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A report by property consultant Knight Frank has called for governments to formulate transparent policies to help release land under their control at affordable rates.
The report notes that while land is the most significant input for property development the argument of cheap historical land cost to justify the expectation for lower home rates does not command merit, as the current market price of land (and not the developer’s historic cost) determines replacement cost, according to the report.
High land prices
Land prices now constitute almost one-third of the property prices in most cases. It is as high as two-thirds of the rate in some pockets of cities like Mumbai and Delhi.
For example, CIDCO follows the ‘present worth’ method for fixing the reserve price of land. Despite the economic slump, the reserve prices of land in Navi Mumbai have increased by almost 30 per cent in the three years since 2009-10.
“The Government should introduce clear and transparent policies for the release of land at an affordable price, increase the development potential of urban land with adequate infrastructure and enhance connectivity to distant suburbs through the Mass Rapid Transport System,” says Mr Samantak Das, Director, Research and Advisory Services.
The disconnect between demand and price of real estate over the last few years has raised serious questions about the position of real estate developers, he adds.
While there has been a lot of debate about the standoff between a home buyer and developer, little has been discussed about the relationship of the developer with the suppliers of factor inputs.
“While land is considered as an investment in common parlance, it is working capital for a real estate developer. This interpretation highlights the significance of replenishment of the portion of working capital that is sold as developed property,” Mr Das says.
Steel, cement
Nearly 57 per cent of the total construction cost is contributed by three major input items — steel, cement and labour. Steel and cement constitute one-third of the total construction cost. These are produced by just 520 and 140 manufacturers, respectively. In contrast, there are more than 6,000 developers across India relying on these manufacturers for their purchases, leaving a developer with little bargaining power, Mr Das says.
amritanair.ghaswalla@thehindu.co.in
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