Retailers Halt Expansion, Awaiting Real Estate Price Correction
Commercial real estate has always been seen as an asset where only institutional investors or HNI’S can invest, which, however, is changing. Many commercial investors are now getting into the retail real estate play
Whether we like the crowded shopping malls coming up everywhere or not, real estate is one of the most prominent pointers of a country’s growth and is one of the major avenues of investment for people. The strengthening real estate market in terms of demand and prices have made an investment in the commercial real estate a very proͤtable option. That is why commercial real estate has always been seen as an asset where only institutional investors or HNI’S can invest, which, however, is changing. Many commercial investors are now getting into the retail real estate play.
India is seen as one of the top markets giving great returns, especially in the commercial and retail space. The commercial segment in India has been doing very well. In 2015, some 38 million sq. ft. retail space was taken up.
In 2016, 46 m sq. ft. was taken up In 2017 about 40 m sq.ft. space was closed. The Delhi NCR, Mumbai, and Bengaluru had already seen more than 180 retailers entering or expanding their operations in the country. International fashion brands and the domestic food and beverage segment led the demand for quality retail space during the year.
There are 6 major factors affecting real estate prices. They are Land, Construction Material Costs, Labour Cost, Cost incurred to get approvals and Taxation & borrowing costs, & RERA.
Land: As land is a ͤxed asset, it gives the sector a high capacity to maximise advantages. This works on a model in which a business can be started by taking loans as many times as the value of the asset is. As there are no strict land rules and regulations and the mismanagement of land records makes the land purchase very risky.
Construction Material Costs: Similarly as all raw material costs, also shows atrend moving upwards with rising labors & fuel cost. Alternatively with technology playing a crucial role, new materials are introduced that help in controlling costs and also provide alternative solutions to conventional construction materials. For example, manufacturer sand in place of river sand is used.
Labour Cost: In spite of a huge workforce in India, the labor cost has always seen a hike in the industry.
Approval Cost: As approval costs can go as high as 15 percent of total sale price in large metros, this factor also leads an increase in the price. This includes development charges, Premiums, and cess which is paid so that the better infrastructural facilities can be provided to the citizens. Taxation & borrowing costs: On top of all other charges there are taxes incurred for Stamp duty, registration, GST, etc. to property buyers. With the introduction of RERA by Government of India, developers will be under severe pressure to take all approvals and deliver the projects on time. This law is a great boon for the end user, which will result in reduced inventory in market. The cost incurred by the developers to get all the approvals on time, plus the pressure to deliver the product on time will result in additional pressure on the capital expenditure for developers.
So from all this, it is presumed that there will not be a crash in real estate prices. We might see a slight correction in prices but not a crash. Prices will remain stagnant for a long time.
India’s real estate market has been losing momentum for quite some time as the country’s economy remains under stress. The primary reasons for the slowdown are strict monetary regulations due to high inflation, new norms for lending to the real estate sector and property prices touching peak levels.
Reasons behind the slowdown in real estate sector in India
Increasing real estate inventories in the major cities due to slowdown Unstable economic condition of the consumers
Increase in price due to higher costs of production
Declining consumer trust due to delay in completion of projects Introduction of technology-oriented retail spaces
Region speciͤc consumer demand
Expected future of real estate in India A commercial property can be a small shop, a housing complex or a shopping mall. Each of these properties should be looked at from different angles- amount of investment, proͤle of tenant, returns, exit options and the risk associated.
Thus retailers who are thinking to expand the business shouldn’t wait for the real estate prices to increase or to decrease. Even if few points above look far & distant they will impact the market in next 3 to 4 years. And exactly when many will start thinking that India will defy all economic laws and when people will feel prices will never fall, it is then that a crash will appear.
Dr. Rupal Agarwal