Are you a young professional wanting to live in comfort in the city where you have secured your first job? Or a student studying in a city other than your hometown, looking for affordable, good quality housing? Or a middle-level professional wanting to invest in a house in that part of the city most convenient to you? Technically, you are the target that developers, city managers and housing finance institutions should like to zero on, either as a tenant or a buyer. However, in India if you do belong to any of these categories, you would most likely hit a road-block.
Most likely, because the residential real estate market in the country is still evolving. While affordable housing earlier was synonymous with that created by state housing boards, affordability today has a very different connotation. With private players creating vast quantities of housing stock and the housing finance disbursals scaling up each year, affordability today is synonymous with access to finance. Therefore, the market values of housing have been consistently pushed up with growing demand.
The major reason for skewed real estate values is the huge cost of land as a percentage of the value of the asset. Land release is still controlled by state authorities, and is limited. State authorities often hold on to land till the real estate values rise and sell at peak prices to maximise demand. In the intervening period, there is a shortage in the market that pushes up prices. Today, the opportunity value of land is in excess of even 70% of the cost of an apartment. To make such a project viable, developers are fast switching from affordable to premium housing.
Therefore, the dearth of housing which matches the requirements. With a large part of the workforce being new entrants to the corporate world, who require small houses with good facilities, preferably in the rental category, this demand is left untapped. ?A good rental policy that favours both tenants and owners alone will trigger rental housing,? says V Suresh, former CMD of Hudco. In Europe, 55% of housing is in the rental category. This includes those developed by corporate houses, fund managers, etc. Going by the fact that about 40% of rental housing in Europe is either studio or small apartments, there is obviously a market demand for this category. Small and affordable studio apartments catering to the requirements of young professionals and students are a vital part of global real estate markets,including India.
Most markets around the world have several categories of housing. Premium housing in core inner and upmarket suburban areas are highly valued. Larger apartments in well-managed condominiums form the next rung of the real estate ladder. It then gets scaled down to smaller one and two-bedroom apartments which meet the requirements of working professionals. Values are largely determined by accessibility, location along the transit lines and accessibility to social infrastructure such as schools, hospitals, entertainment facilities and proximity to premium areas. However, in India, values are pushed up by developers who load opportunity costs, as demand for different categories rises. In many instances, unethical practices such as bulk, investor-fuelled demand leads to rise in values.
Another crucial factor in the mindless rise of real estate values is that Indian cities do not have redevelopment norms. Therefore, old areas which have had plotted housing may now require multi-storied group housing, but development norms have not allowed that in the city. Therefore, the demand-supply gap leads to rising values of existing stock.
Rental housing often takes pressure off values. But in India, where rental laws are weak, a large percentage of residential housing remains unoccupied. In many instances, this is one reason for poor maintenance, which leads to loss of asset value. Suresh estimates that regular maintenance should be approximately 3-5% of asset value. This alone will ensure the longer life of assets and continuing premium returns. Only systematic returns can ensure good asset maintenance, which has a direct corelation to the price of real estate.
Ultimately, prices stabilise when the latent demand in the market is met. The current bull run in the real estate market can only be met when the untapped demand for small housing for young professionals and students in cities is met, either through the rental or sale route.
