Real Estate Prices Increase Irrespective of Slow Demand

A recent study by India Ratings & Research has showed a negative sign regarding the unchanging view of reality industry in 2014-15, which is based on the unrelenting depressed end-user demand and the differing consumer sentiments.

The rating agency also showed that the real estate market is seeing drop in sales, reduce in income, Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) limits and sustained deterioration in credit metrics and inflow of cash.

The agency rated most of real estate companies with a steady view, based on the hazards impacting the sector. The companies or group rated at investment level are residential companies with robust sales and resilient cash flows or single commercial properties with long-term lease agreements.

The rating agency believes credit metrics will continue to decline in fiscal year 2015, due to increase in residential prices that will lower the sales, that will lead to increase in bank credit and an increase in inventory for the sector.

In the first half of 2013-2014, the sale of new residential units has recorded a decline and the reason behind this is the reducing consumer sentiments and high price of real estate properties.

Though, the end-user demand seem to be weak, prices continue to remain high and it is considered due to the restrain of gold import by the government that has regarded to have boosted the investors and speculators.

This rise in property price is also justified by the report of National Housing Bank's house price index in the second quarter of financial year 2014, which recorded after a decline in the earlier two quarters, as it overlaps with the obligation on gold import.

According to Ind-Ra, it is likely that the commercial property demand would continue to subdue in 2014, because of decline in economic growth and it is due to the continued slow economic growth that would affect the new requirements in most sectors of the real estate market. It is also anticipated that demand in retail will be sluggish in Financial Year 2015, as retail companies would endure to enhance their store ranges.

In 2013, the private equity and foreign investors interests was observed to be strong in the real estate sector and strong investment was seen in rent-yielding commercial properties where several large transactions took place by the leading private equity players like Blackstone.

Ind-Ra also anticipated that the starting of real estate investment trusts (REITs) would be optimistic for the sector, as it would attract new investors and enhance finance convenience. It is also anticipated that REITs would give easy liquidity option for commercial property developers as most of their funds are invested into rent-yielding commercial properties.

In Depth Analysis of Real Estate Appreciation

When it comes to real estate appreciation, a question pops up as to what are the reasons behind the rise in property prices in certain areas. The whole procedure of augmentation of a property’s market value over time is a prime idea behind real estate investment. This procedure is known as appreciation. There are basically various causes to real estate appreciation which includes: Inflationary pressures; the supply and demand dynamics of a particular location; Arrival of new real estate market drivers in a location; Population growth and Home loan interest rates (cost of borrowing).

Inflation: Inflation results due to an excessive amount of money in circulation. What else happens in this procedure is that there is over-abundance of money which leads to a situation wherein its value falls. During the course of this action the prices go up for a number of things which includes construction materials, the prices of land, legal building permits, number of other things and labor.

Demand and Supply: When there arises a situation wherein there is a noticeable increase in demand for homes in a certain area, then if in case the amount of residential real estate projects is not catching up fast enough, the property prices shoot up. To put in other context, self-use buyers are more than ready to pay extra for a property as they tend to find living in that area extremely favorable.

As a resultant factor, when this demand brings in real estate investors, who eventually buy properties there to sell them at a profit when supply slows down again. As a result what happen is that the property prices in that particular location tend to shoot even further.

Home Loan Rates: There is a direct bearing on property appreciation of behavior of home loan interest rates. When there is an increase in the home loan interest rates, then the demand for property also slows down owing to lesser buyers as they can afford to shell out the extra money required by the banks. On the same facet, what leads to an upbeat in the demand for properties is that a sufficient decrease in home loan interest rates which leads to an increase in affordability.

Population Growth: On the same note, the growth in population in area such as PCMC obviously shots up the demand for residential properties there. This eventually, transforms directly into appreciation in real estate rates.