While a few builders concur with RBI Guv, that if the prices of flats are lowered the buyers would come to the real estate market, most of the builders say they have already lowered the prices and are offering package deals. But still the buyers are elusive.
Nearly a week ago, RBI governor Raghuram Rajan set the cat among the real estate pigeons when he appealed to realty developers sitting on unsold stock to bring down prices. “Once prices stabilise, more people will be keen to buy houses,” the RBI governor said, adding that “property prices need to fall before interest rates on home loans come down, any further.”
It is not very often that the RBI boss talks about one of India’s most bedeviled sectors and real estate developers have no choice but to take notice. Reliable sources say, property prices are already below cost and there is no way in which prices can be brought down any further. People like him say that the average cost of land and construction has gone up; the prices at which properties are selling hardly cover the costs.
`The RBI should try to understand and take into account the cost involved. If you want to give respite to the ruling pressure on residential property, the conservative approach of the RBI on the interest rate has to change. Policy rate is being governed by inflation expectations and not actual inflation. Whatever has been done so far, more transmission is required to be done of the rate cut. I don’t think developers will reduce prices to boost sales. Instead, they will continue with their strategy to reduce apartment size and offer freebies,” says Gupta.
Ashwinder Raj Singh, CEO, residential services, JLL India, told FC that the current ground realities are different from the economic hardships faced during the 2008 crisis. Then builders had a good financial buffer so as to be able to pass on benefits to the buyers. Today, builders are facing an acute cash crunch and any lowering of prices might make their projects unviable. The reasons are very high input costs and high interest rates on the loans they have taken, coupled with steep 35-40 per cent taxes. In addition, they are hampered by delays in government approvals, processes and regulations, increasing their cost of projects and hitting profit margins severely.
This apart, if buyers perceive that prices are being reduced, they will hold off purchase decisions in the hope that prices will fall further. If prices come down, it will lead to a vicious cycle of price-reductions with no impact on actual sales.
“There is no doubt that a lower price makes a buyer happy, but a number of developers have already cut down prices and a number of their existing projects are in the reasonable and affordable range. Every developer, small or big, is working towards schemes and offers, as they know it is the only option available to clear unsold inventory and bring the real estate market back on track,” points out Sam Chopra, founder & chairman, RE/MAX India.
He adds: “the banks also need to cut interest rates on home loans as it directly impacts the buying decision of a customer. Other initiatives like easier approval processes, single window clearance, provisions by the government in land acquisition processes and bank funding will collaboratively make it a win- win situation for all!”
The RBI governor has some backers in the developer community as well. Says Sunil Jha, MD, Shristi Infrastructure Development Corporation Ltd, “I agree with the RBI governor that for real estate industry to survive and thrive, it is essential that prices come down because some projects, especially in metros, are overpriced and have become non-sustainable.”
Jha also empathises with developers because bringing down property prices may affect the image of the company among existing and prospective customers. “We have to bring in innovative solutions for this, like the stock market where third party deals in the pricing of property and they adjust the price according to market demands/supply ratio, but it needs a lot of brainstorming. The other way to push demand is to build in categories where there is demand and not according to what we can build. There is still a lot housing shortage in India. We have to go further to tier 2 an 3 cities to get the right mix,” he explains.
Market sources believe that unsold stock needs a clearance so that developers can survive in this market situation. The unsold inventory is creating a no-oxygen situation for developers. Lowering the prices will give them a way out of this situation. On the other hand, it will be difficult for them to close by lowering prices as they must have sold many units at current prices, balancing of which will be the toughest challenge for them in the current scenario, he says.
CREDAI agrees there is a pressing need for an appropriate policy direction to revitalise the Indian real estate sector. “However, we feel that Rajan has somehow not been able to comprehend the fact that a substantial reduction in prices has already happened across the country, thanks to concerted efforts taken by developers and any further decrease in sale price would be a deterrent for growth,” opines Sushil Mohta, president, CREDAI Bengal and chairman, Merlin Group.
Much will depend on state governments and the Centre to rationalise taxes, streamline and simplify the approval process of building plans and other related clearances, which will bring down property prices. “It is to be understood that a processing time of a year escalates the unit cost by nearly Rs 200 – 1000 per sq ft, depending on the location of the land by way of interest. There is also a pertinent need to completely overhaul the system of obtaining an environmental clearance for real estate projects. Our experience says that this process is so slow and cumbersome and that it takes about six months to get an environmental clearance in hand,” he says.
On the likely home loan rate cut, Mohta believes that “a rate cut in home loans is also need of the hour to relieve home buyers from the huge burden of mounting EMIs. The sector on its part is eager to focus on execution and supply of good quality housing stock to enable the government’s ambitious housing for all by 2022. But at the same time, we seek guidance and cooperation from statuary and legislative bodies to be able to positively work towards the vision of the prime minister.”
How, then, can property prices be brought down?
Hemant Tikoo, chairman, Experion Developers, says that making amendments in monetary policy and reducing lending rates by banks can substantially incentivise serious buyers. In addition, faster approval of licenses, special interest rates for first-time buyers and limiting the quantum of taxes can help boost market sentiment.
Chopra of RE/MAX proposes his own remedies. “Initiatives by the government like the land acquisition law, which can stabilise property prices and cut down on construction delays, can have a major impact. Not only will it avoid delays in the project execution time, but will also keep property prices stable. Currently developers need around 45-50 approvals before the actual launch of the project. The creation of a single window clearance by the government will avoid unnecessary delays and also cut down prices. It will be a double benefit to developers as well as buyers.”
“Simultaneously,’’ says Chopra, “banks need to cut down interest rates for home loans and developers need to come up with attractive payment plans, which suit the customer’s pocket. Extra amenities at the same price will be a very attractive proposition for buyers. The government, realtors and banks need to work together to have this impact on real estate,” he avers.
To bring back realty sector on track, price correction can be done depending on the location and housing segment, explains Chopra. “We need to identify actual home buyers and target the schemes and discounts as per their requirements. It has to be a collaborative approach and we need to come up with policies that are influential and effective. Only after the unsold inventory is clear, can we look towards a way forward,” he predicts.
JLL’s Singh says India has a shortage of almost 20 million homes while builders are sitting on unsold inventory. The best way to solve this mismatch is to offer affordable home loan rates while at the same time reducing or abolishing stamp duty, taxes and VAT for low-income housing projects. This would reduce prices drastically and help low-income category population to buy homes at lower costs and at cheaper home loan rates.
Then there are developers like Sandeep Ahuja, CEO, Richa Realtors, who feels that the issue is not only about prices but also about the overall sentiment in real estate market.
“We have seen many examples where developers have reduced prices and in some cases are selling at less than the cost and have yet not been able to sell. In these cases, the customer feels that the developer is selling at lower prices to sail through these rough times and may not be able to deliver. So the real issue is of trust deficit and the customer is not sure if the project will ever be constructed. The only way the market will recover is once the overall economy recovers, when people are sure of retaining their jobs, businesses start generating enough investable surplus and the overall sentiment recovers,” says Ahuja. Well, a lot of things, then, have to fall in place.