The disconnect between the demand and price of real estate over the last few years has raised serious questions on the position of real estate developer says a Knight Frank Research. 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.
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 not withstanding the economic slump, the reserve prices of land in Navi Mumbai have been increased by almost 30% in three years since 2009-10.
57% of the total construction cost is contributed by three major input items namely steel, cement and labour. Steel and cement constitutes one-third of the total construction cost and is 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% and 24% respectively.
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.