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Real Estate - where it is going?

Real Estate one of the hottest investment avenues in Chennai is facing uncertainity as slowly the global meltdown starts percolating to the real economy. With number of job losses, cuts in salaries accompanied by severe liquidity crunch, Real Estate has taken a back seat now. This is very evident from the lower number of new launches over the last 3 months, both in flats and house sites. I have not seen any big project launch in Chennai over the last 3 months.

Couple of new house site projects have come up in satellite towns like Tiruvallur, 40 kms to the west of Chennai but I guess the prices are much lower than before. Even then the promoters are finding it difficult to push sales as it is evident in the form of freebies being thrown in. The land promoters have started offering free registration, free patta to entice land buyers. Some promoters are advertising as "triple benefit" offer where the promoters pays the stamp duty of 8%, registration fees of 1% and the patta charges. Considereing the price of the land they are quoting and the actual value at which lands are registered, this is a very small concession from the land promoters. Normally, lands are registered at one-sixth of the actual price being paid, particularly the sub-urban lands where the guideline value is much lower than the actual sale price.

What is putting pressure on the real estate?

1. High interest rates on housing loans by banks and higher margin amounts - The interest rates on housing loans have gone up over the last 6 - 9 months making many of the borrowers who have taken loan on floating rates to be indebted to banks for their life. For many of the borrowers, the loan term has got increased by 10-12 years or you have to cough up more money as EMI if you want to maintain the tenure. Banks have silently increased the margin money which is to be put invested by the borrowers to buy a property from 10% to 30% in most of the cases. That is, banks are willing to fund only 70% of the property value compared to 85-90% earlier. It means, that prices have come down by atleast 15-20% over the last 3 months with regard to apartments. Recently, Times of India carried an article that second hand flats within Chennai city limits have come down by even upto 30% in high priced areas.

2. Lack of liquidity - The liquidity in the economy was completely sucked out by RBI over the last many months. Now they have started pumping in the money by reducing CRR, repo rate etc., but it will take few months to percolate to the end user. Many of the investors have seen their networth being eroded by the falling stock markets thereby adding to the liquidity crisis. When they lose the money in stock markets, they become more scared to invest in real estate. Speculation plays a major part in all investing activities.
3. Uncertain economic scenario - with talks of global meltdown resulting in economy slowdown and job losses across industries, real estate would be the last thing on the radar for the investor. He would prefer to hold the money in liquid investments to tap in case of need.
4. Who wants to catch the falling knife - the investors have seen the asset prices getting corrected in stock markets and therefore, expect that real estate prices would also correct. And it is correcting. Therefore, who now wants to buy. It is better to wait before the investors sees value in real estate and start committing money.

Where the real estate prices are headed from now?

Right now, the projects which have been launched over the last 6 months are not fully booked resulting in more pressure for the builders to off-load the stock at lower prices rather than carrying the inventory. They are under extreme pressure to fund their ventures in the absence of bank lending, investments by PE funds. I understand that the DLF project has not started at all even after almost a year since its launch. The other big project on the OMR, Chennai Pattinam promoted by CeeDeeYes has also reduced the prices, but in this case, they have sweetened it with a guaranteed buy-back offer after completion.

The prices are definitely going to reduce further in the coming months. There is no sign of recovery in the global markets and real estate which was also driven by excess liquidity on speculative dealings have completely dried out. I think the prices would correct further over the next 6 months. It is also prudent to buy houses,flats which are closer to completion rather than going for a just launched project. You can save lot of pre-completion EMI if you are able to get possession over the next couple of months. There are couple of projects which are closer to completion like the Sterling Ganges in Iyyapanthangal (near Ramachandra Hospital) and Ceebros Shyamala Gardens ( on the Arcot Road next to Avichi School), which has started advertising the savings in pre-completion EMI, as one of the advantages. It goes on to show that sales is not happening at all.

Over the next 6-12 months, I expect the prices to soften by 10-25% to make it much more affordable for people and also by that time the global economic situation gets more clarity. I would wait for some more time if I have to buy a piece of real estate.

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