Bangalore real estate cooling off

After seven years of hectic activity, the Bangalore real-estate market is hesitant, perhaps more on the part of bulk investors than serious home buyers. Blame it on the rising inflation or the economic crisis in the US. Like other locations, Bangalore real-estate, termed ‘hot’ by leading realty consultants, seems to have cooled off in the last few months.

Though property prices have not seen a dip, home sales has come down “at least by 50 per cent”, say consultants. According to Mr Karun Varma, Managing Director, Jones Lang LaSalle Meghraj, a real-estate services firm, in Bangalore, “Certain Grade ‘A’ developers have experienced a sustained drop of around 50 per cent on the monthly level of bookings compared to what they enjoyed prior to December 2007.”

First-home buyers, it seems, are still interested in the market, though it is the second- or third-home buyers who are shying away.

This is because of the overall economic scenario, the US economic crisis, sub-prime issue, etc, reasons Mr Farook Mahmood, Founder-President, National Association of Realtors - India. “A certain percentage of these buyers are working in the US, and hence an economic crisis there will have an impact here too,” he says.

However, 2007 and 2008 have not been so bad, says Mr A. Balakrishna Hegde, President, Confederation of Real Estate Developers’ Association of India (CREDAI), Karnataka. Statistics show that 26,000 units were sold in 2007, higher than in 2002-2004 whenabout 22,000 units were sold each year. But it is a far cry from the peak sales of 30,000-32,000 units a year in 2005 and 2006.
Of shark and remora

Mr Varma makes an interesting analogy: Investors buying residential units in bulk are like ‘sharks’ while retail investors are the ‘remora,’ a fish that stays close to sharks. Typically, in a bullish phase, the shark invests in projects at competitive prices. As the market drops, the developer holds on to stocks till the market ‘corrects’, to give him acceptable profits.

But the ‘shark’ sells out at wafer-thin margins, dragging the market to the depths. Thus, in addition to immediate profit booking, he rolls his cash into more units for a future profit. The ‘remora’ is more likely to align with the developer and hold on to stocks. In fact, as the ‘shark’ sells, the ‘remora’ flocks to pick these units up.

While the sharks could have a drastic impact on the market if left to themselves, the remora’s decision does not have as drastic an effect on the market.

Also, the developer would be able to influence a retail investor better than the large investor in such a phase. “Thus, it is not difficult to see who the favourites would be for the developer in the present circumstances,” says Mr Varma.

But this comes with a price… developers offer competitive pricing and other sops to retain the retail investors’ support and keep large investors away.

So, repeat unit buyers get pre-launch offers and other marketing sops to get wooed into investing further into the developer’s portfolio.

Mr S.N. Nagendra, Senior General Manager-Karnataka and Goa, HDFC, cautions, “It’s a little risky to be selling to investors in such a market, and many first-home buyers have adopted a wait-and-watch approach.”

Prices are perceived to be high, and so they are a little hesitant, he adds.

A recent report from Cushman & Wakefield, real-estate services firm, says that end-users and investors over the past six months have adopted a cautious approach towards purchasing residential plots, apartments, villas, etc, in Bangalore, which is quite evident from the relatively lower collection of stamp duty and registration fees by local authorities.
‘Correction, not crash’

However, reputed developers offering homes in booming locations in the city are still selling. In fact, some of them have upped their pricing by 3-7 per cent, with South and South-West homes costing 3-5 per cent more. In the North of the city, prices have gone up by 8-12 per cent, says Mr Hegde.

Disbursements have bettered expectations, Mr Nagendra adds, indicating that this is a correction phase and not a crash as witnessed in 1996. Mr Mahmood says that the market currently is more need-based and mature; there’s no need to panic, he adds. He expects prices to head north again in the third and fourth quarters, and recommends buyers make their deals then. There’s a 10 per cent more supply than demand in the market now but this should get absorbed by the last quarter of 2008-09.

According to the Cushman and Wakefield report, capital values appreciated marginally by 1-2 per cent across micro markets in January-March 2008 on account of increasing demand, primarily from a migratory and working population. It is expected that both capital and rental values in the city will continue to stabilise during the next few months across select micro markets (Whitefield, Kanakapura Road, Outer Ring Road) with a large number of investment-based properties expected to see softening of rates over the next six months.

via BL