An version of this Q&A first appeared in
DNA Money edition on Monday, January 06, 2014.
Shashank Jain, executive director, PwC India in conversation
with Ashish K Tiwari speaks of the perils dogging the Indian
residential realty sector and why the market is the way it is. Edited
excerpts..
Unaffordable
housing is said to be the key reason for lack of demand and
oversupply scenario in key Indian metros. What is your take on it?
There
are larger issues involved in terms of resolving this – not only
with the developers but with the entire eco-system. Building
affordable houses starts with two things, land and infrastructure and
both go hand in hand. Land prices will always be high in places where
infrastructure is already developed leading to significantly high
starting input cost for the developer. So land cost in cities like
Mumbai and National Capital Region (Delhi and Gurgaon) could form
over 50% of the total project cost. And where the infrastructure is
not developed, there are very few takers for the residential projects
thus raising questions on their viability. So it's like a chicken and
egg situation.
Unfortunately we haven't had a situation where
both central and state governments have taken this pro-actively and
have focussed on building infrastructure in a greenfield way –
infrastructure has always played a catch-up role with urbanisation
and development and not the other way round.
Residential
market would pick up if you have a commercial catchment area in the vicinity.
People would prefer buying into a residential project if their work
place is close by as well. While a developer may build affordable
housing, if the project is far away from the main city and if people
have to travel over 2 hours one way to get to their place of work,
the development will be a non-starter. So developing of commercial
catchments is crucial for micro markets to pick up the way one would
want it to happen.
A
holistic approach with infrastructure, commercial, corporate and
residential units around it is thus essential when developing cities
and micro markets. All of it has to happen simultaneously.
But
residential prices are unaffordable even in the extended suburbs of
cities where there is very little or absolutely no infrastructure
development.
I'd
say that has also got to do with the availability / scarcity of
resources (primarily land) and the situation is more severe in the
Mumbai Metropolitan Region (MMR) because of its unique position /
geographical layout.. However, if you look at the National Capital
Region (NCR), it has expanded on all sides and offers housing across
all price points. Similar is the case with Chennai or Bangalore
markets which can expand horizontally. While it may not be completely
affordable, one can possibly look at owning an apartment after
stretching (finances) a bit.
Unfortunately, in India we are in
a situation where if you look at from a developer's perspective, the
input cost is so high that it makes the starting point
unviable/unaffordable for the realtor as well. For a developer land
is inventory and an essential resource for a long-term play of say
10-15 years or more. This means land prices have already seen
significant appreciation at places where a common man would actually
think of buying / residing. That's because the developer is thinking
five to seven years ahead and focuses on acquiring land that may not
be uninhabitable at present. So acquisition of land and development
always plays a catch-up game and land prices are hence always ahead
of the curve that way thus raising a big question on the
affordability factor.
Also,
income levels of potential home buyers haven't kept pace with the
extent of increase in realty rates in the last 3-5 years.
That's
correct. At max, salary levels on an average would have gone up
marginally when compared to overall inflationary increase.
Leaving aside the exceptional cases, that's generally the kind of
increments people would have got in the recent past. However, if you
look at real inflation at the consumer level, it's far higher. So
from a cash available to sustain I'd say it's a negative growth
situation.
Now
consider that scenario vis-a-vis developer's input cost for
building a house, that's increasing year-on-year too. This is clearly
evident from the fact that the primary market, which is is the key
driver for affordability – where one can get into buying a house
with lower capital requirement – is seeing an increase to the tune
of 10-20% every year. Given the overall economic uncertainties of
the last few years, salary levels certainly haven't kept pace with it
and that definitely is a key challenge.
According
to Apnapaisa.com estimates, a monthly income of over Rs 1.5 lakh is
required to be able to purchase (through a home loan) a residential
apartment worth Rs 1 crore. How many people in the working class
would really qualify?
The
National Council of Applied Economic Research (NCAER) and Centre for
Macro Consumer Research do come up with such data. The last I
recollect, there is a a bracket of households earning Rs 12.5 lakh
and above and that number is just 1% of the total households. A quick
math would reveal that if we are about 120 crore people and taking an
average household size of five, then we are talking about 24-25 crore
households in the country.
The
reason I'm focussing on households is because buying a residential
apartment is a household decision and not an individual decision. If
1% out of those many households are earning more than Rs 12.5 lakh
annually we get a figure of 25 lakh households spread over the
country. If we increase the Rs 12.5 lakh limit to say Rs 15-20 lakh I
think it could be even half. So we are talking about only 10-15 lakh
households who possibly be earning that kind of a money to afford an
apartment worth Rs 1 core.
This
profile of households would majorly be in the top four or five metros
of the country that again brings back to your question about
affordability. When people who can afford are concentrated in certain
geographies, prices in such markets would shoot up. Which sort of
makes it a vicious circle again, because wherever developers are
building affordable housing people living there do not have the means
to buy into such projects.
Another
concern for home buyers is of the uncertainty in terms of delays /
deliveries of housing projects be it in the city, suburbs or extended
suburbs. It only adds to the dilemma (to buy or not to) and related
sufferings.
Real
estate is one of the few sectors wherein delays in a project
execution actually gives more returns from a buyer's perspective. At
a macro level, by making a booking and not paying for that owing to
the project delay, I actually get an appreciation on the investment.
That anomaly needs to get corrected at a macro level.
That
anomaly could be true for the investor community. The end-user
however is at the receiving end incurring rental and EMI expenses at
the same time while fighting inflation...
I
agree, the end-users are significantly impacted as a result of
project delays. Unfortunately we are in a situation that in any
project which gets launched, I'd think majority of the buyers are not
end-users. It's a vicious circle. The investors are indifferent to
any delays in the project as it helps them get better
appreciation.
In fact, the registration numbers that get
released every quarter, I'm told a large proportion of it is
secondary sales.
The
other related parameter in my opinion, is that in any micro market,
if the secondary rates are Rs 1,000 to Rs 1,500 per square foot lower
than what the developer is offering, that's a clear sign of an
overheated market. Why would any project that's at an advanced stage
of construction be sold at a lower rate as compared to a fresh
launch? This is a clear indication that there aren't many takers in
the market for projects that are significantly constructed and that
clearly is an investor driven market.
But investors
continue to drive the residential realty market thus giving the
developer that much required initial cash flow.
There
are two types of investors, one is the business community with
element of unaccounted surplus being parked in the real estate
sector. The government is trying to control it by imposing tax
deduction at source (TDS) of 1% for an amount of Rs 50 lakh and more.
Secondly, a significant chunk of investment is made by white collar
executives especially in the metro micro markets. by This class of
investors is putting their surplus income in second or third home and
they don't have exit pressure. They have a steady stream of monthly
income that helps support second or third home thus giving them a
significantly higher holding power. That again brings back to the
question that prices will not come down significantly.
