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The absolute cost of construction has increased 25-30 per cent over the last four years and the capital values have gone up by about 20 per cent in major cities in the country, according to real estate consultancy Jones Lang LaSalle.
The cost of finance has increased in the light of banks’ reluctance to fund what is currently perceived as a high risk sector. In addition, most of the private financial institutions have also switched from providing equity funding to debt funding.
Equity funding involves taking some risk against expectation of higher returns and debt funding on the other hand is usually at a high fixed interest rate.
Anuj Puri, Chairman and Country Head, Jones Lang LaSalle India, in the sector review for 2013 and outlook for 2014, expects the market sentiment to improve during second half of 2014. The current cautious market sentiment is likely to continue until the first half of 2014.
Tracing some of the key trends in the backdrop of tough economic scenario in the country, the report highlights how there has been some shift of bargaining power in favour of buyers during 2013 and there has been rise of the suburbs.
In mid-2013, the rupee-dollar fluctuation gave NRIs and foreign investors an opportunity to earn incremental returns of 10-15 per cent merely on the exchange rate movement. In addition, the developers’ willingness to lower prices by 10-15 per cent gave local buyers a chance to get genuine bargains on property purchase.
Providing a broader outlook for 2014, the consultancy sees affordability will drive growth in 2014.
With availability of land in urban agglomeration being scarce, redevelopment will emerge as another growth driver. Indian cities present an exceptional opportunity for developers.
Some of the initiatives of the government to boost the construction sector , including the importance accorded to real estate investment trusts (REITs) as a tool to attract money at a relatively cheaper cost, could open up opportunities for small investors to diversify their asset structure, the report said.
>rishikumar.vundi@thehindu.co.in
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