Sentiment Index: If you think Modi will become PM, better to buy property now

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If you are looking to buy property but waiting in the wings in the hope that sentiment will improve post elections, think again. For the real estate market today is at its worst with launches and absorption levels near 2009 levels, when the global financial crisis had crippled the realty industry and builders were literally at the mercy of buyers and lenders.

According to India’s first real estate sentiment index prepared by industry body Ficci and real estate consultancy firm Knight Frank, which captures the perspective of builders and financial institutions, the business environment for both residential and office real estate is worse than what it was six months ago but is likely to improve once the elections are over.

“Pessimism in the industry means the negotiation power is stronger with the buyer and an improvement in sentiment goes hand in hand with property appreciation,” says Rajiv Piramal, Vice-Chairman and Managing Director of Peninsula Land, and Co-Chair, Ficci Real Estate Committee.

What this essentially means is that builders are desperate today. Not only are buyers delaying property purchases but even funding has dried up. While builders believe the condition of the real estate market will not deteriorate in the next six months, banks and private equity funds feel the industry has still not bottomed out.

Says Niranjan Hiranandani, Managing Director of Hiranandani Construction, “the sentiment index is similar to that of an election poll. It shows that the state of business today is terrible when compared to the Diwali period six months ago. Basically business is not at all good today as it was yesterday and even financial institutions agree. But after six months, when the new government comes to power, sentiment will be positive. Everyone is betting on the next government to revive the economy. ”

Most builders are betting on a Narendra Modi-led BJP to change the fortunes of the industry.

“With the current government in power, economy is in shambles. You can’t really expect anything from Rahul Gandhi; Modi at least envisions development. If I had to choose between the two, I would definitely bet on Modi,” Piramal told Firstbiz.

A Mumbai-based builder, speaking on condition of anonymity, even pointed out that as of now builders are solely functioning on debt since crores have been sucked out of the market to fund elections. Moreover, developers are desperate to meet their cash flow requirements in order to service their interest payments for this financial year. Unless they do that, banks will not offer them additional loans.

“Banks have the leeway to adjust interest payments during the year, but by the end of the financial year, they have to spruce up their books or else make extra provisions. So the steep discounts being offered need not necessarily herald the onset of a sustained correction,” he said.

This probably explains the slew of launches Mumbai has witnessed in the last quarter. A couple of projects by big players such as Runwal, Lodha and Kalpataru are being offered at a discount. Runwal in December pre-launched its Runwal Forest project in Kanjurmarg by offering a 10 percent discount. The group sold 450 apartments during the pre-launch period at Rs 9,900-10,500/sq ft against the current prevailing rate of Rs 11,500-Rs 13,500. Similarly Kalpataru Sunrise in Thane sold 450 flats in a month during the pre-launch phase by offering a discounted rate of Rs 7,500 a sq ft against the market price of Rs 9,000-10,000.

Even Lodha Rise sold 2,300 flats at its Palava Project in Dombivli in a month. One bedroom apartments of 729 sq ft were priced at Rs 34.19 lakh, or Rs 4,689 a sq ft.

However, while builders say the right ticket price and affordability is what has led to this demand, an industry source pointed out that several such pre-launches are being offered without all the necessary approvals in place. Moreover, buying during the under-construction period implies a huge waiting period for the buyer.

“If we are running purely on debt at the moment, it means execution will be slowed and my project will be delayed by another six months to a year. Also, by pricing the property lower now, the terms and conditions of the initial agreement can later be changed,” the builder told Firstbiz.

This is exactly what happened in the case of HDIL’s Kurla project, where buyers are being forced to shell out more money for apartments even though the project is delayed by over three years. (Read more about that here).

Moreover, with several builders being unable to pay up interest on loans, banks and financial institutions are threatening to auction properties worth thousands of crores.

Data compiled by, a portal that focuses on stressed assets, shows commercial and residential properties worth Rs 7,700 crore are up for sale. Of this, there are as many as 2,200 units in the commercial category and around 11,000 units in the residential segment funded by banks and other financial institutions that have turned into non-performing assets (NPAs). This is why there are now on the block.

In fact, Maharashtra, largely due to Mumbai, tops both the commercial and residential categories with NPA properties worth Rs 842 crore and Rs 838 crore respectively.

This comes at time when gross NPAs in the financial system are set to rise 4.6 percent to Rs 2.29 lakh crore by September 2014 from Rs 1.67 lakh crore, or 4.2 percent, in September 2013, the Reserve Bank of India said in its Financial Stability Report released last month.

Little wonder that builders’ 80:20 and 75:25 schemes was curbed by former RBI governor D Subbarao. Buyers in such projects more mostly high net worth individuals (HNIs) and investors, who book flats in the initial period and sell them later when the building is almost complete, for a profit. But now there are no takers for these flats, which is why banks are seeing a rise in bad loans.

And while real estate developers are defaulting in the timelines committed for giving possession, short term investors are defaulting in payments because sales to genuine end-users have slowed down.

“We believe that political compulsions will supersede any economic urgency leading to a delayed economic expansion. If an analogy is drawn to the 2009 elections, the determinants of housing demand are strikingly different. Property prices have risen faster than growth in household income or general inflation during this period. Interest rates are much higher today. Lack of any meaningful housing demand implies prices will not see any appreciation in the next six months, ” said Samanthak Das, chief economist and director at Knight Frank.

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