Residential market defies all economic indicators-IV

Date : Jan 15, 2013

Some analysts believe the economy of the scale in the business is helping the developers to hold the stock. They maintain the developer does not put in his own money in financing a project. Even though the cost of land in cities like Mumbai and Delhi accounts for 70-80 percent of the construction cost, at least 50 per cent of the projects are in joint venture with the land owner.

“Have the developers paid for the land? The answer is no – or very partially. Now when you have not paid for the land, and land constitutes almost 70 per cent of the sale price, your ability to hold on is infinite,” says Pranay Vakil, former Chairman of Knight Frank.

This implies that if the builder has not paid for land, holding on to property does not hurt him. And the entire cry about higher interest rates pushing pressure on developers to sell flats at higher prices is just a lame excuse.

Rising interest rates only affects the cost of construction, which is a small part of the overall cost. In the residential space, as long as the flat is booked, the builder makes money against it.  Usually a part of the sales proceeds are more than enough to meet construction costs. Slower sales only result in negative working capital where the builder recovers more than what he spent on that particular project, not counting the land. Hence the pinch to sell flats at lower prices is not that great.

“Older stock is not selling and there is a huge inventory overhang. Unavailability of land, delays in project approvals and low floor space index (FSI) norms are constraining supply in certain markets, thereby affecting the ability of prices to settle at a more rational level” said Sachin Sandhir, Managing Director-South Asia of RICS.

Unlike China, which has adopted a slew of measures to cool its once red-hot property markets India still lacks regulation to stem price rise and tackle the shortage of affordable housing for its burgeoning urban population.

Mumbai, where a 2,000 square foot flat in the city’s posh southern district can cost more than $3 million, the same as a two-bedroom flat in central London, has seen home sales slide by 45 per cent from a year earlier.

source: http://www.track2realty.com/residential-market-defies-all-economic-indicators-iv/