Mumbai residential pricing trends: 2015 vs. 2016, JLL report

The following is the report by Ashwinder Raj Singh, CEO – Residential Services, JLL India

It is always darkest before dawn, and this holds true for the Mumbai property market. 2015 started with a lot of hope, but the year did not play out as anticipated. The city’s residential realty market performed way below expectations, partly because of pricing.

As per records, the unsold inventory in the Mumbai Metropolitan Region (MMR) stands at a massive 77,000 apartments; it will take almost 11-14 quarters to clear off this inventory against a healthy expected cycle of 4-6 quarters. Only about 3.5 per cent of this inventory is completed or ready for possession.

It is easy to put the entire blame on slowing demand, but the reality is that an astounding 70 per cent of the unsold inventory is priced at Rs. 1 crore and above. If we compare this to the average annual household income of a Mumbaikar, which is only approx. Rs. 7.5 lakh, we get a clearer perspective of the slowdown.

Affordability

A generally accepted yardstick of affordability says that the cost of a home should not exceed about five years of combined annual household income. Anything above that breaches the affordability barrier. Also, it is the affordable housing segment that is driving most of the demand in Mumbai, and such housing must necessarily be priced either under Rs. 30 lakh or between Rs. 30-65 lakh. However, there are no projects with units priced under Rs. 30 lakh, and very few in the latter pricing segment. Mumbai’s builders are basically catering to a market segment which has no demand, so the obvious result is poor sales.

This situation cannot change overnight, as the developers started these pricier projects in response to a then thriving economy, foreseeing potentially robust demand. The economic slowdown over the past two years put paid to those projections; price-sensitive buyers have been playing the waiting game, waiting for prices to come down before they invest. However, builders cannot just reduce prices, since the cost of construction, interest rates and other financial liabilities have remained same or even risen in recent past.

The options are clear: either wait for the economy to grow and buyers to be more comfortable with paying high prices, or resort to discounts and innovative financial structuring to catalyse sales, recover investment and bring in liquidity for further projects. Most builders in Mumbai have chosen the first route, but those without deep pockets have resorted to the latter.

Given their urgency to recover costs and bring their financial books in orders, Mumbai’s builders have started offering attractive schemes to woo borrowers and at some places even reduced the prices. The result basically translates into marginally reduced prices. To illustrate – the average price of a 2BHK in Mumbai was around Rs. 3 crore in 2014, and this has come down to around Rs. 2.9 crore in 2015. If we consider MMR, then the figures stand at Rs. 1.32 crore and Rs. 1.31 crore.

In percentage terms, there has been a price reduction to the tune of approximately 0.95 per cent in MMR and 3.25 per cent in Mumbai. The average per-square-foot has reduced from Rs. 13,020 to Rs. 12, 896 in MMR, while in Mumbai it has dropped down to Rs. 19,681 from Rs. 20,125.

Trends for 2016

These reductions may not look spectacular or attractive enough for buyers to make a rush. However, things do seem to be working out in the long term:

Developers are keen to reduce their inventory level, and are offering discounts and better deals. This would definitely attract buyers and investors
Interest rates on home loans offered by banks are coming down; even if not to the expected magnitude, then still enough to give a definite advantage to home loan seekers.

Moreover, the country’s overall economic scenario is improving, and all major fundamentals point towards a 2016 that looks a lot better than 2015 did in terms of economic performance. The indicators point to healthy growth and rise in sales as well as prices and profits by 2Q 2016, by which time our markets will be much more settled and gearing towards an upward trajectory.

For Mumbai’s residential property buyers, there is a lot to look forward to.