Residential Prices to Witness Marginal Appreciation
According to Jones Lang LaSalle India, a global research firm specializing in the real estate sector, residential unit prices in India are expected to experience marginal appreciation over the next six months. This prediction is based on various factors that are likely to influence the market.
Meeting Middle-Income Demand
- Over 60% of residential launches in the Top 7 cities (excluding NCR and Mumbai) are priced between Rs 2,000-4,000 per sq. ft., catering to the demand of middle-income buyers.
- This pricing strategy is expected to boost demand, as it aligns with the affordability of the target audience.
Impact of Interest Rate Cuts
- The Reserve Bank of India (RBI) has hinted at probable cuts in key rates during the second half of 2012.
- Such reductions will enhance affordability for homebuyers and provide lower interest costs for developers, thereby increasing demand for residential units.
Prevailing Absorption Rates
- Despite the current slowdown, prevailing absorption rates are at nearly 10-12%, translating to an average absorption period of 8-10 quarters for a residential project.
- This implies that, at average prices, a typical residential project should be sold out before construction is completed, approximately three years from the launch.
New Project Launches and Developer Finances
- New project launches, previously slow in Mumbai and the NCR due to approval and land acquisition issues, have now started to pick up.
- This uptick is expected to improve cash flows for developers with large land banks during 2012, relieving some of the financing pressure caused by high interest rates (nearly 15-18% on borrowed funds).
Pricing Strategy Amidst Slowdown
- Despite the financial strain, builders are not cutting prices, as most projects are already priced at nearly cost prices.
- Developers aim to maintain minimum replacement returns, given rising input costs, thus providing home buyers with a small window of opportunity for marginal appreciation over the next six months.
- A second wave of high appreciation is predicted to follow thereafter.
Micro Market Variations
- In some micro markets, such as Gurgaon's Dwarka Expressway, price appreciation has been sharper, with prices almost doubling over the last two years.
Market Overview
- The Indian real estate market experienced a slowdown over the last year, but predictions of a hard landing for the residential property market in 2011 and 2012 have not materialized.