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Expecting A Correction

Ashutosh Limaye believes that prices in the real estate sector might correct towards the end of 2011…

Ashutosh Limaye, Head, Real Estate Intelligence Service, Jones Lang LaSalle, India, on the run-up in property prices, the possibility of a correction, and the debt overhang within the sector

On the run-up in prices
Prices have crossed the peak of 2008, both in Mumbai and the NCR. So there has been 100 per cent recovery.

On affordability
Affordability has become an issue due to several factors. One, prices have gone up and that too within a short span of time. Two, earlier, banks would give 85 per cent of the value of the property as loan. Now they do not give more than 70-75 per cent. And three, interest rates have also gone up.
While salaries have also gone up, the rate of growth in property prices has exceeded it.

On decline in transaction volumes
Transaction volumes have certainly declined. They had started declining in the last quarter of 2010. In the first quarter of 2011, there was a nominal quarter-on-quarter reduction, and in the second quarter they declined even further. On price correction
Price correction has not occurred so far in key markets such as Mumbai and the NCR, or in the other big cities. The third (monsoon) quarter is generally a slow quarter for real estate. The last quarter of the calendar year is typically the most active one. You have the festive season. Most NRIs also visit India during that quarter and make purchases then. All developers have their eyes fixed on that quarter.
I feel developers will not bring their prices down till the last quarter. If a lot of transactions occur in the fourth quarter, prices may start rising again. But if sales do not pick up, we may see a price correction towards the end of that quarter or the beginning of the first quarter of 2012.

On developers’ cash flow problems
In the residential sector there is a lot of demand at the right price point (mid- and low-income housing). Developers are typically accustomed to very high profit margins, because the last four-five years prior to 2008 were very good years. Those high profit margins are not possible now.
In the past, margins were in excess of 30-35 per cent. In big cities they even went beyond 50 per cent. Now margins have come down to sub-30 per cent levels. Developers still won’t make losses. But they must stop benchmarking against the high profits they enjoyed in the past.