Negotiating with developers this festive season

The current slowdown in the Indian economy has impacted several sectors, including real estate. Apartment sales volumes have plummeted and inventories have piled up, creating an ideal environment for buyers to negotiate with developers.

However, successful negotiations need to have a firm foundation of information and strategy

Knowledge of the current market situation Currently, the biggest indicator one should be informed of is inventory levels, which play and important role in the dynamics of bargaining power across various cities. However, one must also understand how prices have moved in the recent past in order to keep flamboyant expectations in check.

a) High inventory levels

As per our proprietary REIS database, developers in Mumbai are holding on to inventory levels of close to 48 months. That is quite significant, considering that a comfortable level of inventory is around 12-15 months. Other tier 1 cities such as Delhi (with 21 months), Bangalore (with 25 months), Chennai and Kolkata (both with 17 months) are in a relatively more comfortable state when compared to Mumbai, although there are signs of pressure to sell in these cities as well.

b) Rates have not risen much versus inflation

Property prices have not risen much over the last 19 quarters (from 3Q 2008 until 2Q 2013) across major metros in India. In Mumbai, residential apartment prices have risen at a modest compounded annual growth rate of 4.3% during this given period. If we compare this with the wholesale prices inflation rate, which averaged over 7.0% during the same period, we realise that prices have actually fallen marginally. The situation in other metros such as NCR-Delhi (1.4%), Chennai (3.8%), and Bangalore (5.5%) is not too different. Therefore, it is imperative to keep expectations from a negotiation at a rational level.

Convert meaningless offers into meaningful cash discounts

In order to attract buyers in the currently difficult market, several builders are resorting to offers and freebies. Some of the recent examples of such offers include free 10-gram gold coin, waived floor-rise charges, free stamp duty registration, free memberships to club houses and amenities, free modular kitchens, international holidays, free cars, etc. Negotiators who do not see value in such offers can and should negotiate for better prices instead.

Enlist the help of an expert

Typically, buyers seek to avoid brokers because they wish to avoid brokerage fees. However, not all buyers are in a position to strike a good deal with builders or landlords. They could risk paying more than required, or winding up with an apartment in a bad locality and by a less-than-reputable builder. Buyers should explore all channels of transacting – brokers, online information sources as well as direct contact with owners, if possible. This will help evaluate one’s on-ground ability to strike a good deal. It may emerge that a good broker is actually a better bet.

Express interest
This is probably the most misunderstood aspect of a negotiation. It is a myth that expressing their interest in purchasing a flat puts one at a disadvantage at the negotiation table. In fact, buyers should clearly express their desire to purchase so that developer can seriously consider offering them a better deal. Builders treat genuine buyers very differently from idle information-seekers. Buyers should approach the negotiation table with their chequebooks, ready to pay a token amount and every assurance of serious interest if a good deal is offered.

Don’t attempt to time the market

There have been far too many victims of this syndrome in the past, both in the financial markets and in real estate. Builders are currently willing to offer good deals to serious buyers. Armed with sufficient knowledge about the current market situation and honed negotiating skills, buyers can leverage the current opportunities to purchase a house at good prices. While prices will correct to some extent in certain cities, no one can precisely predict the bottom.

(The writer is CEO, Operations, JLL)