetheless,Vikas Halan, Moody’s Vice President and Senior Credit Officer believes that despite the difficulties, India´s solid economic growth will provide some support to housing sales and the gradual easing of lending rates will also boost investor confidence and activity.
“Cuts in interest rates by the Reserve Bank of India, if passed on by the banks, will filter down to the property market, reducing the cost of borrowing for developers as well as buyers, and supporting demand,” says Halan.
Rental yields are low
Rental yields in India are low, according to Global Property Guide research.
- In South Mumbai, average yields range from 2.2% to 2.3% gross, even lower than a year ago.
- New Delhi rental yields remain very poor, at between 1.9% and 2.1%.
- Bengaluru registered higher yields ranging from 3.7% to 4.4%, but are still much lower compared to the figures registered in 2007, ranging from 7.2% to 10%.
Yields data from real estate company Magic Bricks paint the same picture:
|Source: Magic Bricks|
As Ambit Capital notes, if the Indian real estate market was correctly priced, the rental yield should tend to be somewhere close to the cost of borrowing. Instead, Mumbai, for example, has a rental yield of around 2%, while the lending rate is around 10%.
RBI cuts interest rate by 25 bps
The Reserve Bank of India (RBI) cut its policy interest rate by 25 basis points to 6.5% in April 2016, in line with the reduction expected by economists after inflation slowed to 5.18% in February. Interest rates are now at the lowest level since 2011.
Since January 2015, the central bank has reduced its policy rate by 125 basis points. Butwhile the cuts have helped improve sentiment, banks have been very reluctant to lower rates for borrowers, complaining of tight cash conditions.
To make policy rate cuts more effective, the RBI has taken steps to increase liquidity by:
- reducing banks’ reserve requirements
- raising the reverse repo rate – the rates lenders charge to the central bank
- pledging to inject more long-term liquidity over the next 12 months
The RBI had also invoked new rules forcing commercial banks to set lending rates in accordance with those of the RBI.
Is Indian economy the world´s fastest-growing, or are the numbers wrong?
The Indian economy expanded by 7.3% during FY 2014-2015, according to the Statistical Office – the fastest rate of economic growth in the world, coming just as the Chinese economy is losing steam, with its annual growth slipping to 6.8%. The same organization forecasts growth of between 7-7.5% for India in 2016-17.
However not everyone is convinced. The figures, which are based on a new methodology, raised eyebrows from several institutions including the Reserve Bank of India. The new methodology instantly raised India’s GDP growth from 4.7% to 6.9% for FY 2013-2014, according to Arvind Subramanian, chief economic advisor to the government of India.
“Some observers feel the figure is inflated, and that sectors like IT are booming while core fundamentals like agriculture and industrial manufacturing aren’t performing as well: In other words, India´s economy may look better on paper than it feels to a lot of Indian citizens,” said Jonah Blank, senior political scientist at the RAND Corp.
The Reserve Bank of India is now attempting to get a more accurate picture of the health of the economy through hybrid models that mix elements of the old and new GDP methods.
The Statistical Office, however, assures the fitness of its data. “You have to understand the new GDP data essentially captures efficiency, says Ashish Kumar, former head of the CSO. “Comparing it with volume-based indicators would be a mistake.”
Indian mortgage market growing
Given the boom of the past few years, the rapid growth of India’s mortgage market is no surprise. The combined portfolios of banks and specialized housing finance companies catering to the housing market have increased 20% CAGR over the last decade. Banks’ have made USD 142 billion of real estate loans, according to Ambit Capital. Housing Finance Companies have an exposure of USD 68 billion to the real estate sector.
Total housing loans in India amount to around INR12 trillion (USD 180 billion), slightly less than 10% of GDP. This is still small compared to, for instance, China’s at 20% of GDP, the UK’s at 88% and US’s at 81%.
How fast was expansion last year? Reliable data on home loans is unavailable. However, according to Housing Development Finance Corporation (HDFC), India´s largest mortgage company, made INR 130 billion (USD 2 billion) of loans in 2015, up from the INR 86 billion (USD 1.3 billion) worth of loans in 2014 and INR 33 billion (USD 500 million) in 2013.
India’s property market can be divided into three segments:
- Delhi-NCR and Mumbai, most affected by oversupply;
- Bangalore and Pune, where sales are lagging but healthier;
- Tier-II or small cities and towns, which are mixed.
