Can the Coronavirus pandemic help developers to reduce unsold inventory?

[ecis2016.org] Data available with PropTiger.com show that the inventory stock in India’s top nine real estate markets, stood at nearly 7.39 lakh units, worth approximately Rs 6 lakh crores, as on March 31, 2020

Sales of residential units in the January-March period of 2020, were adversely affected following the government’s decision to impose a lockdown from March 25, in order to flatten the curve of the Coronavirus spread in India. Housing sales in India’s prime residential markets declined by 26% during the last quarter of FY20, data available with PropTiger.com show. This also has a bearing on the unsold stock in India’s nine prime residential markets. The combined inventory stock in Ahmedabad, Bengaluru, Chennai, Gurugram, Hyderabad, Kolkata, Mumbai, Pune and Noida markets, stood at nearly 7.39 lakh housing units, worth approximately Rs 6 lakh crores, as on March 31, 2020.

You are reading: Can the Coronavirus pandemic help developers to reduce unsold inventory?

Even though the inventory overhang has slightly decreased now to 27 months, developers might take longer to sell off the unsold stock, considering the prevailing market conditions. Inventory overhang indicates the time that builders will take to sell the unsold stock, at the current sales velocity.

Unsold housing stock in India’s 9 markets

Source: PropTiger DataLabs

Experts are also of the opinion that as sources of liquidity dry up, developers might have to cut prices and sell this inventory stock at reduced rates.

“A bit of compromise in the prices by developers, will revive the real estate sector vis-à-vis demand stimulus in the next six months. Buyers who have liquidity should buy properties now as the inventories will be available at good price,” said Deepak Parekh, the chairman of HDFC, at a recent webinar held jointly by real estate industry bodies NAREDCO and CREDAI.

COVID-19 impact on affordable housing

More importantly, developers who had bet big on affordable housing projects to improve their sales, might be more affected, because of the adverse impact that the pandemic and the subsequent lockdown would have on the middle-class, in terms of salary reductions and job loss.

Note here that half of the unsold stock in these markets, is government defined affordable units – homes that cost Rs 45 lakhs and less – which provide buyers with several tax benefits, if it is bought with the help of a housing loan.

A majority of the stock in this category is concentrated in Mumbai and Pune. The NCR markets of Noida and Gurugram have another 55,000 unsold affordable homes.

Affordable housing inventory in the top 9 markets

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Source: PropTiger DataLabs, as on March 31, 2020

Even though the RBI has significantly reduced the repo rate and made housing loans much cheaper, the uncertainty on the job front, might discourage buyers from investing in real estate for the time being.  However, as the demand for ready-to-move-in homes would increase, as compared to under-construction properties in the medium to long term, this unsold stock may help developers to find their way out of the Coronavirus-induced pain points.

How long will it take for unsold inventory in real estate to clear up?

By Pooja Bhatia

With real estate developers still struggling to cope with the problem of unsold inventory, we look at how the recent policy changes impact the scenario and whether buyers have anything to gain

December 29, 2017: The number of unsold housing units in the seven major cities of India, stood at 6.85 lakh units at the end of the September 2017 quarter, according to a report by Anarock Property Consultants. This was a fall of nine per cent, from the year-ago period. The national capital region (Delhi-NCR) had the maximum number of unsold units at two lakhs, although the number declined by 12,000 units from the September quarter of 2016.

Anuj Puri, chairman of Anarock Property Consultants, blames the trust deficit between builders and buyers, the demand-supply mismatch in terms of categories and non-implementation of the Real Estate (Regulation and Development) Act (RERA) to the full extent, for this inventory pileup in the NCR. “There has been a chronic trust deficit between buyers and developers, largely on account of developers’ failure to deliver on promised possession timelines and project specifications. Also, buyers have been staying away from the market, hoping for further drops in prices and now they are waiting for projects to be listed with the real estate regulatory authorities,” he explains.

Investor-driven Delhi-NCR worst hit

Gurugram is being pegged as one of the top destinations, with a huge inventory pileup in India. Acknowledging this issue, local real estate agent Harish Arora of Wadhwa Associates, says that clearances related to the RERA, have led to an unprecedented slowdown.

