The lull in the country’s realty space seems to be finally over. With the

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economy showing signs of recovery, there is a certain buzz about activities in the real estate sector. Be it a buyer, investor or broker, there is an unspoken optimism, tinged naturally with liberal doses of caution. The most pertinent question doing the rounds at this point of time is this: if there is a rise in property prices, would it cause a slump in demand? For an industry still trying to pick up the pieces from the horror that was 2008, it is an important question to ask.

Consider the most recent survey by ICICI Securities, for instance. The ICICI Securities survey (based on responses of both online and offline surveys) indicates that the buyers surveyed have shown “cautious optimism”. According to the survey, most buyers expect property prices to rise, although they perceive prices are already high. They also expect healthy demand for homes at current prices. This conclusion is based on responses of 2,697 individuals (ICICI direct customers) who participated in an online survey conducted by ICICI Securities (review period: January-February 2010) and on responses of 6,767 who participated in an offline survey conducted by ICICI Bank (review period: December 2009 to February 2010). There has also been a broker survey – based on responses of 57 property consultants who participated in an offline survey conducted by ICICI Securities (Review period: January-February ’10).

Nearly 44 per cent of brokers have seen an increase in number of enquiries in the past three months. As many as 53 per cent brokers have seen increased queries in the affordable housing and 44 per cent have seen a decline in queries for the premium segment. Most believe that prices have increased in the past three months and will continue to increase over the next six months.

“We have observed a price rise of 15 – 20 per cent in the past six months itself. Going forward, prices in a few prime areas can go up by another 5–10 per cent. However, most of the cities except Mumbai and Delhi, will see prices stabilising where they are,” Gulam Zia, national director, research and advisory services, Knight Frank India, told FC Estate. Zia’s is one school of thought, for sure.

Uday Dharmadhikari, CEO, Usha Breco Realty, too thinks that property prices have already gone up. “There has been a significant increase in property rates due to the sign of revival of the Indian economy. The same has been increasing over the period as a result of several influencing factors including improved liquidity, positive market sentiments and an increase in taxes,” Dharmadhikari told FC Estate.

Then there are others like Shailesh Sanghvi, director, Sanghvi Group of Companies, who thinks prices would rise, although for different reasons. Sanghvi Group is one of Mumbai’s key mid-segment real estate developers. Explains Sanghvi, “Property prices may rise during the festive season of Navratri and Diwali towards the end of the year. Also, an increase in the costs of raw materials like cement and steel will sggravate the situation”.

Further the monetary tightening by the Reserve Bank of India, the burden of service tax & VAT on projects according to the recent union budget and state budget will lead to a further price rise. All these costs will finally be passed on to the end user who would have to pay a much larger sum in order to procure his / her dream home.”

Talking about the property demands at existing prices and if demand would be adversely affected when prices go up, Zia of Knight Frank India said that the demand had already shrunk due to the prices rise and the developers were acutely aware of it. “Hence, our considerable price in future is not round the corner,” he said.

Sanghvi said, “At present, the residential demand overall is at a decent level keeping in mind the current prices for both affordable and the luxury housing segments respectively. However, if prices continue to increase, it will reduce transaction volumes that had increased in the recent past. Affordable housing in particular would be affected as many buyers would be left disappointed because for most of them, they would have to stretch their current budgets even further.”

Dharmadhikari, on his parts, felt that “prices of homes have escalated significantly by over 20 per cent this year as compared to last year. The real estate industry, mainly for premium housing with a few exceptions in some areas in key metros, is already beginning to witness a slump in demand and the same is expected to worsen with further rise in property prices.”

Be it the ICICI Securities Survey or property consultant and developers, FC spoke to, there is an emerging consensus that Indian home buyers are mostly end users, looking at new properties in upcoming locations. They are comfortable with leverage and primarily interested in mid-income housing

(Rs 2million - Rs 5 million).

Looking at the end-users’ demands city-wise, the ICICI Securities survey suggests, “End-user demand is higher in Mumbai, Hyderabad and Bangalore, while investor demand is higher in Ahmedabad and Pune. Kolkata and Delhi are inclined towards a price rise vis-à-vis Hyderabad, which looks closer to a decrease in prices. The perception of home prices being high is prevailent mostly in Mumbai and Pune. In Kolkata and Hyderabad, most perceive prices to be reasonable. We believe Mumbai and Bangalore-based developers and those with higher component of residential properties are better placed. HDIL & Sobha are likely to see healthier price realisations and sales in the medium term.”

Dharmadhikari on Usha Breco Realty said that the premium properties are likely to be governed by the investors, however affordable housing will attract end users. The mid-income group contributes to a major chunk of home-buyers are interested in mid-income housing ranging from Rs 20-40-lakh. The same trend has been witnessed in various property expos and residential market surveys conducted across the country. With premium housing prices rising way above their reach, interest in affordable housing is on the rise. However the current supply for affordable homes does not meet the required demand.

Also subscribing to the view that affordable segment always moves faster, Zia said, “Our estimates suggest that in current market position the investors could be 20 – 25 per cent of overall demand.”

The government’s initiative like a 1 per cent subsidy on loans below Rs 20 lakh and various property expos, have further boosted the growth of the affordable segment and brought a positive sentiment in the market which was lacking since recession. The premium segment has its own niche target audience and remains largely stable unless of course there is a drastic change in prices, Sanghvi pointed out.

Let us now consider some other interesting aspects like under-construction supply, inventory and volume pick-up to assess the realty scenario in the country. There has been a marginal over supply in so far as under construction properties are concerned. Under-construction supply in eight major cities is 378mn sq ft, of which 64 mn sq ft is ready while the current annual demand stands at 372mn sq ft.

Per-month inventory for Mumbai and Bangalore is the lowest and for Chennai and Ahmedabad is the highest. Finished inventory is higher in Ahmedabad, Hyderabad and Kolkata. When it comes to prices, except in Pune, Bangaluru and Hyderabad, in other cities they have reached earlier highs or beyond, the survey mentioned. In terms of demand, supply or prices, the cities which display a healthier picture includes Mumbai, Bangalore, NCR and Pune.

Although the ICICI Securities Survey pointed out an over-supply (however marginal it may be) in the under construction property market, Dharmadhikari of Usha Breco Realty felt that the current supply for affordable homes did not meet the required demand. This is notwithstanding the fact that the mid-income group contributes to a major chunk of home-buyers, who are interested in mid-income housing ranging from Rs 20-40-lakh. The same trend has been witnessed in various property expos and residential market surveys conducted across the country. With premium housing prices rising way above their reach, interest in affordable housing is on the rise.

With reference to under-construction supplies and inventories, he said, “Many projects in various segments have been announced, however construction at this stage appears to be slow due to the demand and actual transactions.”

Volume pick-up has been maximum in Bangalore and Pune, with NCR, Mumbai and Chennai remaining stable, albeit at lower levels. The transactions have dropped in Hyderabad. Although like Dharmadhikari, many other from the developers’ side feel that it is difficult to know the actual transactions in various segments. Caution and ambition, therefore, remain the keys.