June - July 2012 - mchi-credai

Knight Frank India
Research Report, July 2012
Disconnect between the demand and
price of real estate over the last few years
has raised serious questions about the
position of real estate developer. While
there has been a lot of debate about the
standoff between house buyer and
developer, a little has been discussed
about the relationship of the developer
with the suppliers of factor inputs such as
Land and Construction costs; Knight
Frank’s latest report focusses on this:
Land:
• Land is the most significant input for
property development constituting almost
one-third of the property price in most cases
and as high as two-third in some pockets of
cities like Mumbai and Delhi.
• The argument of cheap historical land cost
to justify the expectation for a lower house
price does not command merit as the
current market price of land and not the
developer’s historic cost will determine
replacement cost.
• Analysis of land allotment policy of some
of the major land aggregators provides
interesting insights. CIDCO follows the
'Present Worth’ method for fixing the
reserve price of land and notwithstanding
the economic slump, the reserve prices of
Re-development in SoBo
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NEWS UOU CAN USE
Intervention of the Bombay High Court in
the matter of redevelopment of buildings
falling under the Coastal Regulation Zone
could have a positive impact for South
Mumbai (SoBo). During hearing of a petition
filed by the developer of a Shivaji Park
building on 19 June, the Bombay High Court
asked the Maharashtra Coastal Zone
Management Authority (MCZMA) to
expedite all proposals pending before it on a
fast-track basis.
The Division Bench of Chief Justice Mohit
Shah and Justice Nitin Jamdar said there
was undue delay in granting environmental
clearances even for reconstruction of small
parcels of land. More than 500 proposals are
currently pending before the MCZMA,
including a few of the marquee projects by
land in Navi Mumbai have been increased
by almost 30 per cent in three years since
2009-10.
Construction Cost:
• 57 per cent of the total construction cost is
contributed by three major input items
namely steel, cement and labour
• Steel and cement constitute one-third of
the total construction cost and are
produced by around 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
• Since 2009, the cost of steel and cement
has moved up by 35 per cent and 24 per cent
respectively.
Conclusion:
• A real estate developer is a price taker in
most of the input items used in construction
and has no significant influence on their
price movement.
• The industry structure clearly highlights
that isolating the developer and solely
holding them responsible for inflated
property price is not justified.
• The government has a pivotal role by not
only being a regulator but also the largest
supplier of land. It should introduce clear
and transparent policies for release of
government land at an affordable price.
top developers, with some of them stuck in
red-tape for over three years.
Media reports quoted State Environment
Secretary, Smt. Valsa Nair Singh as having
said that her department will clear the CRZ
proposals on priority. “We have 60 CRZrelated
proposals, which will be cleared in
the next meeting by the end of this month.
As far as the 500-odd environment
clearance files are concerned, we had
inherited more than 400 of them and are in
the process of setting up two more
committees to expedite the approvals,”
Singh was quoted in media reports as
having said. She said her department
would ensure that waiting time for
environment clearance reduces to just two
months.
Knight Frank Mumbai Report
The key take aways are:
• Disappointing Absorption Rate: 45,000
units were absorbed in the MMR during FY
2012 which is well below the market
average of 70,000 to 80,000 units annually.
The Mumbai market currently has an unsold
inventory to the tune of 80,000 units which
is approximately valued at INR. 1,050 bn, at
current price-points (as in APR:MAY 2012).
South & Central Mumbai which only offer
products at the premium end of residential
price band are experiencing highest
vacancy levels.
• Drop in New Project Launches: The MMR
market has witnessed a steep drop of
almost 40% in project launches in FY 2012
compared to the previous period.
•Rising Debt: Developers are hard pressed
to deleverage their positions as they are
getting buried under continuously
mounting debts with the market offering
them little respite. The total debt position of
five major Mumbai based developers is
estimated at approximately INR 62 bn, as on
March 2012; while it is estimated that they
hold a total unsold inventor y of
approximately INR 143 bn, which is 14 per
cent of the total MMR market.
In the context of various sources of funding
drying up and new launches hitting the
market, the developers may re-plan their
pricing strategy in such a way that the
unsold inventory is monetised within four to
six quarters instead of the currently
estimated eight to ten quarters.
•Regulatory
Bottlenecks: Project approvals
that were practically stalled in 2011, have
started coming through again as the
Development Control Regulations were
amended early this year. However, demand
is likely to remain subdued due to the
prevailing uncertainty in the economy
•Concentration
in Northern MMR: An
estimated 73 per cent of the total residential
units under construction is concentrated on
the northern fringes of the Mumbai market.
Developers are looking to tap into the
largest chunk of buyers looking for
apartments priced up to INR 7.5 mn. Thus,
an estimated 55 per cent of units under
construction presently belong to this price
bracket.
SEAC – II set up in Maharashtra
A total of 554 construction projects are awaiting environment clearance in Maharashtra, which already has a State-level Expert Appraisal
Committee (SEAC). The second committee-SEAC-II-was formed earlier in July to clear construction projects mainly in the MMR region.
Maharashtra is the only state with two SEACs to clear construction projects. The SEAC-II will comprise five members, including IIT staffers,
retired BMC and Mhada officials and the deputy secretary (environment). Maharashtra Chief Minister Prithviraj Chavan had met Jayanthi
Natarajan, Minister of State (independent charge) for Environment and Forests in May, and proposed the formation of SEAC (II).
Forthcoming Events - 2012
20th Mega Show
MMRDA Grounds - BKC
1st - 4th November 2012
For Further Information Contact :
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PROPERTYSCAPE ISSUE • FEBRUARY JUNE • JULY • MARCH 2012 2012
Maker Bhavan II, 4th Floor, V. Thackersey Marg, New Marine Lines, Mumbai - 400 020.
Call : 42121421 E-mail : mktg@mchi.net
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6th INDIA REALTY EXPO
2012 - LONDON
India Realty Expo - 2012
Hotel Cumberland, London
15th & 16th September 2012
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