The Upside Of High Residential Inventory

For the last 3-4 years, residential real estate market has seen sluggish demand, which has caused the unsold inventory levels to go up in some of the key Indian geographies. Supply/demand mismatch in terms of price and configurations has been the main reason for the rise in inventory levels.

From developers’ point of view, this has eventually resulted in:

1. Correction of prices in many markets in order to improve sales velocity of unsold products

2. Increased project launches with the right configurations to cater to existing demand

Interestingly, 2016 had started on a sunny note. The residential real estate market, which had witnessed a slump in project launches in 2015, showed a visible comeback in the first quarter. There was a six-fold increase in launches of the affordable housing projects, as developers predicted greater demand in this highly price-sensitive segment.

One way or the other, factors have now transpired to make residential real estate a buyer’s market that gives buyers the upper hand. They have a lot of options to choose from, with the added benefit of flexible rates and attractive payment plans.

The Advantages Of A Buyer’s Market

Real estate prices usually drop as inventory increases – but even if they don’t, negotiation power goes up. Some realtors and refuse to understand the realities of a slow market and will not accept any offers less than what they feel they should get. If a buyer feels that he is not getting the best possible deal, he should be confident enough to walk away and look at the next option on the list. Remember that in a buyers’ market, it is the buyer who has the power.

It pays to be aware of and confident about one’s bargaining power. If the home has been on the market for several weeks or months, has perhaps already undergone some price reductions and is still unsold, it strongly suggests that the seller is hoping to sell it as soon as possible. In such a situation, it makes sense to ask the seller for add-ons such additional furniture or fixtures, apart from a heavy discount on the listed price.

Also, some real estate brokers may be more inclined to knock a percentage point off their commissions and pass on the benefit to the buyer to get deals done. However, the best advantage for a buyer will lie with property consultancies that do not charge any brokerage from buyers at all, but only from the sellers.

Avoiding Confusion In A Market Saddled With Heavy Unsold Supply

Another inevitable result of heavy housing inventory on the market is that prospective buyers are confused about which options to focus on. This ‘problem of plenty’ can be resolved by looking only at select projects by reputed developers – it is surprising how quickly the range can narrow down if one eliminates anonymous smaller players from the field of vision.

The lure of discounts and flexible payment plans that currently define the market should not obscure a developer’s track-record, on-ground construction activity on projects and the market’s response to these and previous projects. The initial choice should be made based on developer’s reputation, track record, project construction activity at site and locational advantages of the project.

Further Guidelines For Buyers

· In the case of under-construction projects, buyers should only consider those which are likely to be completed over the next 12-18 months.

· Again, going with developers who have a healthy track record of delivery will mitigate the risks related to timely delivery.

· It is also essential to undertake good diligence in terms of the project’s market response and inventory sold, which will ensure that project is delivered

· One should look only at established housing corridors where social and physical infrastructure are in place or visibly under development

Expected Resurgence To Benefit Both Developers And Buyers

Both the RBI and the Central Government have taken certain key steps to revive the real estate market. Firstly, the implementation of Real Estate Regulatory Act will ensure transparency in the real estate transactions, which will help safeguard the interests of buyers. RERA will not only help in expediting the completion of the ongoing projects but also immunize buyers from any fraudulent practices. The RBI has reduced interest rates, which will allow prospective home buyers to avail of cheaper home loans from banks.

These factors have infused renewed positive sentiment in the market, and will ultimately result in boosting demand for residential properties. An increase in demand will ultimately help developers improve sales velocity for their products, help improve cash flows to complete their ongoing projects and pay-off debts.

Author – Santhosh Kumar, CEO – Operations & International Director, JLL India