Prepared by:
Content & Research Team
Magicbricks Realty Services Limited
March 03 2016, 12.09 PM IST || Pocket News Alert
One of the biggest challenges in the current real estate market is lack of consumer confidence in developers to deliver the projects on time. This is reflected in the price differential between Under Construction (UC) and Ready-to-Move-in (RM) properties in the secondary/resale real estate market. The PropIndex report of Magicbricks.com which covers the quarterly price movement in the secondary/resale real estate market shows that at a pan India level, RM properties command an average 5% premium over UC properties.
Consumers with purchase potential are hesitant to buy UC properties as project delay leads to consumers having to bear the additional financial burden of paying rent over and above the applicable home loan instalments. In the current market scenario, consumers are opting for RM properties and are willing to pay a premium as the delivery risk is low when compared to UC properties and buyers can start using the property in a minimum time-frame.
At an individual city level, the premium for RM properties varies from high of 21% in Greater Noida to low of -12% in Chennai. The negative premium means that UC properties are at a premium to RM properties. The premium of RM properties over UC properties for the Oct-Dec 2015 quarter across 14 cities is presented below:
With the exception of three cities (Chennai, Ahmedabad and Hyderabad), RM properties are at a premium to UC properties. Even in case of these cities like Hyderabad and Chennai, RM properties are at a premium in those localities with large scale development and which provide both the options. Consumers are opting for the option with less development risk in such localities. In Hyderabad, RM properties are at a premium in the larger and more evolved localities which have substantial UC and RM options like Gachibowli, Madhapur, Kukatpally Housing Board and Manikonda. In case of Chennai, the RM properties are at a premium in the outer suburbs and peripheral areas. This includes localities like Pallavaram, Tambaram, Pallikarnai, Perumbakkam, Padur, Kolathur, Guduvancherry and Avadi which have large construction activity and both RM and UC properties.
In case of Mumbai, overall the debate over RM versus UC properties is impacted by the fact that RM properties may be more favourably located. This impacts the premium aspect more than the consumer preference for RM properties. This holds true especially for the Western Suburban localities and those further north. However, in localities with relatively large development activity like Virar, Vasai and Mira-Bhayandar, the RM properties are at a premium over UC properties. In case of Delhi, the trend reverses itself slightly as UC properties have seen a decline in prices with the exit of investors from the market.
In other cities with large scale development activity, the distinction in prices is mainly due to the aversion of a consumer to take development risk.
Price Increment
It can be surmised that in a developing market like India, UC properties are likely to command a premium over RM properties. This is so because a consumer/investor can enter a project at different stages of construction, it has lower entry cost and gives flexibility to book profit and exit an investment. However, these advantages are nullified in a slow market like the present scenario, where investors have exited the market and end-users are vary of putting money in UC projects where the project delivery time-line is not certain.
This aspect is reflected in the price increment of these two types of residential assets. The graph gives the percentage price change for UC and RM properties over a 2-year period across 14 cities.
