Real estate in India has been going though a dimly lit corridor during the past one year. Dip in demand for housing sector and a weak economy has resulted in sluggish sales across the country in 2012.
The absorption rates in realty hubs like Dehi NCR and Mumbai have come down by about 30% and Mumbai alone has to bear the burden of around 80,000 unslod units. Launches have plummeted by 50% in most of the cities in 2012 as well. Let us take a look at the major challenges that the real estate industry has to face today.
1. Raising funds is the most difficult challenge for the real estate projects. Indian real estate have suffered from plummeting inflow of funds in the past year. The inflow has been hurt by Eurozone crisis and low performing global economy. While foreign direct investment (FDI) in real estate was about Rs 1,58,490 million in present value in 2009-10, it has come down to Rs 39,474 million in 2011-12.
2. Input cost has been rising steeply due to inflation. Real estate is a capital and labour intensive industry and rise in cost of construction materials as well as in labour makes it harder for realty developers to reduce prices of the unsold units. Cost of cement has gone up by as high as 50% in few states and cost of steel per tonne has gone up to Rs 52,000 from Rs 40,000 per tonne till the first quarter of 2012-13 year. Labour prices have risen by 40%-50% during the same period.
3. Financing cost is also on the rise for developers. As the number of defaulters increases, commercial banks have become more restrictive in lending money to the developers. Developers have to rely on lending from alternate sources at high rate of interests which again pushes up property prices. As a result, prices go above the buyer?s range, making it difficult for the units to get sold.
4. There is a huge gap between the demand and supply of affordable homes across the country. Ministry of Housing and Urban Poverty Alleviation (MHUPA) estimates the urban housing shortage in the country to be 24.71 million at the end of the 10th Five-Year Plan. Although the demand is highest for the range of Rs 10-20 lakh, there is a dearth of affordable homes in the country. Of the total shortage of homes, 88% account for the economically weaker section (EWS).
Recent allowance of external commercial borrowing in to the affordable housing brings in a sign of relief to the developers. It opens up avenue to the developers who are constructing affordable homes to avail loans at lower interest rate.
5. However, there is a downside to emphasis on affordable housing in India. The government has urged the developers to reserve 20% of a developed project for affordable housing, which would mean that the increased burden on the developer could very well be passed on to the rest of the 80%.
6. There is a need to look beyond the IT/ITeS industry when it comes to commercial office space. Any upset in the IT sector would inevitably have a huge impact on absorption of office spaces in cities like Bangalore, Noida and Gurgaon.
7. Speculation in property and land prices have led to the unreal price appreciation in Indian real estate market. Overpricing has been deterring customers from buying homes and as result there exists a huge number of unsold units. Foreign Private Equity funds have been blamed for this to a certain extent as they look for a high return in a short period of time.
8. Lack of transparency also hampers the Indian real estate. Land encroachment, lack of regulation act as a deterrent to foreign investors looking to invest in Indian realty. An independent body appraising prices of lands as per international standard is needed in India to bring in the much needed transparency.
Related real estate articles:
Real estate expectations from budget 2013-14
Home sales expected to revive in 2013
Property market expectations in 2013?
Image courtesy of renjith krishnan at FreeDigitalPhotos.net
Source: http://www.commonfloor.com/guide/major-challenges-for-indian-real-estate-23803.html
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