Demand for housing on the upswing

Home-loan disbursements have picked up as interest rates are under check. RBI is also taking steps to bring in the revival in the real estate sector. RBI has already stated that the current customers should be offered an alternative between continuing with their old home loan rates or move to new rates decided by the base rate system. This will help the old home loan borrower to negotiate for lower interest rates now that the base rate has kicked in from 1st July 2010. However, it is too early to determine the percentage of existing home loan borrowers who might opt of this. As per ICICI Bank, interest liability of existing home loan borrowers will not be impacted unless they voluntarily shift to the new system. The final lending rate will not change drastically.

The real estate sector is back in news. Property prices have been on a sharp rise since the last three quarters as there has been an upswing in the economic growth of the country. This has created improved affordability, lower loan interest rates and better job security helping revive demand for housing. Here is an overview of the current scenario in this segment in various parts of the country.

Mumbai

Judgement on FSI:

In June this year, The Bombay high court quashed the rule that allowed 33% additional floor space index (FSI) to builders executing projects in suburban Mumbai in lieu of a fee. FSI (Floor Space Index) refers to the constructable area on a plot. A FSI of 1 means that the area of construction should be equal to the area of the plot. E.g. a plot of 1,000 sq ft can only have a built-up area of 1,000 sq ft and no more.

The maximum permissible FSI in suburbs is 2 of which FSI of 1 was allowed by the act and developer could avail an additional FSI of 1 if required through transfer of development rights (TDR). The TDR (transfer of development rights) policy was launched in 1991. Owners whose plots were reserved for playgrounds, markets and gardens or meant for road widening, could surrender their land to the BMC and get an equivalent space in the suburbs. In return, they are allowed proportionate TDR rights that can be utilised by themselves or owners, who can also sell the TDR rights.

Earlier in 2008, the government had allowed additional construction rights by hiking the FSI in Mumbai suburbs from 1 to 1.33. This meant that every building in the suburbs was eligible for additional construction rights up to 0.33 FSI without needing to purchase TDR, this however was negated by the Bombay court’s ruling.

The new Bombay court judgment has now lead to an increase in TDR prices by around 20%, thereby increasing the cost of development for the builders.

The prices in Mumbai have shot up in recent times. As per reports, on an average, the prices of residential projectsin Mumbai have risen by around 20% in the past few quarters. This is mainly because of less supply.

On account of the economic turmoil, the developers have not invested in new projects. They are looking at selling their existing projects. Some even ventured into developing small launches in the premium segment of the housing market. While, the units/month sold on average during 1QFY10 was lower than that sold during 4QFY09 by 18%, the months of unsold inventory stood at 8, which is the lowest level since January 2008. As per analysts, the fall in volume on the sequential basis is mainly due to price hike.

NCR region:

After a slowdown in launches during CY09, the Noida-Greater Noida region during Q1CY10 saw the launch of a number of new projects. Over 50,000 apartments are planned to be constructed over CY10-12. Further, the FSI in Noida was enhanced to 2.5x for group housing projects from 1.5-1.75x earlier, which led to more affordable housing projects. Noida saw a higher demand during 1QFY10 (4400 units) as compared to 4QFY09 (3000). In Gurgaon, while on YoY basis, the units/month sold were lower, on the sequential basis, there was a pick-up of 15% to 1900 units sold in March. The price hike would be capped to about 5 to 15% as there is adequate supply to meet the demand.

Bangalore is the fastest growing major metropolis in India. Residential market has seen some significant action. With pick up in economic activities, hiring is back in the IT segment. The IT/ITES sector accounts for about 50-70% of demand in India’s property sector. Bangalore being the IT hub, is witnessing good demand in residential space. The pick-up in the IT/ITES sector have resulted in an improvement in sentiment due to rising salaries and increased job security. This has driven the residential sales. However the buyers are price-conscious and hence the mid-segment is seeing aggressive new launch plans for FY11 which are now being announced after a gap of almost 2-3 years. Property prices have stabilised and have started seeing a rise in mid-segments.

Chennai: Many plush property projects are coming up in the next 2 to 3 years. With the city growing as a major IT hub, demand is picking up on account of the recent hiring by the IT sector. Monthly sales volumes across major cities such as New Delhi, Mumbai, Bangalore, Chennai, Kolkata and Hyderabad are around 2-3 times from their troughs.

Kolkata: Kolkata’s real estate market is buzzing with activity. The city is witnessing new construction activity and re-development which are likely to come up within the next 12 to 24 months simultaneously. The middle class has started migrating to the suburbs in search of affordable housing. The development in the industrial sector coupled with the boom in the Information Technology led to a significant growth of the real estate in Kolkata. For eg: Tata Housing has increased prices of residential units at Eden Court, the company’s first housing project in West Bengal, for the second time in recent times. From Rs.2,750 per square feet since inception, the price has touched Rs. 2,900 per square feet. With few ready-to-occupy flats available the price hikes have happened due to imbalance in supply and demand.

Lending by banks

Home-loan disbursements have picked up as interest rates are under check. RBI is also taking steps to bring in the revival in the real estate sector. RBI has already stated that the current customers should be offered an alternative between continuing with their old home loan rates or move to new rates decided by the base rate system. This will help the old home loan borrower to negotiate for lower interest rates now that the base rate has kicked in from 1st July 2010. However, it is too early to determine the percentage of existing home loan borrowers who might opt of this. As per ICICI Bank, interest liability of existing home loan borrowers will not be impacted unless they voluntarily shift to the new system. The final lending rate will not change drastically.

The government is also looking at changes in the prepayment rules to enable a home loan borrower to shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan. Though still in discussion, as per the government, banks would have to provide a two-month window to their new borrowers to shift to some other bank without prepayment penalty if they have raised interest rates too quickly after disbursement.

On the flip side, the banks have become more cautious with lending. Earlier banks used to finance nearly 80% to 85% of the transacted value. Now only 70 to 75% of the total property value is financed. Further, the lenders pick the lower value of these two – the market valuation done by bank or the transacted value.

In the end

With a better economic outlook and lower interest rates the demand for housing is likely to be on the upswing. Also with the revised paper on DTC, the government has proposed to retain the income tax exemption for up to Rs 1.5 lakh paid as interest on housing loans in a year. This will bring the cheer back to home loan borrowers. The demand for houses in India is huge as many people do not have their first house. However, the supply is limited on account of zoning rules. Also a lot of politics is involved. Buying a house is a lengthy process. Further, experts feel residential prices have reached bubble levels. Further hike in prices would lead to lower sales. Also with inflation levels not cooling off, the interest rate hike would be on the cards. A need for a regulator like the one for the petroleum ministry and for civil aviation is needed. This would benefit the sector in the long run.