“60 per cent of inventory is unsold, which has put the builders in a shortage of funds. There is an increasing trust deficit between the buyers and the builders. Even though several big players in the industry are behind bars, this has not solved the problems of buyers who continue to be at the receiving end, paying rent and EMI,” Arora elaborates.

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Yash Vardhan, partner, Ashley Estate, points out that the geographical expansion of Gurugram, has been huge, even though the corresponding infrastructure development has been poor. Nevertheless, the cost of homes has not come down. “Gurugram has been an investor’s market. Builders followed a tendency of selling partial inventory at normal market rates and the remaining inventory, of about 40 per cent, was sold at lucrative pricing. So, whatever was earned from the premium pricing, was invested to construct further units. This way, the money circulated in the system only. Earlier, while sales happened fast, now, after recent reforms like demonetisation, sales of units with premium pricing stopped. This led to the stalling of construction, as there was no cash. On one hand, we have builders struggling and then, policies like RERA have created a certain degree of awareness among the buyers, who are now in a ‘wait and watch’ mode,” says Vardhan.

[ecis2016.org] Unsold inventory in Mumbai: How it affects home buyers

How policy changes affected sales and inventory

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Venket Rao, managing director, Intygrat Business Advisory, points out that there was a rush to complete projects before RERA was implemented, so as to escape the purview of the act.

“Consequently, there is significant finished inventory coming into the market. Developers have also been trying to push sales, before RERA took effect,” he says. This has led to a pileup of new inventory, as well as finished inventory. “It will take some time, before new projects come up and a market correction will most likely happen in the next six months to one year,” Rao predicts.

Vineet Relia, managing director of SARE Homes, admits that the real estate sector has been facing challenging times, owing to the implementation of various policies. “RERA was implemented, to bring transparency and accountability in the sector. It is in its initial phase and there are challenges but in the long term, it will streamline the entire sector. The main aim of the Goods and Services Tax (GST), is to abolish all indirect taxes. It has been through several changes in its initial stages. However, in the long run, the lower tax burden could translate into lower prices on goods for consumers. The real estate sector will soon revive, hence, benefiting buyers, as well as developers,” Relia maintains.

Impact of affordable housing on unsold inventory

The government’s push towards affordable housing, has also impacted unsold inventory.

“There is now a growing supply of affordable housing units, which means that buyers have the option to choose between a Rs one crore flat and a flat of Rs 30 lakhs, at the same location. With more competition due to affordable housing, people are ready to wait, to get the right property. Moreover, buyers from outside Delhi, like Jaipur and Muradabad, are also ready to wait and buy at corrected prices,” adds Vardhan.

Application for FAR (floor area ratio) permissions, also delay the process of construction and acquisition, thereby, resulting in accumulation of unsold units, says Vardhan.

Abhishek Singh, chief operations officer, Paarth InfraBuild, attributes the pileup of unsold inventory, to developers’ focus on the premium segment. “With demonetisation, the premium segment almost disappeared and so did its buyers. Now, there are affordable homes too, offering units in the range of Rs 15-20 lakhs and the selling action has resumed. Another important factor in favour of affordable housing, is that there are bank rebates and housing loan rate discounts, for the buyers. The same subsidy benefit does not apply to the premium housing segment. So, now, 90-95 per cent of the builders are focused on the affordable housing segment. Most of the unsold inventory of big players, is in the HIG segment, as there are more investors than buyers, in this segment,” says Singh.

South Indian real estate markets fare better

Compared to other parts of the country, cities in south India, such as Hyderabad, Chennai and Bengaluru, have shown quicker recovery and reduction in unsold residential properties.

“Unsold inventory is the highest in Delhi-NCR at 2.60 lakh units, with Greater Noida and Noida accounting for 1.25 lakh units, followed by Delhi, Faridabad and Ghaziabad with 75,000-80,000 units. This situation has been building up from 2009 onwards, until 2016. South India is in a much better position, as compared to the Delhi-NCR. Mumbai too has more unsold property than south India and its share is about 26-28 per cent. Only 16-20 per cent of the unsold inventory lie in Chennai, Hyderabad and Bengaluru, for example. The reason is that south India’s real estate development happened in phases, as per the demand and market requirements,” concludes Singh.

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