The real estate industry, which till a few months ago was plagued with issues of oversupply, low demand and weak sentiments has started buzzing with activity. 

Developers beginning to launch projects, and the Residex data released by the National Housing Bank (NHB) for the third quarter ended December 2013 indicates an uptick in home prices across the country with 16 out of the 26 cities that it covers, witnessing a rise in prices of up to 8 per cent over the previous quarter.

The interesting point to note is that even though the GDP growth has yet to improve and interest rates are not showing signs of softening and there is a major uncertainty in the form of upcoming general elections, the residential real estate market has not only bit the bullet of price hike but also project launches. However, even though there has been a pick up in activity, realty experts feel that a favourable outcome at the elections may provide the market with the desired buoyancy.

“The difference in the market six months back and now is that there is a bit of optimism now that things will improve this year. However till election outcome is there with us, we are still there with a bit of uncertainty,” said Anshuman Magazine, chairman and MD, South Asia, CB Richard Ellis.

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RESIDEX DATA

If 22 out of the 26 cities witnessed a fall in residential real estate prices in the quarter ended June 2013, the prices went down in 10 cities of the 26 in the quarter ended September signalling some stability coming back to the sector.
However, by the quarter ended December 2013 only 8 cities witnessed a fall in prices whereas 16 cities including major markets such as Delhi, Pune, Bangalore and Chennai witnessing a rise. Mumbai, however, saw the prices remain flat.

Delhi, Bangalore and Pune witnessed a rise in prices for the first time since the quarter ended March 2013. While Nagpur saw the biggest rise of 8 per cent, Guwahati and Pune saw the prices rise by 7.4 and 7.3 per cent respectively.

Home prices in Delhi rose 3.2 per cent over Q2, while those in Chennai and Bangalore rose 3.8 per cent and 3.7 per cent respectively.

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WHY THE RISE?

There was a perception in the market till two quarters ago that a price correction was imminent due to flagging demand and job losses, which kept several buyers in the wait-and-watch mode. The situation has changed now. Industry experts feel that the price rise is a result of factors such as rising input costs, pick-up in demand and expected rise in economic activity including the creation of new jobs.

“Price is a function of the cost of land and construction cost. Since these two costs have gone up substantially, it has led to a rise in the prices,” said Om Ahuja, CEO, residential services at Jones Lang LaSalle India.

RV Verma, chairman, NHB agrees that the price rise is due to higher input costs, but more significantly due to an upswing in demand from the end-user segment. “There is a strong demand coming in from the end-users. While interest rates are not coming down and have in fact gone up, home buyers are not willing to stay on the sidelines now and are coming into the market for their requirements thereby leading to a demand-induced price rise too,” said Verma. NHB also acts as a quasi-regulator for the sector.

But price rise in not being witnessed across all categories such as the premium segment where prices are still high. “There is some activity in the mid-segment as there is an underlying demand there,” said Magazine who expects a spike in sales and prices after a favourable election result and after the new government announces its reform steps.

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MORE SUPPLY COMING

A rise in demand and a subsequent rise in prices has led to a surge in the number of projects being launched across various markets. An industry insider, however, added that most of these projects were stuck in the queue for environmental clearance and have now got the green signal. “Recently a number of such projects received the environment clearance thereby laying the ground for the launches,” said the source who did not wish to be named.

“There is an expectation that the overall economic activity will rise after the elections and so developers feel that if they launch their projects now then they would be able to capitalise on the demand coming up over the next six months,” said Ahuja.

While big IT companies are getting ready to increase headcount, Ahuja feels that the effect will rub-off on markets like Bangalore, Hyderabad, Pune and Chennai, the main centres for the IT and IteS sectors.

Home buyers and investors however still need to keep the basics in mind. An end-user needs to figure out a good project with decent location at a fair price and not get caught up in price fluctuations. An investor should not get in for quick exits, but enter only with a time horizon of 3-5 years, say experts.