There is an urgent need to create a fair and transparent market place, which can be done by bringing in a regulatorFinance Minister P Chidambaram has joined the lines of the common man in demanding lower real estate prices. But that’s where the similarity ends - while a common man haggles with the builder, the FM has asked banks to put pressure on real estate developers to lower property prices.
According to a report in The Economic Times, the FM in a meeting with bank chiefs asked them to impress upon builders to complete projects as per schedule and lower prices of apartments that are ready for possession but not getting sold.
The past record of builders as well as their recent comments in media suggest that even the FM, like the common man, may not get what he wants.
While the FM is right is pressuring banks, builders have historically been tough nuts to crack. Though sitting on an inventory of 500,000 flats, they are refusing to bring down prices. Newspapers have quoted various builders as saying cement and steel prices and interest rates are preventing them from reducing prices.
The Mumbai Metropolitan Region has an inventory level of 40 months of sales while the National Capital Region’s unsold flats are equivalent to 23 months of sales. Registrations for the month of July in Mumbai did not pick up ahead of the pre-festive season demand. Registrations for the second month running in Mumbai was below 5,000 (including both sales of new and old flats).
In spite of such high inventories, builders are sitting pretty and refusing to lower prices, while banks are unable to free their Rs 1.2 lakh crore. Sitting on high inventories for such a long time has meant that builders have already increased their costs. The Economic Times in the same report has quoted national secretary of Confederation of Real Estate Developer’s Association of India saying there is no scope to cut prices given the kind of input and finance cost escalation, unless cost and requisite margin are recovered.
The “requisite margin” for the real estate players does not seem to be in line with other industries. The first quarter results show that real estate companies though have lower sales volume; their operating profit margin has remained high at 40 per cent while net margins stand between 18-20 per cent.
Builders, however, have a point if one looks at the “cost” on account of multiple clearances from various government agencies. Builders have been asking the government for a single window clearance which will reduce costs by 10-12 per cent.
Their high profit margins clearly show there is room for builders to bring down prices. There is little reason for Indian real estate prices to be among the world’s highest when the supporting infrastructure leaves a lot to be desired.
With the Indian real estate market expected to touch $180 billion and the increasing number of players willing to enter India, there is a desperate need to create a fair and transparent market place. And the only way to do this is by bringing in a regulator and fixing prices. There is a ready reckoner price which is used to compute capital gains; this can be a great way to determine realistic prices. Till such price control measures are introduced, builders will always have the upper hand, irrespective of what the FM wishes.
Source: www.business-standard.com
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