By Sanket Dhanorkar | ET Bureau on 21st Nov 2016 | Economic Times
For many city dwellers, owning a home is always a distant dream. Unaffordable real estate prices compel them to stay in rented properties instead. However, several events and trends taking shape now could soon turn that dream into a reality.
The government’s surprise move to clamp down on black money hoarders through the ban on Rs 500 and Rs 1,000 currency notes is expected to have a cooling effect on certain pockets of the residential market in the country. The housing market is a hot-bed for the indiscriminate use of black money. Many developers, resellers and homebuyers insist on having hard cash as a component of payment in real estate deals.
The recent ban on high value currency notes is expected to deal a body blow to this practice. Another likely side effect of the move is a down ward pressure on the interest rate structure. This would come as a relief to people who cannot afford the high EMIs on housing loans. In addition to these factors, many developers are also aggressively turning towards the affordable housing segment. This effectively opens up another avenue for those who find themselves priced out of the housing market in metropolitan cities.
Further, with many states likely to enforce the buyer friendly provisions of the Real Estate Regulatory Act, homebuyers can expect more transparency. This would also provide them protection from delays in construction and handover, as well as other unscrupulous practices employed by developers. In the following pages, we will outline the opportunities these developments are likely to present for homebuyers, and delve into the emergence of the affordable housing segment.
Fewer new homes in the market
Number of new projects declined in top 9 cities
All cities have witnessed a drop in launches
What awaits housing?
Industry experts believe that the housing market will experience a lull in the coming months, as these developments take their toll. Homebuyers can expect property prices to come down in certain pockets, which would provide an opportunity for them to make their move.
Rohit Gera, MD, Gera Developments, asserts, “There is no doubt that sales which involve the exchange of cash will be affected. This will impact land prices too. If land prices crash on this account, there will be a likelihood of property prices coming down as well.”
As CARE Ratings points out in its report, developers are already grappling with the problem of slow sales, which is leading to rising inventory levels in all major micro markets. Given the growing uncertainty and negative impact on demand caused by demonetisation,people are likely to postpone their plans to buy property, which would lead to further increase in inventory levels. As a result of this, developers and sellers could be compelled to cut down prices to drive sales. Most experts are of the opinion that the secondary market will be visibly impacted, since it deals with a significant amount of cash. ..
Ashwinder Raj Singh, CEO, Residential Services, JLL India, says, “The real estate sector will definitely be affected by the demonetisation exercise, as it has traditionally seen a very high involvement of black money and cash transactions. However, almost all such incidences have been in the secondary sales market, where cash components have traditionally been a ‘must’.” He further states that projects undertaken by reputed and credible developers in the top eight Indian cities will remain more or less unaffected.
This is because buyers who invest in such projects take the home loan route, and all transactions are carried out through legal channels. Hence, the primary market is likely to remain relatively untouched by the radical step. However, home buyers can look forward to better pricing in the secondary or resale market.
“For buyers, this could be a great opportunity to get a deal, especially in ready to move-in projects, as real estate prices are likely to face a downward pressure and a few sellers may be more willing to negotiate and lower the prices of housing units,” says Khurshed Gandhi, Managing Director, Consulting Services, India, Cushman & Wakefield.
Excess inventory build up in this segment has already put a lid on prices, making existing possession-ready properties a more viable option for buyers. For those who are keen on buying directly from the developer, the options might be limited.
However, the demonetisation move could prove to be a boon for those who have been looking for deals in the high-end or luxury housing segment. According to Rohit Poddar, MD, Poddar Housing and Development, this segment could face a big impact in terms of pricing. “A large cash component is the norm in the luxury housing segment, as many buyers insist on using cash.
But with the government clampdown, sales in this segment are likely to dip, leading to price cuts. Some developers have already slashed prices.” The affordable luxury segment, which is priced within the reach of buyers slightly below the HNI category, may offer good opportunies in the coming months.
Home loan rates will soften
If you have been putting off buying your dream home because you’re not ready for the high EMIs, you can expect to have more breathing room now. This is because lending rates are likely to come down further. Due to demonetisation, a large amount of cash in circulation will be brought within the purview of the formal banking system through low-cost current account and saving account deposits. Since this will reduce the dependence of banks on higher cost borrowings, banks are likely to slash the marginal cost of funds based lending rate (MCLR). This will accelerate the fall in home loan interest rates, since CASA ratio is used in computing MCLR.
Fixed deposit rates have dropped across banks
Increased liquidity has brought down deposit rates, which would in turn lower lending rates.
If home loan rates are cut by 25 BPS
The surge in low-cost deposits is likely to bring down bank deposit rates and ultimately lead to a drop in lending rates as well. Here’s how a decline in home loan rates will impact borrowers.
If you have a loan of Rs 50 lakh at 9.5% for 20 Years : A 25 basis point cut will reduce the EMI by Rs 812 per month.
Rs 46,606 Old EMI at 9.5% : Rs 45,793 New EMI at 9.25%
Lenders usually leave the EMI amount unchanged and reduce the loan term when rates are cut. The extent of reduction will depend on the balance tenure of the loan. The longer the remaining tenure, the greater the impact.
