The search for the right kind of house in Chennai can be a complicated process involving balancing the budget with the right location.
The trick lies in locating the right product. Though the demand for residential space is virtually limitless, pricing is a deterrent for a consumer makeing a decision to buy.
Do developers need a magical touch to help them identify the right product and price it attractively to push the momentum forward? Let’s look at the causes that drive prices.
Inflation in cost of construction, tightening debt in the financial system – which forces developers to go for private equity or debt at high returns – and lack of clarity in approvals contribute to high input costs. The bureaucratic hurdles in getting a project approved that lead to a long gestation period between land procurement and project launch also make it necessary for stiff pricing
Conversion of land is another big hurdle in the way of development. It takes 6-9 months for land conversion on an average, followed by more time for design approval, making approval time for a large sized project to be anywhere between 12- 16 months.
Competition in supply necessitates an increase in marketing spend, which adds to the sale price. Development of social infrastructure around the project site leads to price escalation. As far as landscape of the city goes, there are so many pockets of development but a capital value of less than Rs 3000 per sq ft is a rare find.
There is a definite chance that sales will pick up with a drop in capital value, which drives home the point that all possible measures to assist drop in capital values need to be adopted.
When it comes to affordable housing, a drop in capital value involves a drop in construction cost, but that should not mean a compromise on quality.
The base civil specifications for a home for affordable or luxury segment remain the same. It’s only the auxiliary specifications of a building like the paint, exterior and interior finishing and the finer specifications like quality of taps, electrical switches, social infrastructure in the apartment complex and provision of generator for the whole complex that vary between the nature of the products. But where does the balance lie?
Is it not possible to deliver a standard product with a lower construction cost without compromising quality?
Is Rs 1,700 a sq. ft becoming a starting point for construction cost with that of multi-storeyed buildings going upwards of Rs 2,200?
With construction cost for multi-storeyed buildings on the rise, it only goes to prove that the pricing of such a project cannot be below Rs 3,000.
There are options available in peripheral areas for developers and those are all large land tracts, which can provide opportunities for good township development. Landlords are getting more exposed and amenable to joint development route to unlock the value of the land. But the expectation from landlords, in a lot of cases, are a factor in the increase in sale price which leads to inflation.
Developers have tried pruning the sizes of apartments over the past 5 years to make the home affordable and have seen reasonable success with that. By dropping the construction cost without affecting the base quality, the sales would be even better.
Earlier in 2007 when the growth prospects were looking up, developers had planned a 2 BHK apartment to be of 1,100-1,250 sq ft and a 3 BHK apartment to be between 1,300 and 1,500 sq ft which today has been cut to 900-1,100 sq ft and 1,200 -1,400 sq. ft respectively in most projects.
There has been a moderate price increase of 10-15 per cent in capital values in a period of 4-5 months from launch time across most regions of the city with the characteristic more visible in affordable homes segment. In specific projects, the price rise has been to the extent of 30-35 per cent from launch price in less than 6 months.
But what is getting misinterpreted is that the rise of 30-35 per cent for the project sets the benchmark for the next project in the surroundings. When this happens, it forces potential buyers to put off purchase .
What developers should also realise is to phase out the project, looking at supply in future in the specific micro market. Phasing out of supply can be done by doing a good market assessment of proposed stock in that region. An additional benefit avoiding oversupply and helping achieve price escalation than otherwise crowding the market, which would warrant price cuts to push sales forward.
To conclude, it is definitely possible that with proper assessment of supply and with newer construction techniques emerging, demand can be met. The aim should be to narrow down the gap between supply and demand as we go forward.
Policy action
RBI should look at liberalising the tightening credit interest rates on a periodical basis, but at the same time keep track of inflation as this measure will further boost sentiments and encourage buying decisions.
With residential demand being infinite at least for the next two decades in our country, the opportunities are only plenty and the objective should be to deliver a house for the needy and aspiring youth.
The need of the hour is for developers to design and deliver the desired product at a right pricing.
(The author is an Associate Director and City Head, Chennai, DTZ-India.)