On a steady ground

Land prices are an ex­cep­tion to the trend of realty price cor­rec­tions af­ter de­mon­eti­sa­tion

Hindustan Times (Chandigarh) - Estates - - ESTATES - Mu­niesh­wer A Sa­gar mu­niesh­wer.sa­gar@hin­dus­tan­times.com ■

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 in­su­la­tion

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.

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