Analyzing Mid Market Residential Segment

Is this is a good time to buy? How much are prices likely to drop? Should I wait or buy now? Unfortunately, the answer is not a simple “yes” or “no”. One needs to consider factors such as economic growth outlook, interest rates, job security, demand, credit supply etc, understand the overall dynamics of the real estate sector. Rough estimates show that out of the total 100% real estate market the residential segment weightage is approximately 75% whereas 20% is commercial office spaces and balance 5% comprises retail, hospitality. The mid market residential segment (residential properties between Rs 15 - 50 lakh) represents nearly 85% of total mortgage disbursements in India. Therefore, the mid market residential segment represents nearly 64% of the market. Almost 55% of mortgage finance disbursement for residential properties happens within the top seven cities and the balance 45% is shared by the whole country.

There was a dearth of two to three bedroom properties within this range of Rs 15 - 50 lakh within the greater metropolitan areas of major cities. Easy supply of money from equity capital sources created an artificial demand of land for the development of large township projects and SEZs. Everybody started announcing huge and multiple projects but ignored the calculation, execution and delivery capability perspective involved. Most developers started projects 10 - 20 times the total square footage of what they had delivered in the last 20 - 30 years. The various sources of institutional capital lapped up the story. However critical considerations like the nature and kind of organisation structure, management bandwidth, labour, capital equipment, machinery, project time were ignored.

The pricing of residential projects went up by 400 - 500% in most cities between 2006 - 2008. Interest rates also went up from an all time low of 7.00%, 20-year fixed mortgage to as high as 13.75% floating rate in 2008. This put a lot of strain on affordability. The stock market crash and job insecurity that followed the Lehman Brothers fiasco, drove away investors and actual buyers. The credit tightening from domestic banks and marked to market losses started reflecting on credit supply to the sector and the market went dead. Developers came stress with no cash flows from the sale of projects and rentals of commercial office spaces and retail spaces also dipped by as much as 50% and everybody started playing the waiting game and bottom fishing to get back into the market.

However, before you conclude the deal, do a due diligence on the developer’s track record, talk to the financing bankers about the delivery capabilities of the developer. Only buy from a reputed developer and if possible buy a completed project or one which is nearing completion. Don’t succumb to the pressure from sales staff saying “if you don’t buy now, you don’t get an apartment of your choice”. It is wise to monitor the project site for 3 - 4 weeks from the time you first visit the project and observe the number of laborers, the progress of the project every week, take pictures for 3- 4 weeks of the site to see the progress yourself and be convinced that construction is moving at a good pace. Ideally over 4 weeks, a good developer’s project should go up by 2 levels. Avoid first time and small developers as they have limited capital and resources and may not be able to deliver on time. It is advisable to use a reputed broker to help choose the right project and right developer and get all the relevant information. The 2.00% fees you will pay them is money well spent in getting that dream home.