Balance loan tenure at 9.5% : 5 Years
Number of EMIS reduced at 9.25% : 1 EMI
Balance loan tenure at 9.5%: 10 Years
Number of EMIS reduced at 9.25%: 2 EMI
Balance loan tenure at 9.5% : 15 Years
Number of EMIS reduced at 9.25% : 5 EMI
Balance loan tenure at 9.5%: 20 Years
Number of EMIS reduced at 9.25% : 12 EMI
MCLR rates change
The 15-20 bps reduction in Axis Bank’s MCLR shows the emerging trend
While the currency notes ban has left less cash in the hands of consumers, thus driving down consumption for the time being,taking older Rs 500 and Rs 1000 notes out of circulation is also expected to have a longer term deflationary impact on the economy. It will bring about a slowdown in highticket purchases such as white goods, jewellery, high-end retail and of course, real estate.
“Banks that have excess liquidity will look to sanction more loans going forward, and will probably effect another round of interest rate cuts on home loans,” says Adhil Shetty, CEO, BankBazaar.
“The sudden decline in money supply and simultaneous increase in bank deposits is going to adversely impact consumption demand in the economy in the short term. This coupled with the adverse impact on real estate and informal sectors, may lead to the slowing of GDP growth,” says Sunil Kumar Sinha, Principal Economist and Director -Public Finance, India Ratings & Research.
This will probably lead to a softening in inflation, which may prompt the RBI to carry out interest rate cuts and give more leeway for banks to lower their lending rates. “With this move, we also expect that the RBI will reduce rates, which will have a direct impact on home loan interest rates, thus giving consumers more cash flow to invest in real estate,” says Brotin Banerjee, MD & CEO Tata Housing Development Company. Several major banks like SBI, HDFC and ICICI, have only recently slashed home loan rates
SBI continues to offer the lowest interest rates under its recent festival offer of 9.15% for loans of up to Rs 75 lakh sanctioned in November and December this year. Private lenders HDFC and ICICI Bank now offer interest rates at 9.2% for home loans of up to Rs 75 lakh, down from 9.35%. Experts predict another 10-15 bps reduction in interest rate soon.
Until recently, developers were more focused on offering solutions in the premium and upper-mid range segments, since they expected high demand in this space. However, there has instead been a visible shift in demand from big ticket purchases mostly led by investors, to purchases by end-use customers, who now constitute almost 90% of aspiring home buyers. As a result of this, builders are increasingly shifting their attention to the affordable housing segment.
“Not only are prices down in most cities, but developers have also introduced schemes and incentives to make deals more lucrative.” Anuj Puri Chairman & Country Head, JLL India
Data from Cushman & Wakefield, a real estate consultancy firm, shows that the number of launches in this segment in the first half of the year has doubled from the same period last year. In the top eight cities alone, 17,000 new affordable housing units were launched, out of a total of 60,000.
Pune saw the highest supply, with 4,170 new units being launched. Bengaluru came a close second with 4,155 units. Affordable housing is distinct from low-cost housing, which is meant for the economically weaker section and is equipped with only basic housing facilities.
These units are typically up to 300 square ft. in size, and priced up to Rs 15 lakh. Affordable housing, on the other hand, is mostly meant for the middle-income families who can afford to spend Rs 30-50 lakh. These are mostly located on the peripheries of the bigger cities. Anuj Puri, Chairman & Country head, JLL India, says, “Constraints like the nonavailability of land and high costs often make housing within primary city boundaries unaffordable. Therefore, affordable housing projects are largely located in the outer peripheries of these cities.”
However, these provide all basic amenities, and some large projects even have social amenities such as landscaped gardens, schools and shopping centres. “Staying on the outskirts is no more considered to be an inconvenience. Additionally, these newer locations are well planned and offer a lot of green spaces as compared to city centers,” Banerjee points out. However, to keep costs under check and improve affordability for the buyer, developers typically offer units in 1RK and 1BHK size, with a reduced saleable area of up to 350 square ft. for 1RKs and up to 500 square ft. for 1BHKs.
The average size of affordable housing units launched in the first quarter of 2016 was reduced by 11% from those launched in the corresponding period in 2014. In Delhi NCR, this reduction was to the tune of 8%. Many projects in this segment are coming up in the form of integrated townships, which attempt to provide maximum value for money to buyers. With more serious developers entering the segment, there has been a distinct improvement in product quality. “The sales of smaller builders are being cannibalised by branded developers, who offer a better quality of lifestyle,” Poddar observes.
Homes are getting smaller with time
Apartment sizes sold in top 9 cities
Bengaluru, Mumbai and Pune are driving sales for smaller sized units
Is it right for you?
If you resent shelling out large amounts of rent, but have been afraid of taking on the burden of high EMIs, affordable housing could be your way out. “Thanks to the recent spate of price declines driven by the market realities, affordable housing has never been more accessible to the common man. Not only are prices down in most cities, but developers have also introduced various schemes and incentives to make the deals more lucrative,” Puri adds.
