The paradox of India’s real estate business
(Any opinions expressed here are those of the author and not of Reuters)
Over the last two years, India has been battling various economic issues such as rising fiscal deficit, a falling rupee and increasing food inflation. No, nothing new there. And what does this have to do with real estate? Quite a lot.
A country’s economic performance has direct repercussions on how its real estate market behaves. This is especially true for the residential property segment. More prosperity means higher financial confidence among home buyers, and this leads to a greater demand for homes. The opposite is, of course, equally true.
We have already seen that overall sales of residential real estate in India have gone down rather markedly in major cities like Mumbai, Delhi and Chennai in the first half of 2013. The market was far more encouraging in the same period last year. Bangalore and Pune performed a little better but not by much.
There are various reasons for this slowdown in the sale of homes in India. One of them is that prices have kept rising in the bigger cities, despite actual sales decreasing. Also, home loans have got more expensive because of increased interest rates. Many Indians just aren’t earning as much this year as they did before.
Residential property prices have gone through the roof in cities like Mumbai, making homes in the city more or less unaffordable to all but the ‘creamy layer’. The hue and cry over Mumbai’s developers refusing to lower prices is understandable, but there are also some ground realities of the real estate business that cannot be overlooked.
Most people do not realize just how challenging the real estate development process really is. It is not as simple as buying a plot of land and erecting a building on it. Developers have to run a gamut of permissions and licences before they can even think of starting construction – 57 of them (and sometimes even more).
Each of these permits and licences increases the amount of money they have to spend on the project. While they wait to complete the bureaucratic processes, they are stuck with non-productive land for which they have to pay revenue. On top of it all, the cost of building material and construction labour is constantly rising.
It is pretty clear by now that most people in cities such as Mumbai and Delhi are unwilling to buy homes in highly priced projects. The time has definitely come for developers to lower their profit expectations and prices. At the same time, they have to keep their businesses in the green. That’s the paradox.