Elevated property prices despite high vacancies stump analysts!!
Recently, FM Chidambaram’s directive to banks to put pressure on builders to reduce property prices has been rejected out rightly by the builders’ body CREDAI.
This has brought the issue of elevated property prices squarely on to every analyst’s radar. As per the recent study done by realty research firm Prop-equity, the percentage of vacant flats (which are either ready to move or just about to be completed) in all metros has been high. And more supply is in the pipeline. Then how come there is no softening of prices? The following is the table of vacant property published by Economic times quoting research by Propequity.
As you can see both the absolute number of vacant flats as well as the percentage of units is high in Chennai, Bangalore, Hyderabad and Pune while other metros are not far behind. Then why are the property prices not recording any lower levels?
The answer, in our opinion, lies in the liquidity situation.
- As long as the builders have the holding capacity, they will not be compelled to reduce prices. Which means as long as banks and other investors such as PE and VC players fund the builders, property prices will hold up.
- Let us also not forget that in the last 5-7 years, many prominent builders accessed the stock market and have raised a lot of money from the public through public issues.
- Most of the big builders have also accumulated land banks over the last decade and are sitting on land that can be developed in future which takes care of their biggest expense in a project launch.
Hence only a combination of factors like a crash in demand, tightened liquidity and huge supply can actually make a dent in the property prices. And as things stand today, such negative environment is not immediately on the horizon.
Hence FM’s concern, though understandable, may not get an immediate resolution.