Factors preventing Indian Real Estate Developers from reducing prices

Factors preventing Indian Real Estate Developers from reducing prices

To begin with, funding has become a significant challenge for developers over the last few years. Low sales, increasing debt-equity ratio and banks’ refusal to disburse loans for residential construction have all contributed to this situation. Also, with RERA in place, developers are not able to 'diversify' funds collected from homebuyers anymore.

The NBFC crisis: The crisis has intensified the pain for real estate developers. Further, after the IL&FS crisis, some NBFCs even revoked the loans they had sanctioned earlier. But the worst was yet to come - fearing the increasing turmoil, some NBFCs asked developers to return the funds they had disbursed to them. Most recently, NHB has asked NBFCs/HFCs to do away with the subvention schemes – further dampening the flow of working capital.
Low profit margins: Over the last few years, the real estate sector has undergone a paradigm shift. Developers who earlier restricted themselves to premium/luxury housing are now venturing into the affordable segment. While the profit margin on luxury housing could be anywhere between 10-20% depending on location, property type and developer, it does not go beyond 8-12% in the affordable housing segment. Also, with the new GST rate minus the ITC benefits, the profit share shrinks even more - unless developers hike up their prices. According to the latest report by CARE Ratings Ltd, during the last one year the Ebitda (earnings before interest, tax, depreciation and amortization) margins for 25 listed real estate developers contracted by 230 basis points.
Unrelentingly high input costs: Increasing cost of land acquisition, delays in getting requisite approvals, and high cost of raw materials are major factors that prevent developers from slashing property prices further. Construction materials like cement and steel still fall under the highest GST slab of 28%, making adequate price moderation extremely challenging. Increase in customs duty on various raw materials such as PVC, vinyl floor etc. in the recent Union Budget adds even more pressure.

So - will property prices reduce?

Considering the above factors, there is minimal scope for any further price corrections. Should you buy a home now or 'time the market' a little more? If it is the hope of a price correction which holds you back, it may be a pointless wait - in fact, prices are already increasing on the back of improving sales.

There may be any number of other reasons for choosing not to buy a home now, including the perception (currently justified) that other investment options like mutual funds or gold can yield better returns. Or you may simply prefer the flexibility and lower financial impact of rental housing. The rationales governing the buy-versus-rent debate are plentiful, and it is not a debate which is likely to lose steam in the coming years.

However, the anticipation of a massive price correction will likely remain a vain one.

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