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Real estate even today is recommended as the best appreciating asset over a 5 year horizon

 

“Real estate even today is recommended as the best appreciating asset over a 5 year horizon”

It is a known fact that there is a shortage of housing in the country, documented at 20 million units in urban areas and 40 million units in Tier 2 and Tier 3 cities. The Prime Minster acknowledged on one of his trips to Mumbai that the actual shortage is 11 crore units. That means there are smaller towns in the country where another 5 crore houses are required. Given this documented shortage of housing in India, the state itself would not be in a position to unleash this kind of a supply in the next 6-7 years which is the mission declared by the government and it is only imperative and practical that the private sector be involved in achieving this supply. The argument most often heard is that most of the shortage is in the LIG & EWS categories and the private sector does not really cater to these which to a point is true. Two facts which must not be forgotten here are:

  • Out of these documented shortage of housing in the country, may be 90% is in the LIG & EWS categories, but 10 % still remains in the MIG & HIG categories. Over there, the private sector is working very aggressively and may be the absorption today is slower than the supply in many metros, which is why we keep hearing of a so called “inventory overhang” which seems to be the favourite pastime of most analysts and IPC’s who are connected to the real estate industry. The other reason why the private sector is not effectively present in the area where there is a 90 % shortage is mainly because the state does not really enable the private sector to do profitable business in this area. This is only so because of the bureaucracy involved in getting approvals and land use change issues in such locations. If the state could enableself-certifications in such locations where the private sector has dared to venture, namely Tier 3 and Tier 4 locations and some kind of a fiscal incentive, these would go a long way in attracting private participation in this space in such areas.
  • Nobody can overrule the challenges of land acquisitions in today’s day and age. This is only compounded by personal vendettas of political parties who instead of playing enabler when it comes to land acquisition actually play spoiler wherein not only do they make it impossible for the private sector to acquire land at realistic prices but also deny the farmer/seller of a fair and timely compensation for his land which he may not want to cultivate any longer because of rapid urbanisation.

The basic challenge of approvals is that many unnecessary steps have historically been put in place to create obstacles for the developer so that time and again he has to revisit the local sanctioning authority for a certificate of some kind or the other. To industry, it is a very simple procedure of having your plan sanctioned, completing the project as per the sanctioned plan after getting your requisite related clearances such as environment, fire etc. and then completing the project as per the sanctioned plan and going back to the authority for a completion/occupancy certificate. Unfortunately, many states in the country after giving a sanction to plans of a project ask the developer to apply for something known as the “commencement certificate”. Once the commencement certificate is received, work is started and then again after every 4thor 5thslab, the developer has to go back to the sanctioning authority for something called the “plinth certificate”! Where is the need for this repeated interaction with the authorities to get a certificate time and again which obviously involves harassment and delay? This kind of bureaucracy has to be done away with. The process has to be made much simpler, very fleet footed because even in states where such processes did exist, for example in the Campa Cola project in Mumbai, where both plinth and commencement certificates were obtained, there was still unauthorised construction under the very nose of the municipal body. So what was really achieved with so many checks being put in place? An effective example of speedy approvals and real estate development could be seen in the NCR region in Noida where an approval process does not involve more than 3-4 months and once you have got your sanctioned plan, you construct as per the sanctioned plan and once the project is complete, you go back to the sanctioning authority for obtaining the completion certificate and if the building is not made as per the sanctioned plan, you are penalised very heavily. If this kind of a system is followed across the country, then there is no need to have so much bureaucracy in the approval and construction process and this will in turn cut down cost of the finished product.

It seems that the flavour of the season is to have that “I told you so” attitude towards the real estate industry with anybody who’s anybody claiming many millions of units of unsold inventory and inventory overhang to be blamed on the high price regime driven by real estate developers. To them I would like to say that supply has been encouraged in various parts of the country in the last 4-5 years and all this will definitely take some time to be absorbed. To say that this will never be sold is absolutely unfounded and incorrect. One must understand that the sentiment of the home buyer has been deeply affected since 2013 which was the year before general elections and the uncertainty of the outcome of the elections let the home buyer to postpone his decision to buy. In May 2014, when the country got a stable government at the centre, various statistics show that there was a spike in real estate transactions which continued till the mid of the second quarter of 2014. Then, when there was a general whisper in the media and drawing room conversations about “Acche din” not coming soon enough, there was again a lull in the real estate transactions. Towards the first quarter of 2015-16, when people felt that the government was trying to push policy, though it was getting stonewalled in parliament, the homebuyer felt that the economy would improve and prices were at reasonable levels and transactions were seen happening once again. Today with constant information being fed into the home buyer’s mind about a correction in prices, even fence sitters who were otherwise looking at closing that deal have decided to postpone the purchase. The reality is that there will not be a correction in prices across the country where the price bands are between 3500 – 6500 rupees per sq. ft. depending on the location because there is no room to actually cut prices any further. One must understand that the construction cost is constant, no matter where you operate, at 2200 a sq. ft. to 2700/- a sq. ft., without escalation for any high rise structure. Considering the land cost in various parts of the country being in the range of 1500 to 3000 rupees per sq.ft., there is no room for a price cut. In metros and Tier 1 cities, the land costs range even as high as a price band of 5000 to 15000 rupees per sq. ft! The discerning buyer has to understand and calculate, whenever there is scope for reduction in prices, it would only be in areas where the offer today is an unreasonably high five digit numbers. Elsewhere in the country there is no scope to cut the rates any further and this is the best time to buy.

Real estate even today is recommended as the best appreciating asset over a 5 year horizon, importance being given to the “real” in real estate. As a person who has been in the industry for over close to three decades now, I would advise home buyers to go for that purchase now and not delay because getting such a deal in another 6-8 months would not be possible.

Author – Getamber Anand, President, CREDAI National

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