Chart: Will unsold property trigger a price cut in Mumbai?

Will  property prices ever fall? This is the question Mumbai’s middle class has failed to fathom despite the massive drop in sales and piling inventory.

All recent developments in the sector— falling sales, rising unsold inventory, slow launches,  a slew of freebies announced by developers —  indicate that a price correction is due, but it all depends on the builder’s holding power,  the kind of capital investment in the sector and the geography where prices are really dipping. There is also pressure on developers due to high debt and increased supply in certain markets.

“The reason for slow sales in Mumbai is the pricing of property in the city,” said Pankaj Kapoor, founder, Liases Foras. “Pune, which is closer to the Mumbai market, sees higher sales in residential units despite having just half the units Mumbai has built. High costs paid for land in Mumbai  has skewed the pricing landscape, which is affecting sales,”  said Kapoor.

“Private equity (PE) investment acts as a buffer against the drop in sales in Mumbai”, an industry expert told Firstpost. As long as investors keep pumping in money, the builder is safe even without selling any flat, he said.

However, Mumbai’s realty market has stagnated in financial year 2012 as  buyers have largely kept away from the market, expecting an imminent drop in prices in the near future. This has resulted in a 60 percent drop in absorption rates from its heyday in 2007 and 35 percent from FY11, a recent report by property research firm Knight Frank has pointed out.

But what is interesting is that  73 percent of the total residential units under construction is concentrated on the northern fringes of the Mumbai market as people are now prepared to move further away from the CBD (central business district) to find an apartment that fits their budget.  And with the luxury market offering little respite to developers who are buried under mounting debt, realty players are now rethinking strategy to tap into the largest chunk of buyers looking for apartments priced up to Rs 75 lakh .

Approximately 45% of the planned launches in FY 2013 will be in Navi Mumbai, peripheral western suburbs and Thane micro-markets. Source : KnightFrank

However, it is not clear this strategy will work, since sales drops have been steepest in Navi Mumbai, which has registered a 65 percent dip between January and March 2012 compared to the same time last year.

Going by the economics of demand and supply, the  current scenario should help homebuyers as the huge inventory ( a result of dip in demand and sales ) should  lead to  a drop in prices. However, a regulator-imposed supply crunch through delays in approvals  and an even greater fall in units launched, effectively offset the impact on prices. 55,000 units were launched in FY 2012, down almost 40 percent from the 92,000 units launched during FY 2011.

The sub-Rs 75 lakh pricing strategy will probably not work  unless prices correct in South Mumbai and Greater Mumbai. This is because a rise in prices in the higher-end apartments has a cascading impact on prices even in the suburbs. ” “Unless the price of a flat in Napean Sea falls by around 30 to  40 percent, prices in areas like Thane, Vashi, Kharghar and Borivli will continue to remain high,” Pankaj Kapoor of Liasas Foras told Firstpost.

However, since builders bought the land at exceptionally high rates – take the NTC mill land, for example – they are unable to lower property prices.  “The cost of land is by far the biggest factor that has stopped a developer from reducing prices as the product prices have to be linked to continuously increasing land prices,” said Samanthak Das, national research head at Knight Frank. This is why developers are now oping for development agreements to bypass the mammoth upfront cost that a land acquisition entails.

And, at the same time, the fear of PE investors lashing out at builders for selling property at lower costs has prevented a further price correction. ” The land was bought with PE money at a time when the economy was booming. Unless builders deliver on that high return promise to the investor, prices will not correct,” said Kapoor.


What the builders can do and are doing is offering freebies to dispose of piling inventory. The Mumbai market currently has an unsold inventory of 80,000 units which forms 37 percent of the total residential supply under construction. Developers, in a bid to liquidate their higher priced inventory, have been more open to negotiation in the premium segment, reducing prices upto a maximum of 25 percent in favour of a sizeable upfront payment, explained Das.

Easy EMIs, free car parking space, early discounts, and limited offers are the kind of freebies developers are offering in the high-end segment to improve the absorption rate, said Ashutosh Limaye, head research, Jones Lang LaSalle India, an international property consultant firm.

However, he warned that such freebies will only be present in the luxury segment and not in the affordable segment. This is because geographically, Thane, Navi Mumbai and the Western Suburbs of Borivli and Virar have a higher sales velocity compared to Mumbai, at least on a quarter-on quarter basis. ” Unless the absorption rate falls below 10 percent in these areas, the developer is in a comfortable spot and will not only increase supply, but will also ensure that prices do not  drop, said Limaye.

Hence, as prices in premium micro markets tend to be  more volatile compared to the peripheral suburbs, prices in some South and Central Mumbai locations like Parel, Lower Parel and Mahalaxmi, have declined close to 10 percent over the previous three quarters while prices in Navi Mumbai, Thane and the peripheral suburbs of Central and Western Mumbai have either been stable or have trended marginally upward.

Rupesh Yatesh Dalal
Head Research Department

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