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A ray of hope for buyers in 2009
Source : The Hindu Property Plus Published On : 2009-01-24 City : Chennai

Despite economic slowdown, demand for an optimum sized and affordable housing exists, writes Ramesh Nair

The housing prices in Chennai which peaked in the summer of 2007 began declining in the second half of 2007 and continued the decline throughout 2008. The current trend can be attributed to fundamental reasons such as slowdown of the economy including the IT sector, declining investor sentiment due to global meltdown and increase in interest rates. The turmoil in the global financial markets placed further downward pressure on a housing market already weakened by high interest rates and affordability.

A slowdown was inevitable given the affordability factor. Although a few cities in India have witnessed hard landings, the Chennai market has witnessed only a soft landing . Although the slowdown has been gentle it has impacted overall investor sentiment due to price correction. The price correction is the steepest since 2002.

Speculative buying

The upbeat optimism that energized speculation and expectations of ever-rising prices from 2003 to 2007 is now succumbing to the fear of price correction. However, Chennai can still support stability in prices.

The slowdown is also impacting the growth of peripheral areas in Chennai with many developers slowing down their projects. Also the share prices of a number of listed local real estate companies have fallen in the last 12 months. In spite of all this, the demand for housing still exists thanks to the fundamentals of the local economy and the demand supply mismatch. The home loan market has been impacted with most housing finance companies disbursing at least 30% lesser in 2008 compared to 2007.

Exorbitant rates

With capital raising avenues from both equity markets and debt markets having tightened considerably, many developers borrowed at exorbitant interest rates. Meanwhile, the private equity funds are pushing and getting assured return to protect their downside risk.

Many projects that were priced above Rs. 50 Lakhs saw drop in sales volumes as well as price fall in 2008. Many potential buyers adopted a “wait and watch” approach in 2008 preferring to delay their buying decision. The number of apartments being sold in 4Quarter 2008 was also lower than 4Q 2007. Developers, who in 2007 were offering freebies such as free car parks, interest waiver during construction period etc have started giving direct discounts in prices in 2008. Developers, who were selling their entire projects in a few days, are now taking months to sell their unsold stock.

Properties with deficiencies in location or overly optimistic asking prices were slow to move. The past year saw return of negotiability in asking prices after a relatively long absence from the marketplace. Contrary to what was seen in 2005 and 2006, the number of investors and speculators who entered the market in 2008 was drastically lesser. The interest from real estate private equity investors decreased given the global financial meltdown. The market moved from a sellers’ market to a buyers’ market. Prices in many areas within the city remained stable, in spite of the slowdown.

Chennai market has not yet seen any rapid increase in unsold completed apartments and home loan foreclosures. Home prices across Chennai declined in the 3rd and 4th quarters of 2008.           Overall consumer confidence recovered marginally in December after the government announced home loans at 8.5 % and 9.25%, but remained low. The conditions in the housing market seem to be improving since December after several months of negative signs mainly driven by the success of projects priced below Rs. 25 Lakhs.

Outlook for 2009

It is expected that developers will construct smaller units without compromising on the amenities but reducing frills to make it more affordable. The year 2009 will be the year of affordable housing in Chennai. Residential yields are expected to remain stable. Interest rates have begun to reduce as inflation rate decreases. These factors should continue to maintain reasonable demand in 2009.

The market is adjusting after a period of unprecedented expansion. It’s reasonable to expect that price appreciation will flatten or decline in some areas. The length and depth of the adjustment remains to be seen. Even today, there have been instances where entire projects, priced right, being sold within a few weeks of launch. Although the Chennai real estate story is real, large in size and will pay in the long run, developers need to realize that volumes are inversely related to price and lower the price higher the opportunity.

The author is a Managing Director with Jones Lang LaSalle Meghraj. He can be reached at ramesh.nair@jllm.co.in

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