Dream run of developers and investors in last two years has halted
By Mriganka M Bhowmick
It has been a dream run for developers and investors in Delhi NCR over the last two years in luxury residential real estate. The year-on-year price rise of new launches has been no less than 20%. A steep and steady increase in prices has brought cheers to developers and investors alike. Higher prices and larger residential units have continued to sell like hot cakes, thanks to NRI investments in the luxury segments of NCR, emboldened by India's growth story and the weak rupee compared to the dollar. The party lasted until May 2024, when the sentiment began to take a downturn, with a limited number of sales queries in the ultra-luxury segment indicating that prices have peaked and the market can no longer support further price increases. This has resulted in limited new launches and developers, including branded ones, offering back-door discounts.
Post-COVID, it was noted that buyers showed a preference for larger homes, even in the luxury segment, as organized sector buyers with stable jobs had more disposable income. There was a spree of new launches in the luxury residential segment with strong demand. This was a boon for developers, despite a 30% increase in construction costs due to global situations like the Russia-Ukraine War. Everything seemed positive as the luxury segment of NCR was focused on domestic home buyers and affluent people migrating from tier 2 cities to metros. But, by mid-2022, the segment entered to a phase of high price escalation driven by the NRI segment and investor bubble.
Now, at the end of the first quarter of 2024, the situation looks sombre as end-user home buyers are no longer able to afford further price increases. It's essential to remember that for every good real estate investment, there should be a genuine end-user to buy that unit. Hence, price appreciation is likely to come to a halt, possibly for an extended period this time.
We need to question whether anything labelled as luxury truly meets that standard. A new luxury project may be offered by a reputable developer, but is its location and specifications suitable to be considered a future-ready product that will be ready to move in three to five years? Fundamental questions remain unanswered when considering the purchase of new residential units, whether by investors, NRIs, or domestic home buyers. Will the project's location truly become an upscale area in the future, or will it remain a peripheral location for an extended period? Do the promised specifications genuinely add value in terms of meeting changing home buyer needs, whether in home automation, climate control, or urban infrastructure essential for a holistic living experience? Moreover, do these specifications truly add to construction costs, or are they merely a marketing gimmick?
In NCR, one can find more than 20 projects located 20-30 km away from city centres like Gurugram or NOIDA, still fetching high premium prices. The only plausible explanation could be their launch by premium developers. The rush into these investments seems more driven by FOMO (Fear of Missing Out) than careful consideration of future needs.
A possible bear cycle in NCR luxury real estate is about to begin, following a bullish price run in the luxury segment over the past two years. If luxury segment prices have increased by 30%-40% in the last two years, this increase hardly reflects the earnings growth of affluent Indian buyers. With sluggish income growth, how can home prices be sustained by new buyers entering the luxury segment each year? It is challenging to find genuine home buyers willing to purchase units at Rs 20,000 per square foot when investments were made at Rs 18,000 per square foot just a year ago.
A more worrisome situation may emerge in the coming days. The limited holding capacity of investors may further depress luxury segment prices. If investors are not adequately funded to hold their luxury units for an extended period, they may sell below market rates. It's crucial to understand that investors need to commit more than 60% of the unit value in a construction-linked payment plan to hold a unit for more than two years. Expecting quick returns on a luxury deal with a 40% margin can prove disastrous in the future, resulting in delayed collections on future demands by developers. If a project's buyer segment comprises more than 60% minimal committed investors, the project's construction is likely to suffer.
There is no pricing advantage in waiting for end-user buyers to choose under-construction luxury projects. Many ready-to-move luxury homes are selling for less in the secondary market of NCR than the primary prices of newly launched luxury projects. End-users are likely to gravitate more towards ready-to-move inventories in the coming days compared to overpriced new launches.
It may be time for NCR developers and investors to recalibrate their strategies and products in the luxury segment. A pause in price escalation will lead to higher capital costs for developers sourcing funds from different sources. In a buyer-driven market, more rational price points and selection of end-users who can avail bank finance, can help the developers to sail through projects in turbulent times. Avenues for cheaper funds and land need to be explored to meet the unmet demand of the mid-market segment. Industry bodies and the government must take necessary steps to revive mid-market segments with new launches of stalled residential projects. A long winter may await luxury segment investors in NCR to book good profits, but it will not be as severe as China's real estate crisis. (IPA Service)
