Ready Homes’ Premium Over Under-Construction Properties Shrinks, Says Anarock

The premium that ready-to-move-in properties command over under-construction homes in the top seven cities narrowed for at least the second straight year as inventories piled up amid a sectoral and economic slowdown.

The average price disparity between the two categories fell to just 3-7 percent in Delhi-National Capital Region, Mumbai Metropolitan Region, Bengaluru, Pune, Hyderabad, Chennai and Kolkata in 2019, according to data by Anarock Property Consultants Pvt. Ltd. The gap stood at 5-9 percent and 8-12 percent in 2018 and 2017, respectively.

The main reason for the narrowing gap is that developers are reluctant to hike prices of ready properties amid the slowdown, said Anuj Puri, chairman at Anarock. “In a market scenario of limited housing sales, price hikes dampen homebuyer sentiment. Ready unsold stock will not find many takers if prices increase.”

That comes when India’s real estate developers are struggling to raise capital after funding from non-bank lenders dried up following the surprise defaults of the AAA-rated IL&FS group a year ago. Before that a new law, The Real Estate (Regulation and Development) Act, 2016, prohibited builders from using advance payments for one property to fund the construction of another, thereby curtailing an important supply of working capital. This together triggered consolidation in the sector and slowed new launches.

“Previously, the ultimate selling proposition of under-construction homes was significantly lower prices over ready-to-move options,” Puri said, adding that along with the other benefits that ready homes provide, they don’t attract GST. “The RTM premium was primarily on the instant gratification quotient, immediate freedom from rent and zero construction risk. In the last two years, the price gap between these two categories has eroded year-on-year.”

Unsold residential inventor across India’s top seven cities stood at 6.56 lakh units as on Oct. 31, Anarock had estimated in an earlier report. This was lower than in earlier months the report stated - “Unsold residential inventory overhang in Top 7 cities reduced to 30 months as of Q3 2019 against 37 months in the corresponding period of 2018”. Builders have been focused on clearing this inventory further, many experts have pointed out through the year.

The price gap is reducing as new launches have come down, especially in the National Capital Region and Mumbai, and there are few takers for properties that are getting completed, Paresh Karia, a Mumbai-based realtor and chief executive officer at Acquest, said. Developers are reluctant to launch new projects till existing inventories are sold, he said, adding that this will ensure that prices remain subdued which is good for homebuyers.

Here is a city-wise price difference between ready-to-move-in and under-construction homes in the following cities, according to Anarock Research:

• Among the top seven cities, the National Capital Region and MMR saw the maximum ready-to-move-in and under-construction price gap reduction in two years—from 10 percent in 2017 to 3 percent in 2019.
• In MMR, the price gap has fallen from 11 percent in 2017 to 4 percent in 2019.

Both NCR and MMR have witnessed a sharp decline in the number of new housing launches, according to a report by Anarock Research that was released earlier this week. NCR added approximately 5,790 units in the third quarter of calendar year 2019 against 13,570 units in the second quarter—a massive fall of 57 percent. MMR fared better in comparison and saw the launch of around 14,040 units—a decline of nearly 39 percent quarter-on-quarter and 29 percent year-on-year, the report said.

Jaxay Shah, national chairman at developers’ lobby Credai, said this clearly indicates that its the right time to buy. And as new launches are down, there will be limited inventory in the future, Shah said, adding that developers might increase the prices of ready-to-move-in properties as and when the liquidity improves.