New Delhi (06.02.2021): The majority of real estate developers have been showing remarkable resilience in holding firm the prices of their unsold stocks despite the strains the Chinese virus inflicted upon the whole economy. They have even ignored the advice of Union Minister of Commerce and Industry Piyush Goyal to slash prices and get rid of their unsold inventory. Even though the Minister's advice was blended with a warning that RE developers may not find any support from the financial system in their holding operations, it didn't trigger the intended impact. 

According to a report by the brokerage firmPropTiger, the weighted average prices of properties continue to hover around pre-2019 levels.

As of September 30, 2020, unsold stocks in the top nine residential markets consisted of over 7.23 lakh units worth over Rs 6 lakh crore. Yet, there seems little likelihood of any reduction in property prices, in the medium to long term.

Why are builders not willing to take a haircut as a remedy to generate liquidity and reduce their inventory burden? 

In fact, the price reduction is very much desirable from the developers’ side, if they want the number of property purchases to rise. Still, the majority of them continue to resist corrections in property rates and evade any suggestions of re-pricing their unsold housing stock, which continues to pile up.

Behind the builders’ unwillingness to lower rates is their disinclination to lower their profit margins in the fond hope of prices to reach the levels prevalent before a widespread slowdown hit the real estate markets in 2013. Another reason why they do not want to lower prices is their fear of reducing the (notional) value of the collateral (the homes they have built and not sold) that they pledge in order to secure the lending from banks and non-banking finance companies (NBFCs). Reduction in home prices would also lower the value of the collateral, creating a problem for real estate companies and lending institutions.

So, developers refuse to compromise on pricing even if they are unable to find enough takers at their preferred price tags. Hence there is no let-up in unreal prices which most genuine buyers cannot afford. It's a wonder of wonders and a poor reflection on the so-called market economy that housing prices, though remaining stagnant for the past few years in a low-demand market, still remain unaffordable for the average homebuyer. The average price of an apartment is still so high that the demand factor is almost non-existent.

Instead of offering any real price cuts, developers have been employing a string of techniques to convince buyers to accept their offerings in the backdrop of low-interest rates, incentives on affordable housing, and reductions in circle rate and stamp duty by state governments. But buyers, in general, seem to realize that all these so-called incentives on housing only account for a certain portion of a property purchase. In fact, what actually translates into tangible gains for buyers is a reduction in per sq ft rate, which nowhere figures in the promotional schemes and offers flaunted by realtors. And hence, buyers are shunning the offers.

Combined with buyers' indifference, a firm attitude of banks and other financial institutions may bring RE developers around to see the commonsensical logic of increasing the volume of profits even if the margins decline. Builders may do well to recognize that buyers have become smarter and their tricks of the past aren't going to yield the same result. So they must reform themselves if they want to remain in business.