The practice of under-writing has created a scenario in many real estate markets, where there is an increase in capital values of property, despite a dearth of buyers in the resale market
Appreciation in property prices may not always mean good news for home buyers in India. Often, property owners who try to sell their houses are in for a rude shock, when they find that there are no takers for their house in the secondary market, at the prevailing rates quoted by the developer, for the unsold units in the project. This artificial appreciation in real estate prices is caused by a nexus between builders and under-writers and may involve substantial amount of black money.
In the property market, it is usually the brokers/financiers, who operate as under-writers, to induce an artificial appreciation in prices. Under this strategy, the builder offloads his stock to the under-writers. In return, the latter gets control over the marketing of the project and its price point. With artificial demand, thus, being created, the builder keeps on increasing prices. The under-writer, then, sells the stock to investors or end-users, at a discount to the builder’s price. The premium charged by the under-writer, is usually paid in cash by the buyers and this leads to a circle wherein, the unaccounted income/cash component/black money is flushed into the real estate market.
Artificial appreciation
These under-writers make profits through the huge difference between the price of a project at its launch, and the artificially inflated price. Home seekers, living under the illusion of property prices appreciating, fall prey to the ‘discounted’ prices (which is much higher than the the project’s launch price), offered by the brokers/under-writers, who make money through this channel. Gullible buyers believe that there will be a further increase in prices, whereas, the end-users, who purchased units at the time of the project’s launch, hardly find a market to exit at that level.
No rational explanation of economics can justify how property prices keep on moving up, despite the pervalent sluggish demand and the large amount of unsold inventory that has been reported by various research agencies. While this lends credence to the expectations of prices to fall, prices of residential properties in India, move only in one direction – up.
Abhay Kumar, CMD of Grih Pravesh Buildteck, argues that if the appreciation is artificial, then, why are people investing more in property, as against other investment instruments? While agreeing that a nexus between builders and under-writers existed, he insists that it is a thing of the past. “There was a time, when the market was growing at a pace that could sustain artificial appreciation. Not anymore! Today, buyers understand market realities and the likely ROI. So, a forced appreciation is just not possible,” Kumar maintains.
Nikhil Hawelia, MD of the Hawelia Group, believes that one should look at the secondary market, to ascertain the true credentials of a developer. “If my project is not attracting as much a premium as others in the neighbourhood, in the secondary market, then, I may have failed in my marketing strategy,” admits Hawelia.
It is not just the secondary market that indicates the real versus artificial appreciation in prices, in the housing market. The difference between rental yields and capital values, also indicate that the price points in most of the property markets across India, are not realistic.
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