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Decoding Oversupply In The Realty Market

Monday, September 21, 2015
By A Business Reporter

Oversupply in the Indian Property Market’ is the latest buzzword within the real estate fraternity. There has been a growing concern on the number of unsold inventories in major metropolitan cities. And industry stalwarts are discussing this topic at prime time television inundating the target audience with hefty arguments and viewpoints indicating a situation of oversupply.

So, what really does this mean? A just released a report on Decoding Oversupply in Indian Realty Market, by real estate portal Commonfloor.com explains the same....

Understanding the Situation
Oversupply, which we may rightly call as the demand-supply mismatch in the Indian context, is something that has been debated enough. To answer this question of oversupply, we need to first understand how a healthy realty market really looks like. A healthy market, so to speak, normally maintains about eight to ten months of inventory. Also, it is certainly not the one where the dynamics of supply and demand are at par.

It is also imperative to understand that good supply of homes gives consumers an option to choose from. Moreover, an array of options ensures that monopoly does not exist.

So while we talk of the oversupply in the Indian realty market, it is also important to know that there is an acute housing shortage in the country.

A Paradox!
As per estimates, over 10.2 million inventory is currently lying vacant across the country.

On the contrary, stats also reveal that the Indian real estate is currently reeling under the peculiar pressure of an acute housing shortage. Urban India today faces a shortage of 19 million housing units. To further analyze this data based on the income group, the economically weaker section (EWS), with an average annual household income of up to Rs 1 lakh, accounts for over 55 per cent of this shortage. While 40% of the shortage is from the lower income group (LIG) with an annual income of Rs 1 and 2 lakh.

Hence, there is a paradox in the Indian real estate sector.

In the Chinese Context!
If we look at our neighbor China, there is a similar situation of an oversupply haunting them. But the authorities there have hit on an idea to turn around a worrying oversupply of property that has been dragging down prices – buy them up and convert them into social housing.

A note from Barclays reads, ‘’Although a disorderly correction is not expected, given that the real estate sector is too important (to the Chinese economy) to fail, many look for a multi-year adjustment process and say that a gradual slowdown in property investment is their base case…The government’s latest plan to purchase unsold residential properties and convert these units into low-cost public housing is seen as a practical way to reduce inventory levels.’’

Experts feel that it will be good for the existing investors who have been facing the negative growth for the last two to three years. It will also provide for those who were left behind to own a house in a rapidly urbanising country with prices far beyond their reach.

What can be India’s solution for ‘oversupply’?

“In the middle of difficulty lies opportunity” ― Albert Einstein

It’s easy for many to say that we follow the footsteps of China. But, can we really do so? Well, we are two very different economies on the global map. More importantly, the term ‘oversupply’ means different for each of the two countries. For instance, China has somewhat overbuilt homes in its cities even while the demand is cited to be less.

On the contrary, in India demand for homes is very high and there is only a mismatch in the demand-supply scenario. Hence, we need to find a solution in the Indian context and try to bridge the gap between this demand-supply mismatch. Few possible solutions include:

Convert unsold inventory into rental home: One possible solution could be to convert these unsold inventories into rental homes as it will curb housing shortage and possibly reduce developers’ financial burden? Further, residential REITs may also take over the unsold inventory similar to that in countries like the US.

Interestingly, CommonFloor recently conducted a survey titled Buy vs Rent: Know What India Thinks! What was surprising was the fact that the gap between respondents preferring to buy and respondents preferring to rent was very narrow. As per the survey, nearly 40 per cent respondents wanted to rent a property over buying one.

Hence, it may be possible to release vacant homes for renting purpose in areas where the trunk infrastructure has already been developed or is developing?

For instance, in a major boost towards rental housing, MMRDA and HDIL are jointly looking to provide rental housing to as many as 43,000 low-income families for which it is looking to develop 525 acres in Virar. Here, one can easily argue that while the initiative is good but why not use the inventory which is already constructed and lying vacant. Do we really need to build more, when built homes already exist?

Rent to Buy: Further, can we also look at options like Rent to Buy? Here, the government will have to be the torchbearer in setting some base rules. Under this scheme, one gets to rent a newly built home at approximately 20% below the market rate for up to five years (exact period of time varies by property). During that time period one has the option to buy the property or to buy part of the property under a Shared Ownership scheme. And when one gets to the end of the time period he/she either has to buy part of the property or leave.

Moreover, can a public-private partnership model be created? These questions are worth pondering upon!

One Positive Outcome
But as they say ‘Glass is also Half Full.’ Despite mounting inventories across the country, one can look at the scenario from the positive perspective. With huge inventory piling, cash-starved developers are today mainly focusing on completing their already launched projects rather than coming up with new supply.

In fact, data shows a dip in new launches as compared to 2013 while; on the other hand, several projects will be ready for completion in the time to come. Builders are increasingly looking to complete their under construction projects which in a way is good news for the sector at large. Considering this demand-supply mismatch, we can only hope that the housing inventory overhang finds its true buyer and Indian real estate climbs back on the fast growth track.

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