Realty yields to economics ::Business Line

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Buyers baulked at exorbitant prices across major Indian cities. Builders felt the pinch of escalating costs, slowing sales and rising inventory, but were reluctant to cut rates. For the realty sector, the laws of economics kicked in nonetheless. Realty came off its high horse and took some tentative steps towards reality in 2012.

UNDERPERFORMS

The price juggernaut in motion over the last few years seems to have slowed or even reversed in many Indian cities, shows data from the NHB (National Housing Bank) Residex index.

The index tracks price movements in the residential housing segment in 20 cities across the country.

In 9 of these 20 cities, residential realty price as on September end was lower than in the beginning of 2012.

Also, in 10 of the 11 cities where price increased, the growth rate was in single-digits, mostly less than 5 per cent.

LOWER RETURNS

This means that unless there is a sharp pick-up in the December quarter, returns from real estate on an average will be lower than that on equity, debt and gold in 2012 – by a wide margin.

Realty’s performance this year is a reversal from 2011 when residential home prices increased in 9 out of 15 cities, mostly in healthy double-digits.

True, houses in most major Indian cities remain unaffordable for a majority of the population due to the sharp rise in prices over the past few years. But the 2012 performance brings closer to home the fallibility of real estate’s much-touted invincibility as an asset class.

BASE EFFECTS

In 2012, only in one city – Jaipur, did residential real estate prices rise sharply (around 33 per cent). But this seems to be a result of the city catching up from a low base.

The Residex shows that unlike most other cities, real estate prices in Jaipur had steadily declined over the years. In December 2011, the index for the city was almost 36 per cent below than in 2007, the lowest among its peers.

Also, Hyderabad which had seen price declines over the past few years saw a 6.3 per cent rise in rates this year. This could be indicative of more value buying in real estate in 2012.

On the other hand, many cities which had seen rapid escalation in home prices since 2007 sounded a retreat or grew only marginally in 2012. For instance, in Bhopal and Faridabad where prices more than doubled between 2007 and December 2011, prices fell in 2012.

Also in Kolkata where rates had almost doubled, prices remained nearly stagnant this year, growing by just 0.5 per cent.

But Chennai where prices had almost trebled between 2007 and December 2011 bucked the trend.

Real estate prices in the city which is mostly end-user driven grew 5.4 per cent till September 2012. But this too was a far cry from the runaway growth seen in earlier years.

Also, Mumbai and Delhi – the biggest real estate markets in the country with a reputation for being investor-driven – saw prices rise, but at rates much slower than the past. Among the metros, only Bangalore saw rates decline in 2012 despite stagnant prices from 2007 to December 2011.

Among the non-metros, Pune saw the highest growth in residential real estate prices (9.2 per cent) while Surat witnessed the maximum fall (9.2 per cent) between December 2011 and September 2012.

POCKETS OF STRONG GROWTH

While on an average basis, real estate price rise moderated across cities in 2012, there were some pockets of high growth.

For instance, in locations such as Nala Sopara and Pokaran Road outside Mumbai, residential real estate rates rose between 50 and 65 per cent in 2012.

This may be due to the high demand for affordable houses which are not available within the city. Mumbai’s Lower Parel area which houses several offices also saw rates rise by 40 per cent in 2012.

Similarly, in some suburbs of Chennai such as Guindy, Ashok Nagar and Chetpet which are being connected by the metro rail project, residential realty rates rose between 26 and 32 per cent.

This suggests that price increases in real estate followed fundamental factors such as affordability, proximity to employment hubs, and infrastructure development.