Real Estate Prices Unlikely to Bottom Out This Year

by Avadh Singh

While real estate prices this year may not go up at last year’s dizzying pace, they are unlikely to bottom out either.

Spiraling land costs and construction costs have played a prominent part to appreciation in sale prices by 80 to 200 percent in the last two years, on the basis of area and location. What’s more, land acquisition costs have contributed majorly to the escalation in prices even as increasing construction costs have played their part.

The overall project costs is affected by the increasing labour costs, raw material costs including cement, steel, sand and interests costs on developer loans. "The increasing stress on quality materials and amenities has also meant increased construction costs which have gone up by 10 to 15 percent in the last one year," pointed out Geeta Chaubey, Managing Director of Geeta Real estate.

In my opinion, the cost of construction has increased because of various factors such as rise in input costs, service taxes, VAT and increasing labor costs. All of this has meant a construction cost for a 20-storeyed building in a suburb like Worli would be about Rs 1800 to Rs 2,000 per square fit.

"The economy is doing quite well and there is demand for real estate, which has led to land prices shooting up. As of now there is hardly any barren land available in the city. The scarcity of land is a big issue and hence acquisition costs are only going to go up," said Navin Nischol, CEO of Dream builders.

Keeping this aside, there is no control on the construction costs with cement and steel prices rising. There is no doubt that builders who have paid heavy capital costs will not sacrifice their margins easily. If latest figures are taken into account, the cost of construction has gone up in the past two years from Rs 850-1000 per square fit to Rs 1250-1400 per square fit. In an attempt to control spiraling cement prices, the finance minister P Chidambaram had also announced indirect tax sops by giving concessions on excise duty to cement companies. This will however effectively minimize the price by Rs 7 per bag, which may have only a marginal impact on reduction in overall prices.

According to experts, the reduction in excise duty will not have a substantial impact on the end users, since a major component judging the flat value is the land cost. At the present moment, the market is seeing a lull as buyers in the category of say, Rs 20 lakh to 50 lakh, have gone slow in their decision-making. However, the same is not applicable for the commercial sector where there is no slow down.

Whatever be the case, one thing is for sure prominent developers will not bring down their prices, as the stock is limited in nature. On the other hand, smaller developers facing financial constraints may negotiate. This would however mean the gap increases between the A class and B class developer.

"The benchmark for the lowest rate will be fixed and sale prices will not fall below a certain level," pointed out Ramesh Sippy, Managing Director of Sippy Associates. As far as the impact on the end user is concerned, he will have to fear the brunt. While there may be some who wait and watch, those who really need to buy will do so while small developers will try to liquidate on a short-term basis in the market.