Delhi-NCRThe Delhi-NCR property market is now struggling in the midst of an inventory overhang. The investors who used to dominate the market have started to flee, with some entering a “distressed resale” mode, offering a 15-20% discount on the primary market price. Around 48,800 units were sold in NCR in 2015, a surprisingly small improvement over 2014, according to Knight Frank.
“NCR has certain systemic issues because the market is built on speculative ground and the basic financial and execution discipline required by a developer is absent. The only trigger that will get NCR back on its feet is execution and delivery,” said Jasmeet Chhabria, managing partner at ARGIL Advisors LLP, an affiliate of Religare Global Asset Management.
Developers have been restricting new launches, which stood at only 63,460 units in 2015, down 20% y-o-y and the lowest figure since 2010.
No new major projects are being launched in the city except for a few redevelopments, according to Colliers. Ongoing projects expected to come online by end-2016 to end-2017 include:
- DLF Ltd.’s DLF Kings Court in Greater Kailash at INR 40,000 (USD 602) per sq.ft.
- Aarone Group’s Botanica in Neeti Bagh at INR 35,555 (USD 535) per sq.ft.
- Parsvnath Developers’ Parsvnath Paramount in Ashok Nagar at INR 18,000 (USD 271) per sq.ft.; and Parsvnath La Tropicana in Civil Lines at INR 17,000 (USD 256) per sq.ft.
The picture is not any better in Mumbai, with new launches dropping by 23% to 20,776 units in the second half of 2015 compared to the same period in 2014 – the lowest H2 figure since the financial crisis, according to Knight Frank. Builders have put new projects on hold while trying to rid of old inventory.
“It s a tough market. Even though builders may not be giving discounts openly, behind closed doors, negotiations are on,” said Colliers India director Arvind Kapoor.
Despite the festive season, sales in Mumbai have fallen 6% y-o-y to 34,135 units in the last six months of 2015, according to Knight Frank.
Projects expected by Colliers to be completed by 2017-2019:
- Kanakia Spaces’ K-14 project in Bandra West at INR 65,000 (USD 978) per sq.ft.; and Kanakia Paris in BKC Annexe at INR 23,500 (USD 353) per sq.ft.
- Rustomjee’s Seasons in BKC Annexe at INR 27,300 (USD 411) per sq.ft.
- Radius’ Project Bandra in BKC Annexe at INR 26,900 (USD 405) per sq.ft.
- Ahuja Group’s Altis in Worli at INR 24,000 (USD 361) per sq.ft.
Interest from the developer community seems to be shifting away from the major cities of Mumbai and Delhi, to cities like Bangalore. Bangalore´s rise is due to the e-commerce boom and the IT sector, and the city is still relatively affordable. Although new launches in Bangalore fell by 26% y-o-y in H2 2015 to 24,190 units, they were 16% higher than in Mumbai, according to Knight Frank. Sales were up by 25% compared to H1 2015.
“With 31% of overall India launches in April-June, Bengaluru has left the NCR (25%) behind for the first time in recent history,” says Anuj Puri, Chairman & Country Head, Jones Lang LaSalle (JLL) India.
Ongoing projects coming online in Bengaluru between end-2016 and 2019, according to Colliers:
- L&T Realty’s Raintree Boulevard in Sahakar Nagar at INR 6,900 (USD 104) per sq.ft.
- Sobha Developers’ Sobha Forest View in Lingadheeranahalli at INR 6,109-6,950 (USD 92-105) per sq.ft.
- Brigade Properties’ Golden Triangle in Budigere Cross at INR 5,400 (USD 81) per sq.ft.
- Prestige Developers’ Lakeside Habitat in Varthur at INR 5,220 (USD 79) per sq.ft.
- Godrej Properties’ Godrej E City in Electronic City at INR 4,450 (USD 67) per sq.ft.
Its proximity to Mumbai and its affordability encourage growth in the Pune area. Both new launches and sales rose in the second half of 2015, according to Knight Frank. A total of 18,135 units were launched in H2 2015, up 9% compared to H2 2014; while 20,740 units were sold in the same period, up 3% compared to a year ago.
“Pune is the only city that has shown double digit price appreciation in the last two years,” says Ashutosh Limaye, Head of Research & Real Estate Intelligence Services, JLL India.
Projects set for completion between 2016 and 2018 include:
- Supreme Universal’s Supreme Estaban in Koregaon Park at INR 16,200 (USD 244) per sq.ft.; and Supreme Amadore in Baner at INR 9,000 (USD 135) per sq.ft.
