Residential property prices are projected to rise 10-15% as builders seek to counter rising costs, according to Confederation of Real Estate Developers’ Association of India (CREDAI), the apex body for private real estate in India with over 13,000+ member developers.
Due to the festive spirit in FY22, residential real estate sales in major cities outperformed the sales in the same period in the pre-COVID years of FY20. Historically, as the price of fuel climbs consistently, prices of practically all materials and commodities rise as well. The prices of construction raw materials like steel and cement have been steadily rising since January 2020.
Add to that construction delays caused by lockdowns and labour scarcity have resulted in increased labour costs, leading to a 10% to 15% increase in construction costs in the last 18 months.
Agreeable terms
Similar to the issues at hand, even the solution to this problem is multipronged. One way of addressing this issue could be to permit escalation of prices by allowing a clause in the buyer seller agreement. The Government may also consider either allowing Input Tax Credit for real estate projects and/ or rationalisation of GST on various construction raw materials from their current rates as this would help in reducing the prices of residential properties immediately. If these steps are not taken, then property prices across all segments will shoot-up.
Homebuyers will have to invest more for their dream house and this would negate the savings arising out of all-time low housing prices. The last one year has seen the demand for ready-to-move-in (RTMI) units swell in almost all real estate segments, including luxury, affordable and mid segment housing. The share of RTMI homes in total housing sales in the primary market increased to 21% in the pandemic-hit 2020, up from 18% the previous year, as home buyers preferred completed apartments to avoid the risks associated with under-construction properties.
Global shortage
India’s affordable housing offers $0.62 trillion of funding opportunities for private funds in the backdrop of the government’s push for this segment. The affordable housing sector in India has witnessed private equity (PE) investments to the tune of $2,597 mn since 2011. The investment in affordable housing has been 17% of the total PE investment in the residential segment in India in the last 10 years (since 2011), mentioned the report.
However, it is yet to become a major theme for the funds in the country with a very few private equity funds dedicated to funding affordable homes, says international property consultancy — Knight Frank, in its latest report.
Affordable housing shortage exists across the globe and various policy level interventions are the key ways to resolve the issue. From Maharashtra standpoint, the nature of policy intervention is getting close to the degree of maturity of the economy to impact land development.
Unavailability of affordable land is a big barrier. Once the regularity concerns such as restricted development regulations are eased, it is likely to progress. Affordable housing projects become unviable as there is a mismatch between land value and income affordability, therefore the asset class that is likely to give better return becomes priority, other than fulfilling the need gap.
Waiving premiums
Affordable housing in Maharashtra, specifically in Mumbai, to make it a reality, there should be an incentive given to the developer from the government, where cost of premiums are waived, also rebate in property tax needs to be given for land under construction. GST waiver should be given to the developer for incentivising the construction of more affordable houses in Mumbai, Maharashtra and MMR. As MMR contributes to 30% in real estate market all over India, this needs to be prioritised.
It’s very important that prices of raw materials come down, so that developers create sustainable and affordable houses, which will also increase the sales rate and can be in the favour of both buyers and developers.
If the prices of raw material comes down, developers will start developing affordable houses, which will increase the buying rate as more and more people will tend to invest in properties. It will also help in the growth of the real estate sector.
The writer is Director, Ajmera group.
