Real estate market in for a sea change

News Posted - 2010-02-08

With the economic slowdown, the real estate market will undergo a sea change and both residential and commercial markets will get corrected. This will lead to stabilised market for real estate across the country.

As far as residential space is concerned, the market for affordable housing has been on the increase. In the last few months, there is a sharp correction in property prices, reduction in mortgage rates and smaller unit sizes per apartments. There has been an overall price correction of 30 per cent.

At present, transaction prices in most markets are down by 25-30 per cent across the board. However, demand remains subdued with end-users postponing their home-purchasing decisions given an uncertain job market and expectation of further price corrections.

Price corrections are more pronounced in new launches than existing projects, which are mostly sold to end-users/investors and hence are cost covered, says Anuj Puri, Chairman, Jones Lang LaSalle Meghraj (JLLM), India.

In a recent study conducted by JLLM, he has stated that the industry focus has shifted towards affordable housing and the margins are becoming thin on account of the high cost of existing land inventory (acquired during 2006-08) and the current cost of construction. JLLM expects Rs. 1,800-2,000 per sq. ft. as the bare minimum pricing level in the current market.

For commercial space, overall rents have declined by 40 per cent from the peak given the subdued absorption levels and decline in pre-lease activity.

Going ahead, Tier-II and Tier-III cities are likely to take a major beating as they could lose their competitive advantage with sharply falling rentals in the Tier-I suburbs/ metro locations.

Mr. Puri feels that the overall office space demand is expected to more than halve from the 2005 levels of 48 million sq ft in 2009 due to the weak spending environment in off-shoring.

However, this to an extent has been offset by new demand from non-IT corporates. Space vacancy levels across micro markets are likely to increase during 2009. The market is expected to recover in late 2010. In the retail segment, rentals are coming down by 20-30 per cent as the retail spending has slowed down.

Despite the correction, there is more room for more. The fact is that the existing lease rental is more than the international standards. So rental does not appear to be an attractive segment anymore.

Source: Hindu 15/2/09