At Capital Mind, we have captured a slowdown in the Capital Mind All India Housing Index (based on the Residex). This slowdown seems to be deepening.
Knight-Frank has found alarming dips in the sales of the top 25 real estate companies, in a March 2014 report.
Revenues too have dipped to 1% growth. The distinction between sales and revenue is that a sale is a one time activity, but revenue is recorded over the period of the construction. This means therefore that construction activity has slowed as well.
Regionally, the North and South have dropped considerably from the previous year. Profitability too has dipped due to higher cost of labour (that inflation word again).
Cushman and Wakefield Sounds Their Warning Bell
Cushman and Wakefield, according to Livemint, have said that investments have dropped substantially in the real estate sector.
The Indian real estate sector saw a significant drop in investments in 2013, a sign that investors are cautious about backing projects amid economic downturn. According to a report titled Investment Market beat 2013 by property advisory Cushman and Wakefield, investments in India’s real estate sector dropped 65% in 2013 compared to a year ago.
But Prices Aren’t Yet Falling?
Prices are sticky on the downside. You don’t sell at a loss because you don’t like to take a loss. You’d rather not sell.
A builder needs to keep an uptick on his “rack” rates so that earlier investors keep thinking the market prices are going up. However, they do deep discounts to customers that are actually interested. Rack rates of Rs. 5,000 per sq. ft. now means you can get something at Rs. 4000-4200. Earlier investors are now willing to sell way below builder prices because they just need to get out. See an example on quickr:
So while headline prices aren’t falling the informal rates are lower. Prices don’t easily fall from the perspective of “registered prices” because registration prices are typically at the limit prescribed by the corporation (the rest is in “cash” or black money).
Prices will start to decline when more and more people get desperate. Transaction volumes will increase when prices fall, and if the selling pressure is too high, then prices fall even more until everyone writes off real estate. We’ve had a 15 year up cycle in real estate, and the signs are clear that we’re in the endgame.