Further, in recent times, the government has also introduced various special incentives in terms of tax benefit to both the developer and homebuyer. There are also several schemes aimed at promoting public-private partnerships for the development of affordable housing projects, in order to realise the government’s vision of ‘Housing for All’ by 2022.
Units lie unsold across segments
Noida and Mumbai together account for 41% of unsold inventory in this segment
The Budget 2016 directive allowing 100% deduction on profits earned by developers of affordable housing projects provides an added incentive to builders. It is also likely to lower the chances of delays in the construction and handing over of possession, which has become the norm in recent years. This is because the budget has put the onus on the builders to finish houses within three years of starting work, if they are to avail of the exemption for affordable homes.
“The affordable housing policy has been drafted to incentivise timely delivery, and will motivate developers to finish their projects and handovers according to set timelines. Further, with the Real Estate Regulatory Authority coming in soon, timely delivery will become a norm,” says Jayashree Kurup, Head, Content and Research, Magicbricks.
Old inventory remains unsold
NCR accounts for nearly 30% of unsold inventory aged more than 2 years
The government’s move to exempt service tax on the construction of affordable houses of up to 60 square metres will also fuel interest in this segment, and keep prices low. There is also a cost benefit for developers in building these units. The project completion time is much shorter in this segment, and sales are realised much more quickly than for mid-and-high range properties.
Further, for first-time homebuyers, the government offers an added tax deduction of Rs 50,000 per annum on interest payment for housing loans of up to Rs 35 lakh, for properties valued at under Rs 50 lakh. This is over and above the Rs 2 lakh deduction allowed on interest payment on any housing loan under the Income Tax Act.
According to experts, affordable housing is better suited for end use, than it is for investment. Since the scope for price appreciation is limited in the segment owing to smaller unit size and remote locations, homebuyers should consider various aspects before opting for affordable housing project, asserts Gulam Zia, Executive Director, Advisory, Retail and Hospitality, Knight Frank India.
According to Puri, focusing only on the price tag is a bad idea, as this can trick the buyer into investing in an inferior project, or one located in an area with little connectivity. “Since most affordable housing projects are ough background check of the developer before putting the money into any project is crucial. “Buyers should verify the developer’s credentials based on their project completion timelines, reputation in the market, customer feedback, and how much experience they have in the construction business,” cautions A.S. Sivaramakrishnan, Head, Residential Services, India, CBRE South Asia.
Better than renting
Given the conditions at present, Kurup advises that young couples who pay rent should consider buying ready-to-move-in apartments which have EMIs of up to 25% more than their monthly rent. However, it is important to ensure that the distance to their workplaces does not increase so significantly that the expense it adds to their monthly outflow. “Buy according to your current needs, and ensure that the price fits into your budget. Over the next five years or so, your property value will go up, and then you can sell it and use the proceeds to upgrade,” Kurup adds.
Puri believes the market is currently very well suited for young working couples and professionals. “The ideal strategy for them is to invest in a well-located ‘starter home’ in a project by a reputed developer, with a view to upgrading in the future.
“Affordable housing is better suited for end use than for investment, given the limited scope of price appreciation in the segment.” Gulam Zia Executive Director – Advisory, Retail and Hospitality, Knight Frank India
By then, suburbs which are currently in the initial stages of development would have sufficient infrastructure to support constructed in remote locations, in order to take advantage of the availability of cheaper land, the most important criteria for selecting the right project is availability of transportation facilities in the vicinity, and its connectivity with the city centre,” Zia adds.
“The buyer should also evaluate if the lifestyle offered by the affordable home is in line with their aspirations,” Gandhi adds. Social infrastructure, like education centres and healthcare facilities, should also be within a reasonable distance from the housing project. Most importantly, conducting a thora decent lifestyle.” He points out that Navi Mumbai, Bengaluru, Chennai and Pune are obvious investment destinations because of their accelerated growth and employment opportunities.
“Cities which have a robust economy and multiple employment opportunities are the best options for homebuyers in the affordable segment. Cities like Mumbai, Pune, Bangalore and Hyderabad are therefore likely to witness sustained demand for affordable housing projects in the future,” Gandhi concludes.
Grey market interest rates down to 5%
Interest rates have dropped to 5% from as high as 30% in the grey market, where a flourishing under-the-counter lending business has been stifled by demonetisation. Under grey market lending schemes, investors pool in money that is lent to real estate developers, small companies and people in distress at high interest rates. These loans are given in cash without written agreements.
Now loans can’t be given or repaid in the demonetised Rs 500 and Rs 1,000 notes, which were the most widely used. “The interest rates charged were anywhere from 18% to 30% per annum,” said an investor who is part such an arrangement. “Those who were to return money borrowed earlier are offering it in high denomination notes, and we ourselves are stuck with these. Interest rates have come down to minimum, about 5% per annum or even less,” he added.
Affordable projects coming up
The launch of affordable housing projects has doubled in the first half of 2016-17, far ahead of other segments.
More launches across cities
Ahmedabad and Delhi saw the highest proportion of launches in affordable housing segment in recent times.
Source: Cushman & Wakefield
Infrastructure adds advantage
Planned infrastructure projects that promise better connectivity can boost affordable housing in some pockets.