The residential real estate sector is set to decelerate, according to a report by Nirmal Bang

Ìnstitutional Equities. One of the main reasons is that the inventory level is expected to go up over the
next one year because of declining sales amid increased launches of new projects.

The consequent weakness in transaction volumes will exert pressure on developers in servicing their
debt. This could lead to a softening of prices as banks could force realtors to cut their inventory levels
to repay the debt. Here are some excerpts from the report:

ResidentiaI demand IikeIy to deceIerate further because ...

a) SaIes voIumes have come down: Transaction
volumes in the first quarter of 2011-12 declined
across cities on a sequential basis, while a few cities,
such as Mumbai, Gurgaon, Hyderabad and Kolkata,
reported negative growth year-on-year (YoY).
This was mainly due to the subdued project
launches, the lowest since March 2010, on account
of the delay in government approvals and low
demand because of higher prices and interest rates
on home loans.

b) SaIary growth Iags behind rise in property prices: The
salaried class, which accounts for around 70% of the total
residential demand, has witnessed a 10-13% CAGR in salary
over 2009-11, according to industry experts such as Aon
Hewitt andMercer. However, property prices in cities
like Mumbai and NCR, which account for more than 40% of
residential demand, have gone up by 60-80% from their
2008-9 lows.

Hence, transactions in these cities have been hurt the most
over the past few quarters. Also, the rising inflationary
pressure since the second half of 2010-11 has dented the purchasing power of buyers. Other cities,
such as Chennai and Kolkata, have also seen a rise in property prices by 25-40% since 2008-9, but
the prices in Bangalore have moved in line with the salary growth.

nventory IeveIs to go up further

According to industry sources, the residential
inventory level is still 42-80% off its peak (2008).

Over the past few months, the inventory has
been stable at around 9-15 months across cities
despite the slowdown in transactions, as against
its peak of 30-55 months in December 2008.

This is largely on account of subdued new
launches in cities like Mumbai, Noida and Chennai. On the other hand, the inventory level has moved
up slightly in Bangalore due to aggressive new launches. All this has resulted in prices remaining firm
across cities despite the subdued demand.

AffordabiIity has taken a hit

Affordability has taken a hit with the loan-to-value ratio falling from 90% to 80%, thereby increasing
the down payment for buyers. The increase in interest rates by the RBÌ has also led to a rise in home
loan rates. Ìf the rates come down, it will give some respite to buyers, but residential demand will be
driven more by affordable prices and salary growth.

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