MUMBAI: Weighed down by a piling up inventory as customers stay away, property prices in India's key markets are slated to decline, while in other cities the trend is likely to be divergent .
Apart from the fall in affordability of customers, due to a rise in property prices and interest rates, the other reason is developers' fund requirement to complete the ongoing projects.
"There would be correction in residential prices of up to 5 percent in NCR (National Capital Region), and Mumbai could see correction of up to 20 percent, while prices in southern cities of Chennai and Bangalore are expected to be steady...," Pravin Malkani, president, Patel Realty India Ltd , told Reuters.
Patel Realty is a unit of Patel Engineering . He sees the correction in Mumbai and Delhi setting in 4-12 months. "Prices in Hyderabad would depend on the political situation, while it is steady at the moment," Malkani said.
Crisil Research expects prices in Mumbai to fall 8-10 percent in 2011.
"Prices of houses soared by 43 percent in 2010 in the city's three major supply pockets. Prices thus surpassed their peak values, attained in the first half of 2008 by 26 percent, adversely affecting housing affordability," said a Crisil Research report prepared in January.
For residential projects, funding typically come from construction-linked installments which developers use for the project, said Shobit Agarwal, Managing Director of risk and business consulting and internal audit firm Protiviti Consulting.
"...So when funding gets squeezed, projects tend to slow down due to capital prioritisation. Customers may delay purchases or hold back installments leading to slowing of demand which tends to soften prices for projects under development or construction," Agarwal said, adding, he doesn't expect noticeable correction in prices of completed projects.
LEASINGS RISE In February, realty sales registrations in Mumbai declined 22 percent on year to 4,716, while those of leasing went up 20 percent to 8,055, according to a March 17 note by research firm Prabhudas Lilladher.
"Our interpretation of the sustained upward trend in lease registrations is that increased stress on affordability on account of increasing interest rates along with the expectation of a correction in property prices is leading to a deferral in purchases," said Prabhudas Lilladher.
India's central bank has increased rates eight times in little over 12 months and has warned of inflationary pressures and emerging risks to growth.
The Reserve Bank of India is widely expected to raise interest rates again by 25 baisis points on May 3 when it releases monetary policy statement for 2011/12.
FUND NEEDS, PE INTEREST Most developers are in need of funds, mainly at project levels, and are in discussions with private equity (PE) firms, which are bullish on the long-term prospects of the sector.
Kotak Realty Fund is planning to raise as much as $500 million by the second quarter of this year, while PE firm Milestone Capital Advisors is to invest $450 million this year in various sectors, including real estate.
"Typically, the capital required, to my mind, is about 25,000-30,000 crore (250-300 billion rupees)," said Sunil Rohokale, Executive Director, ASK Investment Holdings Pvt Ltd, which manages 3.50 billion rupees through its real estate fund.
He pegs yearly turnover of residential property industry around 1 trillion rupees .
"This (PE interest) is also a positive indication in terms of pricing, in terms of execution, in terms of delivery and in terms of confidence in the minds of the consumer," said Pradeep Jain, chairman, Parsvnath Developers Ltd , who has a contrarian view on property price movement.
He believes prices would move northwards 5-10 percent in Delhi and NCR, while they would "little bit soften" in Mumbai. In tier-II and tier-III cities, the prices are seen rising.
Godrej Properties Chairman Adi Godrej had also in an earlier interview indicated a price increase.
"We have no plans to reduce the prices, in fact in most of our projects the prices are increasing...," he had said.
Jain attributed the price increase to a rise in input costs, including that of cement and steel, supply and cost of funds.