Fixing Real Estate Pricing Problem

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In my previous article I had written about the pricing problem plaguing the real estate industry. I mentioned how the industry (at least Southern markets) operates on a thin margin and why there is no reasonable chance of prices coming down further. So what should be done to fix this pricing problem?

Let’s reproduce the cost table for our reference here again.

table

If you look at the above cost structure such as construction cost, finance cost & marketing expenses, you will find these are external factors & not within the control of builders. For example builders don’t decide the prices of steel, cement, labour, banks rates, labour cost etc. Most of these costs depends on macro-economic situation at national & global level and are decided by market forces (Economics 101). Post MNERGA labour cost has jumped from Rs. 100 per day to up to Rs. 600 per day in certain cities as there is an acute shortage of labours.

However the Land Cost, which is almost 30% of total cost of project, is not decided by free market forces. Indian real estate prices are high & have become unaffordable because of unreasonable land prices. No where in the world we have such a high land prices for such horrible infrastructure & standard of living. So what can be done to reduce land prices?

  1. Increase supply of land: Government of India, PSUs and State Governments are the biggest hoarders of land banks in India. Two ministries Defence & Railways probably have the largest land banks which by some estimate is over a million acres. Defunct industries sit on huge land banks across India. If the govt is serious about “Housing for All” it should start liquidating these land banks or tie-up with builders for the development of residential units. A large supply of lands from government will put downward pressure on private landowners who demand unreasonable prices for their lands.
  1. Build infrastructure: India has one of the lowest average speed of traffic in the world. Bangalore has the worst average speed of traffic in India with just 18 Km/hr average speed. You can imagine the sad state of infrastructure. To cut travel time people in cities prefer to stay closer to their work place which leads to higher demand for housing in limited areas. We do not have western world’s concept of satellite towns or suburbs where people don’t mind driving for 50 -70 Kms one way. If travel time is cut down for such distances to less than 1 hour people would prefer to shift from centre of cities to outskirts where there is more supply of land at lower cost. What is required is excellent roads along with social infrastructure to support residential development in these areas. 
  1. Increase FAR: Indian cities have lowest FAR (Floor area Ratio decides how much area can be built on a piece of land) in the world. In New York FAR goes up to 14 while in Mumbai it is maximum of 4 (avg of 2). Higher FARs allows development of more residential units on the same piece of land, thus reducing per sq ft (FAR) cost of land. Lower per sq ft (FAR) cost of land can help reduce prices of residential units. However higher FAR is only possible if there are excellent road & other means of intra-city transportation.
  1. Check on corruption: It is a well known fact that most of black money flows into real estate where properties, mostly land, are held in benaami names. Thus few corrupt individuals & corporate are able to hold lands from their ill-gotten wealth which artificially inflates prices of land. Economics 101 on demand & supply says if there is too much demand (money) for a product (land) in limited supply its prices will go up. Hence, putting restriction on black money flows can ease prices of land.

Additionally below majors can help reduce the prices further, albeit not to the extent as provided by above actions, however they are worth implementing:

  1. Reduce corruption in approvals: Cost of approval varies from Rs. 50/- per sq ft to Rs. 1500/- per sq ft (Mumbai). Any curb on corruption will not only reduce the cost of approval but also reduce the time taken to sanction a project. As builders borrow money to buy land, reduction in approval time line will lead to cost saving which in turn can be passed on to end consumers.
  1. Adoption of latest technology: Most of major western & Asian markets have moved on from labour intensive construction method to less labour intensive technology oriented methods such as Pre-Fabrication & Pre-Cast technologies. These technologies can help in reducing time of construction by up to 60%. As builders borrow money to construct, reduction in construction time will lead to cost saving which in turn can be passed on to end consumers.

What is required now is serious, focussed & multi-pronged long-term planning on real estate industry so that “Housing for All” doesn’t just remain a slogan but becomes a reality.

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