Why are flat prices not falling?

MUMBAI: Wanting money to buy shares in a tumbling market, an investor who held a flat at Andheri sold it for Rs1.2 crore in a deal that included parking and stamp duty registration.

Just three weeks ago he was quoting Rs1.4 crore for the 1,000 sq ft flat. Ravi Developers is offering a discount of Rs1 lakh to Rs6.5 lakh if  the flat cost is paid within a stipulated period for his project at Mira Road.

Swastik Developers recently sold 47 flats at Thane by giving a car per flat and offering home loans at 8 per cent interest by tying up with two cooperative banks.

Yet, when Shailesh Maheshwari, executive with a local financial securities firm, visited a property exhibition in Vashi recently, he was stunned by the rates quoted by developers. Flats at Vashi were being quoted at Rs3,500 to Rs6,100 a square foot, at Belapur for Rs3,200 to Rs5,100, and at Airoli for Rs2,500 to Rs3,500.
“Why?” said Maheshwari.

It’s a question that is bothering many house hunters. Over the past few months, brokers and developers admit, there has been a 45 per cent drop in the number of transactions. Some developers like Nahar Amrit Shakti and K Raheja are offering disguised discounts. Why, then, are developers not reducing prices upfront?

“Developers are squeamish about having to drop their rates for they don’t want to be seen being flexible,” says Anuj Puri, country head, Jones Lange Lasalle Meghraj, a global property consultant. 

“They think it would undermine their credibility with regard to pegging proper market prices.”

Developers usually sell some properties (residentialcommercial) to investors even before a project is announced. This helps them to fix a benchmark price for genuine buyers later. Since the benchmark is determined in the initial phase of the project, the investors do not lose out.

According to a senior executive with a housing finance company, about 30 per cent flats are sold first to investors, squeezing availability in the open market. Genuine users then have to pay higher rates.

Besides the money generated from pre-sales, property experts said, developers are rolling in money raised from low-cost borrowings, IPOs, and equity from foreign funds.

“But over the past few months, the developer has had to account for high land cost, cost of construction, TDR, and labour costs,” says Ram Prasad Pardhi, proprietor, Pinnacle Realty. “If he sells at a lower rate, what will he do for the two years it will take his other projects to get completed? He cannot afford to let the interest rate meter tick if he has bought the land at a high rate.”

According to Puri, however, developers over the past year have recovered the cost of land and construction by selling large chunks of flats in phases. “As earning profit is the sole concern, they are taking time to sell the balance flats,” he says.

“Bad government polices are leading to lopsided development,” says Sanjay Shenoy, a broker in Andheri. “For every 1,000 sq ft new commercial office built, 5,000 sq ft residential area has to be constructed. This is not happening.

Instead, more commercial space and retail spaces are getting developed as they bring greater profits. This, in turn, is causing property prices to rise as there is too much money chasing too few properties.”

Shenoy also points out that most investors in the residential sector today are senior-level management executives, who already own a flat. They may have bought the flat on loan in the 1990s and have already repaid the loan, thus encouraging banks to fund their second flat.
m_rajshri@dnaindia.net