Factors affecting real estate supply in India

Real estate supply refers to a schedule that describes the quantity of commercial space or number of housing units supplied at varying prices. The rising economic performance in India has increased affordability and living standards in the country, particularly the upper and middle class. According to SIC (2015), the Indian real estate sector has emerged as a major contributor to the socio economic development of the country. The sector was valued at USD 93 billion in 2014 and with compound annual growth rate of 30% and is expected to reach USD 180 billion by 2020. Though the value of real estate market is increasing there is huge difference between the absorption and launches, i.e. demand and supply of properties.

Demand and supply of housing units in India from 2001 to 2015 (in million units; Source: Crisil, 2010)

The above figure clearly depicts the high demand as compared to the real estate supply in India in both rural and urban circles. The shortage of housing can further be studied in the below figure.

Real estate supply shortage in India (in million units; Source: Crisil, 2010)

Real estate supply shortage in India (in million units; Source: Crisil, 2010)

According to Crisil (2010) data, Indian urban areas were estimated to suffer 19.3 million units housing shortage at the end of 2008, up from 15.1 million units 2005. This shortage became more acute by the end of 2014, at 21.7 million units. Just as the demand for real estate in India is determined by certain factors, the supply too is controlled by macro-economic elements.

Construction cost affecting the real estate supply in India

The cost of building a house or property is a major determinant of real estate supply. High construction cost has been a cause for slow rate of construction in India as building property needs big initial investment. More often construction companies have to incur huge costs in the form of wages, insurances, land acquisition, raw materials, architecture and engineering. Sometimes the builders find themselves unable to fund the construction periodically, due to which projects are delayed. This causes a ripple effect—the longer it takes to complete a building, the more its market price is affected, causing a huge hole in the builders’ pockets. Furthermore, lack of unskilled labor has become a major problem, causing wages to rise by 40% (IBEF, 2008). Therefore, construction cost is the most crucial factor in creating disequilibrium between demand and supply curve.

Foreign direct investment (FDI) and GDP

The government has allowed 100% FDI in real estate sector of India for development of townships and construction of hospitals, hotels and educational institutions. The participation of foreign investors has pushed up the real estate supply level  to a different extent (Shanu, 2015). Moreover, India’s GDP which grew at 7% in 2015 also created an atmosphere of positivity in the market, leading to boosted investment in real estate. This investment has come in the form of local funding, NRI (Non Resident Indian) funding, and FDI. Such a robust GDP growth is expected in the near future too. Not only will it create more interest in real estate but also increase urbanization across the country.

Government regulations affecting the real estate supply

Several government regulations designed for construction companies may discourage local and foreign investors from investing in real estate. On the other hand, relaxed and flexible government policies may also increase the investors’ interest in the sector. Firm regulations such as time taken for approval of the building design, FDI limit and litigation and clearance policies somewhat slows down the process (Shanu, 2015). Since most builders in India are small and regional players who have no access to foreign investment, management of such regulatory requirements become a tedious and discouraging process. Tandon (2015) reported that Indian real estate sector has been faced with a challenging situation due to 2.5 lakhs unsold properties due to litigation problems.

Loan interest rates

Any change in the interest rate impacts the ability of a builder to repay loans, and also the seller seeking home loan. High interest rates lead to the lower supply rate of housing. When the interest rates increase, selling property becomes a challenge for the builder due to two reason:

  1. they have to recover the increased cost of construction and
  2. to appeal to the buyer at high home loan rates.

The implementation of RERA (Real Estate Regulatory Authority) Bill has made mattrers tougher for builders. According to the Act, if a builder fails to deliver a project on time, the buyer can claim a refund at 2% higher interest rate. Moreover, there exists lack of uniformity in lending rates to these builders. The bigger and established ones can avail loans at lower interest rates than the smaller builders (Sinhal, 2016). Loan rates have become a bigger problem for builders when a demographic location may not have high market value initially. People may as a result refuse to pay high prices for that location as demanded by builders.

Unavailability of affordable land

Shortage of affordable housing is another factor influencing the real estate supply as compared to the demand. Acquiring land at competitive rates which can enable builders to put up a structure at low prices is still a challenge in India. There is a huge demand for affordable houses, especially in rural areas. Developers who wish to build an affordable house are outbid by unscrupulous ones who seek to benefit from that land by acquiring and selling it at higher rates (Krushnarao, 2016). However with the implementation of RERA Act and Benami Transactions Act in 2016 and with the launch of ‘Housing for All by 2022’ scheme, prices of overvalued properties are set to stablise soon. This will make homes affordable for the underprivileged sections of the society.

Small steps towards a brighter future for India’s real estate

Given the constraints on the supply side, a lot needs to be done to improve to capitalize on market opportunities available for real estate. The government has already started taking baby steps with the implementation of RERA Act, Benami Properties Transaction Act and demonetization. These steps have been initiated with the aim to regulate the market more and to protect the interests of the buyers. Not only will it increase transparency in property transactions but also improve investor confidence. On the other hand, improving the access to finance for buyers is also required. Currently the financial services sector in India is ridden with issues related to loan sanctioning and disbursement processes, which limits the growth of purchases. This problem will be explored further in the next section.

References

  • Crisil. (2010). India Real Estate Overview. CRISIL Research.
  • IBEF. (2008). Real Estate Market & Opportunities. ndian Brand Equity foundation.
  • Krushnarao, K. (2016). Various parameters affecting affordable housing in government & private sector, Pune, Maharashtra. International Journal For Technological Research In Engineering ISSN (Online Biomedical, Medical and Science, 92–98.
  • Shanu. (2015). Impact of Macroeconomic Factors that Affects Real Estate Market in india.
  • SIC. (2015). Indian Real Estate Sector. SIC Global .
  • Sinhal, P. (2016). Builders to pay 10.9% interest for delay in house delivery. Retrieved from http://timesofindia.indiatimes.com/business/india-business/Builders-to-pay-10-9-interest-for-delay-in-house-delivery/articleshow/55174510.cms
  • Tandon, S. (2015). Unsold property in NCR at five-year high – The Financial Express.
Anita Tomer

Anita Tomer

Research Analyst at Project Guru
Anita is a post graduate in applied operational research and a graduate in mathematics (hons.)from University of Delhi. As a part of her association with Project Guru, she is working in the direction of developing strong statistical concept. Apart from data analytics, she loves adventures and loves to explore places.
Anita Tomer

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