Diwali special offer

Almost every industry in the domestic circuit rakes in the moolah during the Diwali time because the sales go up. Every company looks forward to this festival in the country. Real estate however, has been an exception to this trend.

“A research on the demand for residential real estate during the past five years shows that, contrary to the common perception that a majority of sales happen in the second half of a year, the absorption is largely the same in both halves,” observes Akshit Shah, assistant vice president, Capital Markets Research, JLL India. “A weighted average of the past five years shows that the first quarter attracts the highest number of deals at 27%, while the fourth quarter i.e. the festive season, attracts 25%, which is at par with the average,” he adds.

Industry players attribute slow sales during the first two quarters to the fact that most part coincides with school exams, which negatively impacts the sales as family decision makers tend to steer clear of major disruptions in the schedule.

In the third Quarter, sales tend to be subdued because of the monsoon season and Pitru Paksh, which is considered an inauspicious period for new beginnings.

Therefore, real estate developers used to bet big on the festival season. However, this tendency has changed. The theory that sales boost during festival season was true till 2010, when the country’s economy grew at over 9 – 10%. Being an investment-intensive purchase, property-buying has slowed down considerably in the recent times.

Shah further notes that the average age of home buyers has come down from the mid-50s to the mid-20s. “The younger generation prefers to take informed decisions and focuses on better bargaining opportunities rather than auspicious days to purchase property,” he adds.

The service industry which is a major contributor to India’s GDP at 55%, announces salary hikes and bonuses in the second quarter whereas, the manufacturing and trading industry announces bonuses during Diwali that is fourth quarter. Also, people from the upper-middle and high-income groups plan their investments during the first quarter, for effective tax management purposes.

Despite RBI’s monitory policy review meeting held during end September to slash interest rates, this year too, the real estate industry does not expect to clock in a great sale during Diwali.

Property-festival-offers

Despite real estate developers trying all kinds of marketing gimmicks like funding schemes with upfront payment as low as 5 percent of home price, interest waiver for 2-3 years and freebies, sale velocity has not picked up. The residential property market has been deserted- by investors due to slow moving market with stagnant or dipping prices and by end users because of unaffordable prices.

Even the unexpected 50 basis point repo rate cut by the Reserve Bank of India (RBI) may not see a significant improvement in demand in the festival season. Earlier, only a part of the multiple rate cuts amounting to 75 basis points effected this year before September 29, was passed on to the consumers by the banks.

However, within a week of the announcement by RBI, the hopes of real estate developers and home buyers seem to have been shattered as the banks have still not transmitted the cut to the borrowers.

The State Bank of India (SBI), which earlier announced a 40 basis points cut in its base rate, has now revised its decision by reducing the base rate cut by 50 percent to protect its margins.

Even more confusing is the SBI’s new policy to offer home loans at 20 basis points higher than the base rate to women and 25 basis points higher than the base rate to men in contrast to its earlier policy of offering home loans to women at base rate and to men at five basis points above base rate.

Although other banks had also announced 20-30 basis points cut in their base rates, home loan rates are still hovering well over nine percent. The inability of the banks to transmit the RBI rate cut to home buyers is sending negative signals across the market.

The extraordinarily high inventory and muted sales call for price rationalisation. RBI Governor Raghuram Rajan had also asked developers to cut prices to spur sales. Even Credai chairman Irfan Razack, advised developers to offload high inventory by rationalising prices. Developers however, are holding on to prices as steep rise in input costs and high cost of loan servicing lowers their margins to a great extent.

Domestic home buyers who form the bulk of customers, are therefore not enthused enough to jump in the fray. They are waiting for prices to fall and in the backdrop of interest rate dampner; it looks unlikely that this festive season will turn out to be a Savior for both developers and home buyers.