Stubborn Mumbai Residential Price - Demand Affected

Residential prices in Mumbai continue to remain sticky.  Average prices are up by 49% since March 2010, which is higher than the national average increase of 41%, and are now 1.7X national average. We believe the price increase was on account of: (1) investor buying; (2) curtailed supply due to slower approval process

Sustained higher prices have led to lower affordability and consequently tepid demand. Volume absorption in March was lower by 25% yoy, while rolling 3-month average absorption has dropped by 15%. Recent absorption has fallen by 65% compared to peak level in Nov-2010. We estimate 15+% price correction is required in Mumbai to drive demand. 15% price correction along with lower interest rates/ marginal salary hike will improve affordability.

We have seen several developers offering structured schemes or reducing size of apartments (thus reducing ticket size) to boost sales. 20:80 subvention schemes are one of the most popular mechanisms to propel demand, in which the buyer has to make 20% upfront payment and balance after defined period/possession. Most developers are charging 2%- 3% higher prices on these schemes, but they offer customers an interest
savings of around 15% over a construction period of 3-4 years

Real Estate Regulation Bill - A Landmark Legislatio​n

Indian Cabinet today cleared the Real estate (Regulation & Development) bill.  This bill in our view is a land mark development and will necessitate wide business practice changes across the industry.

Key features of Real Estate Regulation and Development Bill

Project launch only after all approvals in place – It is mandatory for developers to launch projects only after acquiring all the statutory clearances from relevant authorities. Under its provisions all relevant clearances for real estate projects would have to be submitted to the regulator and also displayed on a website before starting the construction.

Sales only after sourcing of clearances- Under the proposed new law, developers will be able to sell property only after getting all necessary clearances.  Registrations of projects with the regulatory authority is a must. This means developers cannot offer any pre-launch sales without the regulatory approvals. Moreover the authority must approve or reject projects within 15 days

Project Escrow to be ensured- The bill seeks to make it mandatory for a developer to maintain a separate bank account for every project to ensure that the money raised for a particular project is not diverted elsewhere. Developers will have to keep aside 70% of the buyers’ funds in a separate bank account to ensure timely completion of projects.

Curb on Misleading advertisements-The proposed legislation has certain tough provisions to deter builders from putting out misleading advertisements related to the projects carrying photographs of actual site.

Written agreement a must- Developers cannot take more than 10% of the advance from buyers without a written agreement.

Tribunal setup in the interest of Consumers - The bill also seeks setting up of a real estate appellate tribunal for adjudicating disputes. The tribunal will be headed either by a sitting or a retired judge