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Wait! Property prices to fall further!

December 30, 2008

Demand-Supply Mismatch

While the bulk of the buyers are looking for property for under Rs 60 lakh, the bulk of the units developers were building, especially after 2004-05, carried price tags of Rs 70 lakh-2 crore (Rs 7 million to Rs 20 million). But developers had a reason for doing so -- profit margins.

Says an industry analyst: "Major players in the premium segment have an operating margin of 50-55 per cent. On the contrary, in the mid-segment the margin is around 35 per cent."

While the average cost of construction of a high-end property was Rs 1,500-Rs 2,000 per sq. ft, it was sold at Rs 5,000-Rs 6,000 per sq. ft, even more in some cases. These units are now finding few takers and sellers are offering huge freebies with them to revive demand.

With repayment and cash flow pressures on developers, there is a limit to how long they can wait before being forced to cut prices to clear stock.

Here's an idea of how bad the situation is. Omaxe and Parsvnath have reported quarter-on-quarter sales decline of 42 per cent each, and Ansal Properties 27 per cent, in the second quarter of FY09.

"We believe that prices of houses will come down further, especially with cost of key inputs like labour and cement expected to come down, leading to lower cost of construction," says Sudhir Nair, head, Crisil Research.

Image: A man paints a logo of Indian property developer DLF Ltd. at their construction site in Mumbai. | Photograph: REUTERS/Punit Paranjpe

Also read: India's most preferred states for entrepreneurs

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