The Big Real Estate Shakeout Is Coming

Will 2016 be the year when the big real estate shakeout happens?

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Here we are, expecting a turnaround but instead are about to run into something else. Something that might actually be good for the real estate sector. The big shakeout.

There’s been some good news. Residential sales are up across India on a quarter to quarter basis, but unsold inventory keeps increasing. This includes both under construction and ready to live units. So, what’s selling? What’s in demand? Just two things, ready to live properties and office space. We’ll come back to that later.

Real estate price have fallen over the past two years, but the decline has been so slow that it’s just not registering in people’s minds. You can’t blame them, when property prices zoomed, they rose sharply and stayed at a steady level. The reverse didn’t happen, but what happened next was a time correction. Sadly, its taken too long to be noticed.

It’s time investors, veterans or newcomers, sat down and considered what’s going on. It’s also time that developers seriously worry about what’s going to happen next.

Coming next, is the big real estate shakeout.

For property buyers, the current rates are as low as you’ll get. There may be a few distress sales available, but what hasn’t been sold till now will go off the market. A lot of investors have reconciled to the fact that they’re now virtually married off to their investments, and will have to wait for years before they consider parting with them. So, those premium properties won’t be available in the secondary market. A lot of not so attractive properties, in under developed locations or unfinished projects, will be always be available, but who’ll risk buying them? So, those older, veteran investors will be forced to stay away for a long long time. The first shakeout.

Now, if you were a first time investor who bought property a year or two ago, or even recently, you’ll see some limited appreciation coming in over the next two years. That’ll make you confident to buy again, it’s ironical what a small ray of hope can do. You are now the new investor, and once there are a few thousand such people we’ll see the market moving upwards again. The second shakeout.

Among developers, we’ll see a silent consolidation. Companies, or rather brands such as Godrej, Tata and a few more will find small developers eager to join hands or what’s even more likely, hand over project selling and development to them. We’ll see launches at rates which will make us look twice at an advertisement, and when it’s been offered by a reputed large developer we’ll probably want to check out the details. The branding of real estate is about to begin. This is the most important shakeout.

An unfortunate result will be that many small developer projects will get delayed or stalled, adding to the widespread negative perception about this sector.  Among these, projects selling smaller sizes, catering to affordable housing, will find the going slightly easier.

Speculative buying won’t return. We’re going to see the maturing of the real estate market. We’re going to see a steadying of secondary market rates, and a lot more demand for office space, resulting in a lot more construction for office space.

This is shakeout time in Indian real estate. We had it coming.

 

Get Real On Real Estate

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Are you someone who’s spent 2015 hoping that before the year ends, the Indian Real Estate market will suddenly surprise you by turning about.  Somehow, magically?

Don’t hope. It’s not happening.

2015 was similar to 2014. 2016 could also be similar. Of course, most investors would hope otherwise. Everyone connected with Real Estate in India would hope so too. Developers who had bought large land parcels on which they’d launched a number of attractive projects, Investors who went on a booking spree in these projects, Real Estate consultants who urged these investors to quickly close deals, everyone’s got stuck in this quick sand of stagnancy which swiftly broke down the perceived unshakable foundation of Real Estate as an asset class.

Did we see it coming? No one did or maybe no one wanted to. This was one long Bull rally whose reversal seemed impossible. On a macro level Real Estate is so much like the stock market. In the latter, trends can reverse in a matter of hours. In the former, trends can take years to reverse, so many years that no one would remember the last reversal. Now, when was that?

2008. Remember how the housing bubble burst?

It’s history. Who cares? The market bounced back, right?

But what really happened next? A lot of affordable  projects were launched in the residential sector. The commercial sector, except for Malls, got ignored. Some developers launched commercial projects in far off areas, with an assured monthly returns commitment. As long as the market rallied investors got these monthly returns while the projects crawled along. In the residential sector, money began chasing money. Projects were sold out on launch, the secondary market saw unexpected appreciation. You could book and exit in a few months time. And then reinvest again. And again repeat the cycle. And then one day, you couldn’t exit. That day turned into months, and now it’s been a couple of years.

When sellers become their own buyers an implosion is bound to occur. When developers see their funds drying up, they go super slow on construction. When an end user can’t shift into that Flat or office he booked years ago,  they’ll surely add their bit to the already negative perception about Real Estate.

So what’s happening now?

We’ve begun to see distress sales, we’ve started to hear distressed voices. This is when the market starts to bottom out. Investors and developers have inventories which they want to off load. Some desperately, some discreetly.

It’s time to get real on Real Estate. It’s time to buy Real Estate that’s real. Real enough to live or work in right away. A ready apartment, a ready office or shop. Buy it. Live / work in it, or rent it out. The rental market is booming. But that’s another article.

Get real on under-construction projects too. The journey from construction to finishing to registration can, and will be painfully slow. Keep looking for an opportunity to exit.

If you’re someone who’s sitting on funds to invest, then look beyond the metros and large cities. There’s very affordable land or realistically priced housing projects on offer there. If you’re willing to stay invested for a long time, you’re bound to get a return.

There are always some unknown opportunities available even in large cities. For example, if Delhi’s L Zone housing development gets all its clearances soon enough, this could just trigger off that Real Estate reversal that everyone’s hoping for.

2016 would then have a lot to look forward to.