The Hindu Business Line : Pricey land stifles demand

Slow sales and market resistance to the high cost of residential space have seen developers slow down the pace of projects. Developers, who blame high land prices and input costs for the increasing cost of developed space, say they are going slow on land deals, cutting back on projects and even prefer to back out of joint ventures.

Irrespective of who or what is responsible, all acknowledge that high land prices in most cities have contributed to the projects being unviable. Fresh supply of developed space is bound to fall over the next year or two leading to a correction in land prices.

When the market is resisting the rising trend in developed space prices it is only logical that there will be resistance to land price increases, say developers.

Costly Chennai

Chennai is considered among the most unviable destinations for developers because of soaring land values. According to contractors, quite a few projects are on the block with developers looking for partners to share the cost.

On the Old Mahabalipuram Road, for instance, considered among the most attractive areas for investment, look at the actual development of residential space, says a developer: Of the 100 acres with Hiranandani, the company is developing only about 15 acres; DLF has over 70 acres but is only looking at about 15 acres; another Chennai-based developer, Olympia Tech Park, which holds 60-70 acres is again developing only about 15 acres.

The overall development of residential space along the OMR up to a distance of about 30 km would be about 150 acres, a fraction of the available area. If projects are not happening it is not because of absence of potential demand but because high costs are stifling the demand.

Survey results

A recent survey by international property consultants Cushman & Wakefield points to a slowdown across cities.

In Bangalore, for instance, the report says “end-users and investors over the past six months have adopted a cautious approach in purchasing residential plots, apartments, villas, etc in Bangalore.”

As for the North, the report says the suburban locations of Gurgaon and Noida witnessed only a marginal appreciation of two per cent over the quarter. End-users as well as investors have adopted a wait-and-watch policy in anticipation of correction in apartment prices and home loan interest rates.

In Pune, “end-users and investors continued to keep a vigil on the market,” the report says. Instability in markets, expectations of a correction in real-estate prices, and high interest rates on home loans have contributed to a slowdown in intake of residential property in Pune, the survey points out.

In Chennai, one developer, who gave a rule of thumb calculation, said that there is a market resistance for residential units priced more than Rs 3,100-3,200. At this price range, developer’s margin accounts for 15-20 per cent, Rs 1,500-1,600 towards cost of construction, Rs 300 for other expenses, and, therefore, the land price should be around Rs 400-500 a sq.ft considering the limitation of 1.5 FSI — floor space index is the proportion of built up space to the land area. Where a viable price is about Rs 4 crore an acre, landowners often demand Rs 8-12 crore. Deals are, therefore, simply not happening.

The situation is similar in Hyderabad but developers manage because of the higher FSI — with a bit of planning it can go up to six, they say. In Bangalore too there are areas in the city’s periphery where land is available at Rs 1.5-3 crore an acre.

According to developers, the market is bound to be ‘tough’ for them and buyers over the next year during which a correction in land prices is anticipated.