Asia-Pacific
Real Estate News
India's Residential Property Market May Be Headed for Hard Landing

India's Residential Property Market May Be Headed for Hard Landing


Himadri Mayank, JLL India.jpg

Himadri Mayank, JLL India

In 1959, Charles E Lindblom, the American political scientist, published a paper in the Public Administration Review entitled The Science of 'Muddling Through'. In this, he contrasted what he called the 'root method' of decision-making with the 'branch approach'.

The root method involves comprehensive evaluation of options in the light of defined objectives, whereas the branch method involves building up, step-by-step and by small degrees, from the current situation. Prof Lindblom claimed that the root method was, in fact, not usable for complex policy questions. His verdict was that the practical individual must follow the branch approach - applying the science of muddling through.

According to Himadri Mayank, Senior Manager of Jones Lang LaSalle India, the residential property market in India, particularly in the Tier I cities, has remained sluggish for the past 12 months, with significantly lower sale volumes when compared to the high absorption rates of 2010. Home loan interest rates now seem to be at their cyclical highs (but should soon decline) and unforeseen tax levies have come at a time when the industry is facing its moment of reckoning.

In these uncertain times, the question arises whether strategic decision-making for residential property developers to improve sales should follow the root method - a comprehensive evaluation of options, or the branch approach - a process of muddling through. In a multiple stakeholder environment with several large uncertainty input parameters, the branch approach seems to be the instrument of choice.

Mayank tells World Property Channel, in adverse market conditions, developers want to ascertain facts on some key issues. They consider whether they should:


The 'Logic' Of Residential Property Pricing

While others require comprehensive evaluation, determining residential property prices usually entails a trial-and-error approach. During good times, prices are invented. When the going gets tough, prices are discovered (hence the term 'price discovery'). Developers continually assess the market with trial price levels to increase sales in on-going projects. To avoid adversely signaling the market (which could lead to a downward spiral) prices in on-going projects are kept 'sticky-upward'.

In the first phase, negotiations are held behind closed doors to test the market's appetite. If sales do not recover, discounts are offered up-front on the table. If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. At this stage, the market is said to have witnessed a correction. This is fundamentally a process of 'muddling through', in which residential prices offered by developers in on-going projects rise like rockets but fall like feathers.

However, during a slowdown, developers try to register sales by launching new projects which are different from on-going projects - and priced much lower than the market average (the price levels being decided by the root method of decision making). Since new projects have a high construction risk, the lower price is somewhat justified and avoids the signaling effect to the market.

Trouble Ahead?

Mayank further ponders if the Indian residential property market headed for a hard landing?

During the slowdown in 2009, prices in some on-going projects witnessed corrections while a large number of projects maintained stable prices. New launches were made at highly discounted prices; subsequently, a significant rise in absorption was observed as prices were termed 'affordable'. Prices then increased rapidly by as much as 30-40% (mostly in newly-launched projects) across Indian Tier I cities until end-2010, followed by slower growth in 2011.

However, all predictions of a hard landing for the residential property market in 2011 have failed to come true. Despite slow sales, highly leveraged balance sheets, expensive finance in a high interest rate environment and rising input costs, developers have been able to avoid a market-wide crash. They have been able to generate sufficient cash flow through the gradual process of price discovery, and several factors are in their favor in the near term.


Mayank concludes with, "This leaves home buyers with a small window of opportunity - the next six months, when home prices should witness marginal appreciation. After six months, a second wave of high appreciation is predicted."


Comment with Facebook


Copyright 2010 - 2014 WORLD PROPERTY CHANNEL NETWORKS, INC. All Rights Reserved.
Luxury Property Spotlight
Red Frog Beach - (Bocas del Toro, Panama)

Red Frog Beach - (Bocas del Toro, Panama)

Red Frog Beach is a new luxury resort emerging in the Bocas del Toro region of Panama. The archipelago is home to some of the most stunning scenery in the tropics.

Read More »

Reader Poll
Real Estate News Alerts
Close

Sign up for World Property Channel updates, information and news alerts