Will residential real estate correct?

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The signs of a price correction are already there. So if you are an interested party, keep looking

Will the residential real estate prices correct? If yes, then when and by how much? These are questions that a lot of people are asking. And the absolutely truthful answer is that no one really knows.

There is no doubt that residential real estate sales have slowed down, in fact dramatically in most markets, due to both unaffordable prices as well as a general lack of confidence in the short-term economic prospects.

Unsold inventory levels in such markets have ballooned rapidly. The Reserve Bank of India’s recent directive to banks asking them to be mindful of equated monthly instalment (EMI) subvention schemes on mortgages will further seriously dent whatever sales were taking place in the last few months.

There is also no doubt that real estate developers’ balance sheets are stressed. With cash flows from fresh sales dwindling, debt servicing has become a challenge for many. A few defaults have happened, more can be expected soon.

Further, new capital sources for real estate developers are severely constrained at the moment. There is only a small amount of bank debt available, absolutely no public market equity anywhere in sight, and a limited appetite from real estate funds, non-banking finance companies and high net worth individuals, all three of which are looking for high yields and adequate collateral for their money.

As if this wasn’t enough, we also have an economy that’s going nowhere—an unconstructive policy environment and general elections on the way.

If all the above ingredients were to be mixed together in a cocktail shaker, the resultant heady concoction should justly be called market crash.

But before you start wiping your brow or rubbing your hands in glee, let me remind you we are talking about property markets and that too in India. Anything that’s particularly logical doesn’t normally apply here. Allow me to highlight why.

First, a factor that makes property markets uniquely different from listed equities, currencies or even commodities is that there is no consistent unitized market for real estate unlike, say, an Apple Inc. share or the dollar or an ounce of gold. In real estate, every micro market is different from the other. Every project and every apartment are unlike the other. Their pricing or value is not identical; it all boils down to the physical features, the demand-supply metrics, the ownership structure and the financial situation of the owner/developer apart from a host of other factors.

What this means for you

To my mind, it means that there is unlikely to be a secular broad-based correction where all markets or all properties in a particular market or all projects of a particular developer will drop prices in a structured manner. When there is no consistency in defining value or pricing, how can we expect it in a price correction?

Hence you are unlikely to witness the whole of Gurgaon or all the projects of a certain developer suddenly trading at 20% lower prices. Instead, what you are likely to see is financially stressed developers taking pricing decisions on a project-by-project basis across their portfolios.

Projects which are in markets with an adverse demand-supply situation may see a price reduction, others may not. Similarly, projects which are at an early stage of construction are more likely to see price reductions while those at advanced stages may not. Flagship/more prestigious projects of such developers may not see a correction whereas the peripheral ones may.

Again, where you have a developer who is about to go bust, you may see a wholesale price reduction across its project portfolio. But those cases would be few and far between.

One more thing to remember, most real estate developers are totally cash flow driven. Assume there is a price reduction and sales starts taking place, the developer will lose no time in taking prices back up the moment their funding requirements for the next few months or quarters are taken care of. Do bear in mind that this business of prices going back up will again vary from developer to developer and project to project.

Added to this unpredictability is the fact that we have a highly opaque property market where true pricing, sales volumes and the payment plan behind the price are almost impossible to decipher. Most such data is not publicly available and what’s available may not reflect the complete picture. Hopefully the above would have given you a sense for some of the things at play here. Without a doubt, there are many more factors that have a bearing on the subject under discussion. These include the role of parallel economy in real estate, lakhs of individual property investors (not end users) and their psychological and financial frameworks among other things.

The signs of a price correction are already there. So if you are an interested party, keep looking.

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