SOON AFFORDABLE

Land Prices Will Eventually Correct To Make Affordable Housing A Possibility For Developers To Invest In The Near Future

With the slowdown in real estate sector over the last one year, the real estate prices have shown some signs of correction. As there is oversupply in the premium segment of housing sector, builders are now focusing in the middle-income group-housing sector. But, the biggest hurdle in this enterprise is the land prices, which have gone through the roof in the last couple of years.

According to a report prepared by real estate consultancy firm DTZ, affordable housing for the middle-income group in the country range between Rs 2,500 per sq ft and Rs 3,000 per sq ft. But as the prevailing land cost of floor surface area of apartments in suburbs like Gurgaon, Noida, Ghaziabad and Faridabad are over Rs 2,000 per sq ft, developers are finding it difficult to build affordable houses for the middle class group. In fact, the cost of land in Delhi is around Rs 6,000 per sq ft. According to an industry source, the cost of construction for an average quality house is in the range between Rs 1,100 per sq ft and Rs 1,500 per sq ft. Besides that, marketing cost is in the range of Rs 150 to Rs 300 per sq ft. Therefore, the minimum cost of an apartment in suburbs of NCR is Rs 3,200 to Rs 3,500 per sq ft.  

Thus, the report points out that the high land prices in cities are main hurdle to develop affordable house in cities. This has led to a sharp drop in the transactions of land in cities like NCR, Mumbai and Bangalore. The report says that the steep fall in the number of transactions indicates that prices are likely to moderate in near future.

Anshul Jain, CEO of DTZ India, says: “Land prices usually lag the real estate cycle. The trend is visible in that while built up property prices have softened over the last few months, land prices have held. However, we anticipate a general softening of land prices in the range of 15% over the next six months.”

A survey conducted by DTZ among the realty brokers revealed that more and more land owners, who were earlier willing to negotiate on price points are now willing to talk to prospective buyers. The report says that in the next 6-12 months the expectations of both sides would start to converge, thereby resulting in pick up of transactions across major cities. It says these transactions are likely to be executed at price points lower than those observed in 2007.

The report says that because of the slowdown in the residential sector in the last one year, developers have shifted their focus to affordable houses. The economics of these projects, driven by the end-use pricing of their apartment units, dictates the pricing of other inputs including land. It says keeping a fixed final-price band in mind, the developer/investor works backwards taking into account the construction, marketing and overhead costs and acceptable profit margins. The cost of land is worked — then worked backward, which defines the acceptable land price for the buyer. Anything significantly higher than that is not finding many takers in the present market.

Even in the commercial land market, the developers are not ready to invest in the costly land. The report said that with the dampening of the expansion plans of many companies, the demand for land for office segment has fallen. A large number of developers who had land designed for IT/ITES use are willing to sell their holdings, while those who had started development on their land parcels are protracting the construction period. This situation is expected to persist, unless the global environment improves in the near future. The current situation in the commercial land market is such that there is a huge demand but the buyers are not being able to meet the overheated prices. Because of this, in many micro markets, large developers are keeping away from the auctions as they believe that this leads to unrealistic prices.

As developers are finding it difficult to execute a project within the affordable range for the middle class, they are delaying the launch of projects. At the same time, the cost of holding a land is also high. This has led to consolidation of land banks among the developers. Developers with strong execution capabilities are expected to reap the maximum benefits. This class of market players can not only maximize their returns from the existing land banks but also capitalize on reasonable land prices to expand the value of their land holdings. This could result in a market shakeout, with the players having strong development capability and land holding emerging winners. But, in the long run, it is the end users who will be the real winners. The consolidation will ultimately lead to increase in the supply of affordable houses. 

                                                                Courtesy: - TOI dtd: - 25^th Oct. 2008