Developers missed writing on the wall in 2015

Track2Realty Exclusive

By: Ravi Sinha

Sunset, Real Estate sunset, Realty sunset sector, Indian property market, India real estate market, Indian real estate newsmagazine, Indian property news, Track2Media Research Pvt Ltd, Track2Realty The year 2015 should have been the year of realization that the days of creating ghost cities with inventory for investors is over. The greedy investor is no more interested in blocking his money with a business where the returns in any of India’s major housing market is not more than six per cent today.

But unfortunate reality is that the acceptance to this emerging realism is among handful of developers only. For how long the developers can live with denial theory that affordable housing is a relative term and the higher input cost does not allow them to reduce the prices?

The fact of the matter is that affordability cannot be just defined in terms of cost per sq feet but also has to do with the size of the apartments. And it is here that the developers need a serious introspection moving ahead in 2016. In most of the urban centres today the demand is for smaller apartments because the cost per sq feet cannot be reduced beyond a point, but no developer is coming forward with 1BHK or 1.5BHK where the demand far exceeds the supply.

Most of the launches in the year has been 3BHK and 4BHK with some mix of high-priced 2BHK. The developers have no one but themselves to blame for losing the opportunity cost in a year when he cost of construction has been probably the lowest due to less demand of cement, steel and other input materials.

Some of the analysts privately point out that there are two ways the houses can be affordable – either the developers listen to the real demand in the market and respond to it or else keep creating this kind of high-end offerings that is increasingly leading them to debt trap and hence distress sale at a point will automatically bring to the market these properties at the lower cost. The latter scenario is neither good for the developers nor the Indian economy at large.

Raj Gala Shah, Partner, Zara Habitats agrees that in all fairness it must be admitted that 2015 gave most developers a ‘Reality Check’. He, however, points out that to say that developers failed to read the writing on the wall would not be entirely correct. Developers thoroughly understand and study their target market and audience. The statistics clearly show that there has been a drop in the number of ‘high-end’ projects being launched, thereby clearly indicating that developers have realised that such projects have a very limited consumer base.

“As such high-end projects are being selectively launched in traditionally upmarket areas of the city only. Creation of affordable housing is always going to be an ongoing process, as the demand in this segment is continuously rising due to urbanisation and the increase in nuclear families. To say that the opportunity is lost would not be prudent, since it is not that the scope or future for building such homes over, just a window of one year is anyways not enough to build the quantum of affordable houses required,” says Shah. 

Arvind Jain, Managing Director, Pride Group, however, agrees that with the low cost of construction now, the assessment that an ideal eco system to build affordable houses has been wasted is true to some extent. According to him, developers, like buyers, often have the unfortunate tendency to wait and watch for the most optimal time, thereby tending to miss out on opportunities. However, it is also true that the eco system for boosting affordable housing is also still work in progress, and many more government initiatives are expected to come in on the heels of the Housing For All agenda.

“The market has definitely been lackluster in 2015, and proved to be a huge learning curve for the entire real estate sector. It would be disastrous to hold on to the false beliefs and erroneous calls that have contributed to this somber situation. Many lessons have been learned, and will hopefully not be repeated,” says Jain.

Nikhil Hawelia, Managing Director of Hawelia Group nevertheless defends the sector with disagreement that majority of real estate developers are executing high-end projects. According to him, in 2015 major focus was on homes for middle class buyers. It was the overall economic sentiments which remained unfavorable throughout the year. Slowdown in all scales of business and economic policies were the major reasons because of which spending power of the middle class even on their regular needs was challenging.

“Truly the cost of construction has been the lowest during 2015. But out of the two vital elements of affordable housing i.e. cost of construction and land, efficient work and planning was not done for the latter due to lack of support from the policy makers and authorities. Any steps taken from the government which could address the concern of lower income class are always supported from the real estate developers,” says Hawelia.

Supporting the developers’ stand, Ashutosh Limaye, Head – Research & Real Estate Intelligence Service, JLL India says he would not agree that developers have failed to read market signals correctly. He says at pan-India residential launches for 2015, the share of apartments priced above Rs. 15,000 per sq ft has clearly dropped when compared with the trend observed over last couple of years. Given that the mid and upper-mid segments attract lot of demand in the major cities, developers are finally trying to launch more units in this segment.

“By nature, launch prices will be different across cities but the broad trend remains that of reducing supply of high-end or luxury apartments. Also, there has been a consistent fall in residential unit sizes over the last few years until 1H-2015 suggesting that developers are trying their bit to ensure ticket size of apartments comes closer to the affordability level of potential buyers,” says Limaye.

Despite the developers’ defense, the fact of the matter is that sales are below expectations despite of property prices coming down in various markets. The key issue is low demand. Most of the developers are holding on launch of their new projects than launching low-cost housing. There have been high inventories and low absorption rate in mid to high segment of housing.

In a nutshell, the overall market of Indian real estate has seen a paradigm shift from being greed driven to need driven. The prices have moderated a bit but yet far from being called realistic and so is the anomaly with the unit sizes. More importantly, the lackluster market in 2015 provided opportunity for a huge learning curve for the entire real estate sector.

The big question is how many developers have taken a conscious decision to learn and move ahead by aligning with the market realities. Not many! The year has been more about the denial theory and hence 2016 indicates to be a painful process of revival for the sector at large.

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