Inventory pile-up – Requires passing of regulation
As per real estate consultants realty developers within most cities are sitting on huge piles of inventories. Cities such as Mumbai possess a 48 months inventory, Bangalore of 25 months while Delhi along with the National Capital Region holds 23 months of inventory.
These figures are drastically beyond the comfortable levels which range between 13 to of 15 months. Analysts believe that this could be yet another indication that there is a real estate bubble. Data collated by a study of transaction data conducted by the National Housing Bank, suggests that prices have fallen amongst 22 of the 26 cities which were surveyed within the June quarter of this fiscal year as compared to the prior quarter. Investment analysts expect builders to cut costs by almost fifteen per cent within Mumbai and NCR while Bangalore might witness 10 per cent due to inventory build-up and liquidity concerns.
There has been an inventory build-up because of the supply at the market’s high end has been miles ahead of the demand from end users. For the bulk of end users buying a house was an investment similar to bank deposits, shares or gold.
Demand booster:
The 20-80 scheme which was commonly being offered by almost all developers was one of the major drivers of boosting and increasing the demand from the end user segment. Under this scheme, buyers were required to pay twenty per cent of the total cost up front, while the equated monthly installments (EMIs) would begin only after a period of two years. During this period of two years the EMIs payable to either the bank or housing finance company would be the responsibility of the builder. Numerous investors would purchase houses with the aim of disposing the property before the period of two years.
Reasons for dip in demand:
With the recent RBI’s ban on such schemes, an entire category of investors are staying away from the real estate industry. In the past, real estate made a good investment option when annual appreciation was at 15 per cent and three per cent of capital value was considered as the appropriate rental value.
However, within the past fiscal year, capital appreciation at its best has been either marginal or flat across markets while rents have decreased to about two per cent of the capital value. This could easily translate into investors shifting their investments to other asset classes, which would only worsen the inventory situation.
Hopes and solutions:
Few of the problems currently being faced on the supply side would be rectified by the recently introduced Real Estate (Regulation and Development) Bill.
The Real Estate (Regulation and Development) Bill intends to prevent developers from launching projects before acquiring all prior clearances, regulate brokers, bring transparency into sale-purchase agreements as well as bring consistency within the definitions of super area, built-up area, carpet area, etc.
It also intends to check indiscriminate expansion by mandating developers to store 70 per cent of the sale money within an escrow account, so that the money is used for developing the project and does not get diverted elsewhere.
Developers have not taken kindly to the bill for obvious reasons. Hence, in order to facilitate correctness by organizing and regularizing the sector, the Bill should become a law as soon as possible.
