Bengaluru, February 18, 2016: Why have the real estate prices not shown any signs of reduction for many years? How does the system operate? Take a look at insights into the real estate sector.
In the last two years, India has seen a steady rise in the levels of inventory across the country. This is mostly the case with metropolitan cities down south especially Chennai and Bengaluru. It found that villas, houses, and cottages in cities and villages in villas in Devanahalli, Bangalore have witnessed over 27 months of inventory. Since the sales figures are dropping, developers are under high stress. Let’s understand what are the main causes of it.
l Easy access to liquidity
Private equity players have invested a record $3 billion in Indian realty. The question that arises here is, if there is easy availability of cash to refinance loans, then why should the prices be reduced. All PE investments in the residential sector were debt deals. In most cases, the cost of funds was somewhere between 17% and 30%. So, then why do developers have to pay lenders so much, but don’t drop prices to improve sales? Read ahead to find out.
l Purchasing land
Land is considered to be the most valuable raw material for construction. Real estate developers either have to buy land or sign a joint agreement with land owners. Sometimes, developers raise money from PE investors or private individuals. The time lag from the day the land is bought to the day the project is launched can extend to more than two years. It is difficult for pay investors from the cash flow over the project tenure, if the prices don’t rise every quarter.
l Black money
Developers require cash to bribe government officials for approvals or land-related matters. If sales are poor, developers are not cash starve as the system is flush with money. Unlike developers in the west, they don’t get busted during a crunch in India.
l No understanding of cash flows
A dollar today is worth more than a dollar tomorrow. In India, developers either fail to understand or choose to ignore this concept. They think it is better to hold on to inventory. Their rationale behind it is that they believe in paying extra to lenders now and realize more when the market improves. In this process, they sacrifice cash flows and seek higher realizations.
l Raw materials
There is no control over commodity prices. Since steel and cement sectors are going through consolidation, prices may rise. So, if a developer sells bulk of units at a fixed price on launch day, the company is unexposed to fluctuations for almost five years. The only way it can be neutralized is by passing it to new buyers. It meant that the prices would have to shoot up if the developer has to manage project cost. Because of this, the real estate industry has become affordable for most Indians.
l Measures:
A couple of steps can help bring down the prices
l Reduce approval timeline
The time to obtain approvals should be reduced. If that gets done, there will be a correction of 5-10%, and it is the end customer who will be motivated to make a purchase as they will get better savings.
l Increase land banks
If the government can auction land in metropolitan areas, private landowners would be forced to leave behind their unreasonable demands over land prices.
l Reduce refinance alternatives
With more financial options, developers can lessen prices to some extent. With diluted restrictions such as minimum amount and areas open to FDI, developers are not motivated to reduce costs and they have to manage cash flows. Non-banking financial companies and debt funds too need to have some restrictions.
l Boost technology
Technology should be used to an optimum to improve quality, productivity, and shorten the time.
All these factors could bring about a drastic drop in the real estate prices. Thus, it would motivate the customer to buy properties consequentially benefiting real estate industry.
Corporate Comm India (CCI Newswire)