- Kool Homes’ Blue Lotus 2 in Sopan Baug at INR 9,500 (USD 143) per sq.ft.
- Kolte Patil’s K P Heights in Kothrud at INR 9,000 (USD 135) per sq.ft.
- Naiknavere Group’s Eminence in Viman Nagar at INR 8,900 (USD 134) per sq.ft.
Sentiment in Hyderabad’s residential market nosedived during 2010-2014, in advance of the bifurcation of Andhra Pradesh. However the city is getting renewed attention. In the second half of 2015, 5,740 units were launched, up 11% compared to the same period in 2014, according to Knight Frank. Unsold inventory shrunk to 31,480 units, the lowest since 2010. Cushman & Wakefield expects 45,000 residential launches in Hyderabad over the next two years.
“All the negative factors are behind us and buyers are now more confident about acquiring property in the Hyderabad market,” says C Shekar Reddy, president of Credai.
Developers are also optimistic about the launch of the metro rail project. Demand is expected to exceed supply in the INR 3,000-4,000 (USD 45-60) per sq.ft. property segment, most of which lies along the metro rail corridor, according to Reddy.
Ahmedabad, the largest city and former capital of Gujarat in Western India, has been unable to sustain buyer momentum, despite the Gujarat International Finance Tec-City (GIFT) and the Delhi-Mumbai industrial corridor.
Sales volumes has been heading down since the first half of 2013. In 2015, only 16,800 units were sold, 9% down on to2014 and the lowest volume in 6 years, according to Knight Frank. New launches, however, rose 11% in 2015 to 15,500 units – creating additional oversupply.
Both the primary and secondary markets of Chennai, another significant beneficiary of e-commerce investment, have been resilient. Sales declined 15% y-o-y in H2 2015 to 8,792 units; but the market’s health has been improving, according to Knight Frank. Unsold inventory has been inching down since the beginning of 2015. Interest in micro markets such as Velachery, Sholinganallur and Mount-Poonamallee High Road (MPR) has risen despite recent floods, according to Colliers.
Notable ongoing projects that should finish by Q1 2016-Q4 2018 include:
- Ozone Developers’ Ozone Metrozone in Anna Nagar at INR 10,990-15,990 (USD 165-240) per sq.ft.
- Olympia Group’s Olympia Opaline Sequel in Navalur at INR 4,700 (USD 71) per sq.ft.
- BSCPL’s Bollineni Hillside in Perumbakkam at INR 4,100 (USD 62) per sq.ft.
- Mahindra Lifespaces’ Aqualily in Singaperumal Koil at INR 3,850 (USD 58) per sq.ft.
- Pacifica Companies’ Aurum in Padur at INR 3,670 (USD 55) per sq.ft.
An activist government with a social agenda for real estate
Prime Minister Narendra Modi’s government has been extremely active since taking office in 2014 in pushing policies to develop the housing market, reduce housing shortages for the poor, and promote affordability.
Housing for All
The Modi government has launched a massive set of schemes under the umbrella title “Housing for All by Year 2022”. The government has identified 305 cities and towns in 9 states for beginning construction of houses for urban poor by means of public-private-partnership (PPP) and interest subsidies, on which it intends to spend US$30 billion over the next six years. It will lower developers´ borrowing costs and increase homebuyer loan limits for affordable housing from INR 2.5 million (USD 38,000) to INR 6.5 million (USD 98,000) in metropolitan cities and to INR 5 million (USD 76,000) in other cities.
The “Smart Cities” initiative was launched two months after Modi took office, and was allocated INR 70 billion (USD 1.05 billion) in the recent budget. The project aims to create large-scale urban areas that can attract investment and provide high quality living standards. The government aims to identify 100 cities for potential development by 2017. Each city will receive a INR 1 billion (USD 20 million) grant per year over a five-year period, according to JLL India.
Real Estate and Infrastructure Investment Trusts (REITs)
First proposed in 2008, REITs were only permitted in India in 2014. It is expected that the country´s first REIT will be launched in the first half of 2016, with large organizations such as DLF, Blackstone and Brookfield already expressing interest. The REIT industry has the potential to reach a market capitalization of USD15 billion in three years, according to JLL India.
Real Estate (Regulation and Development) Bill
First proposed in 2013, the bill aims to establish a regulatory authority to protect buyers, provide a platform to settle disputes, and impose strict penalties on developers for non-compliance with project registration and disclosure of wrong or misleading information. Moody’s believes the bill will lead to increased consumer confidence, transparency and industry discipline.
