Mumbai: Real estate developers will need to cut prices sharply in the second half of the financial year to convert demand into actual sales, as potential buyers continue to wait on the sidelines, industry watchers say.
Small developers at a residential property exhibition in Mumbai last week offered customers up to 15 per cent discounts, waivers in registration fees or stamp duty and free parking spaces, but they failed to excite buyers, analysts said. Cash discounts still didn't change their minds, they added.
"With the writing on the wall pretty clear, developers are likely to be forced to reduce prices further and offer higher discounts to clear existing inventory and to rev up pent-up demand in the sector," BNP Paribas said in a note this week.
"We believe the sector fundamentals remain weak with both pricing and volumes under threat," it added.
While developers are hopeful of strong demand during the next two weeks to Diwali, when demand is at its peak, they acknowledge volume sales will not be as high as previous years and a price correction is on the cards.
"There has been a reduction in volumes compared to last year but prices are still holding," said Sarang Wadhawan, managing director of realtor Housing Development and Infrastructure Ltd, which hasn't reduced prices yet.
"But if demand doesn't pick up (after Diwali) then we will definitely rethink our strategy." So far, in the first half of the year, real estate purchases have dropped by nearly a fifth as interest rates on home loans rose and double-digit inflation deterred residential buyers, industry officials said.
"Only if values reduce between 15-20 percent across the entire spectrum of the Mumbai market, then we will see a revival of the volumes," Pujit Aggarwal, head of city-based developer Orbit Corp told Reuters.
Developers are also facing a cash crunch as steep restrictions on bank lending and weak equity markets limit their fund raising options and the global credit crisis has dried up private equity funding as well.
"The tightness will continue for a few more months, given the difficulty in raising capital," Macquarie Research said in a sector note.
Recent moves by the authorities to free up bank funds for lending may not help the real estate industry, it added. "We do not believe this move solves the problem for real estate players as banks are unlikely to view them as borrowers of choice in the current environment."
Analysts said high unit prices have made home purchases unaffordable for middle income buyers, as mortgage rates remain near peak levels and seem unlikely to come down soon.
A domestic brokerage has estimated that the rise in mortgage rates has pushed up monthly payments for home buyers by a quarter, compared to levels in 2005.
"People will abstain from buying till the interest rates correct in the long-term, so I think we will see some demand pick up only after interest rates ease," HDIL's Wadhawan said.