On a steady ground
Land prices are an exception to the trend of realty price corrections after demonetisation
The sluggish realty market has seen sharp price corrections after demonetisation last month. According to real estate experts, home prices fell by 20% to 50% depending on the location after the policy was announced on November 8. The demand fell as uncertainty prevailed and sellers tried to exit the market at whatever price they could. The culling of the cash element dented the market sentiment and realty deals started falling apart. But the land segment has been an exception to this trend.
“Across the region, in most cases, land prices are relatively stable as compared to the sharp decline in the housing sector, particularly in the secondary market. For how long such a trend in the land segment persists is difficult to say, but currently it is holding on,” says Col RS Perhar (retd), 59, a Chandigarh-based real estate analyst. Prices in the land segment were expected to dip as the cash element in the land deals is generally more prevalent than in other realty transactions. “It is an open secret that the cash component is more sizeable in land deals because of a larger gap between collector rate and prices of land in villages, even when land is located adjacent to cities,” says Perhar.
The land prices are relatively insulated to frequent changes in the housing market. Land prices tend to fluctuate in tune with the long-term market movements and conditions. While the impact of demonetisation on the housing sector was immediate, there will be a lag before the land prices start to respond this major financial event. “It is too soon to judge the impact of demonetisation on land prices. One immediate impact is that not many land deals are being finalised now. Both buyers and sellers are waiting for clarity before making a decision,” says Rakesh Kerwell, 53, president of the Real Estate Development Council of Punjab.
Another factor contributing to the relative insulation of the segment to demonetisation and the consequent general trend of price corrections in the sector, say realty experts, is the lack of urgency to exit the market at any price among the landowning farmers. “Unlike the housing sector where the investor presence was large, in the land segment, in most cases, the land is with the farmer. Though in individual cases there may be an urgent need to raise funds by selling land, in most cases, the farmer sells land only if he is getting a good price for it. Otherwise, he just uses the land for farming. He can hold on to the land and still generate income from it,” says Perhar.
In the last four years, most of the realty sector witnessed price corrections; and the land segment was not an exception. The quantum of price corrections was lesser in this segment than in other realty segments. “Prices in the land segment fell by 20% to 40% depending on the location. Though in most cases, the land where the prices fell was either with an investor or a builder looking to raise funds to complete his project. At present, there is a limited scope for further price correction in the segment. Prices may decline by an additional 10% to 15% in the coming months,” says Nitin Mehra, 31, an Amritsar-based real estate consultant.
The spiral effect
Market insiders say the decline in land prices is crucial for correction and even growth in the primary market. “In the current market, if land prices don’t decrease and construction costs continue to remain stable, builders will not be able to cut on prices in the primary market. Unlike the secondary housing market, which traditionally depends heavily on cash payments, the primary market has limited exposure to the cash element. Already the demand movement is from the primary to the secondary market because the price fall is sharper in the resale market then in the primary market. If this gap widens builders may be forced to cut prices in the short-term but won’t be able to sustain in the medium and long terms. This will impact supply expansion in the sector and launch of new projects,” says Amit Mittal, 42, a Zirakpur-based builder.
There are t wo types of demand-supply gaps in the realty market. On the one hand, in absolute numbers, the supply is more than the demand. But at the same time there is a mismatch between the nature buyer demand and nature of supply available. Most of the demand is concentrated in the budget and affordable segments, while supply is concentrated in the mid-price and luxury segments.
“In the past couple of years, builders had started addressing this mismatch in supplydemand. There was a trend of more and more builders entering the budget and affordable housing segments. This trend will abruptly end if builders in the primary market are unable to compete with secondary market prices. And for primary market prices to fall, the land price corrections is crucial,” says Mittal.
Some realty experts contend that the stability in land prices can be offset by availability of cheaper credit. “If credit becomes cheaper for both builders and buyers, it will translate into higher demand and supply expansion. Even if the land cost element remains the same, or declines marginally, the cheaper cost of raising funds will help builders compete with the secondary market price levels,” says Mehra.