Eligible borrowers of SBI home loans can also avail an interest subsidy up to Rs. 2.67 lakh under the Pradhan Mantri Awas credit-linked subsidy scheme.
In line with the government’s push on affordable housing, State Bank of India or SBI is offering an interest rate of 8.35 per cent on home loans up to Rs. 30 lakh. Eligible borrowers of home loans from SBI, which last month cut its home loan interest rates to the lowest rate in the market, can also avail an interest subsidy up to Rs. 2.67 lakh under the ‘Pradhan Mantri Awas Yojana’, a government scheme aimed at providing subsidised housing loans to the low and middle income groups. Also, customers of other banks can also transfer their existing home loans to SBI at “no processing fee charges!” according to an advertisement by SBI.
The revised rates are effective on new home loans from May 9, 2017. The rates are:
|Two year fixed interest rate home loans up to Rs. 30 lakh:|
|Borrower type||Effective rate of interest|
Affordable housing push
“With a drop in interest rates and significant interest subsidy benefits offered by the Government of India, the affordable housing segment is poised for a major leap forward in the near future, with projects specially designed for the middle and lower income segments,” SBI said.
Home loan borrowers buying their first home are eligible for subsidy on interest repayments under the Pradhan Mantri Awas scheme, which is a credit-linked subsidy scheme run by the government. National Housing Bank or NHB has come up with operational guidelines for availing subsidy under Pradhan Mantri Awas Yojana (Urban) for middle-income groups.
SBI is offering home loan takeovers without any processing fee till June 30, 2017. This facility is applicable on home loans from scheduled commercial bank, private and foreign banks and housing finance companies (HFCs) registered with the National Housing Bank (NHB), among others, SBI said.
SBI has also launched a mobile app – SBI Loans – that enables customers to check loan eligibility and apply for home loans online. The SBI Loans app is available on both Android and iPhone platforms.
Source: NDTV Profit
Until a few decades ago, Indians were generally averse to taking loans to buy or construct their homes and would use their retirement funds for the same. However, with increasing urbanisation, easy availability of home loans and higher earnings of the family as a unit, this trend has changed. Now, many individuals are buying their first house even before marriage, by availing home loans.
Nevertheless, most borrowers feel that that they should opt for short tenures on their home loans, to be free from debts quickly, without realising the implications. On the contrary, one should opt for home loans with a long tenure of up to 20 years or 30 years.
Here are some of the advantages of doing so.
Higher loan eligibility
An individual’s home loan eligibility, is determined on the basis of his/her ability to repay the home loan every month, in the form of equated monthly instalments (EMIs). This, in turn, is assessed on the basis of your disposable income. So, for a shorter home loan tenure, all things being equal, your EMI will be higher and thus, you will be eligible for a smaller home loan amount as compared to what will be available, if you opt for a longer tenure home loan. Consequently, with a longer tenure and thus, higher eligibility, you may be able to buy a bigger or better house, than what you can with a shorter tenure home loan.
Flexibility of repayment
As there are no penalties on the prepayment of home loans under a floating rate of interest, you can prepay the entire outstanding or part of the home loan, if you want to sell the house or just be free from any debts.
If you have taken the home loan under a fixed rate of interest, from any housing finance company, you can still prepay the home loan without any penalty, as long as you are not borrowing from another institution.
Moreover, if your home loan is under a fixed rate of interest, you can still repay a certain percentage of your home loan outstanding every year, without any prepayment penalty. Thus, you can become debt-free earlier, while retaining the flexibility of making payments according to your cash flow.
Income tax benefits
Section 24b of the Income Tax Act, provides benefits on the interest payment on home loans. The effective home loan rate of interest, after taking into account the tax benefit, is better than what one can earn on any other alternative investment avenue. Moreover, as there are no alternative tax benefits that are as efficient as that on home loan interests, it is advisable to avail of this benefit for as long as you can.
Section 80C also allows for a deduction of up to Rs 1.50 lakhs, for repayment of the principal component of a home loan. Nowadays, the quantum of home loan that is needed to buy a decent property, is fairly large. The principal component, in the home loan repayment, will be higher for a shorter home loan tenure, as compared to a longer-duration home loan. Consequently, a significant portion of the home loan repayment will be wasted, as you would not be able to claim the deduction under Section 80C beyond the specified limit, in case you opt for a shorter home loan tenure.