Reduce
Unit Sizes To Improve Affordability
by Mr. Ramesh Nair, JLL India
India's Financial Capital Mumbai has a high inventory of
residential properties of 67,000 units, equal to sales of 34 months. While the
underlying demand is strong, it is not being converted into transactions due to
the high property prices.
From a developer’s point of view, low absorption is a
source of worry; however, due to high costs of land acquisition, raw material,
labour, finance and new costs like fungible FSI, lowering prices beyond a point
seems difficult.
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| Ramesh Nair, JLL India |
Is there a way to end this stalemate?
It is important to understand exactly where the problem
actually lies – in high property price or high ticket size?
While property prices are largely location-driven,
ticket size is a combination of size of the apartment and property price. As
per the developer community, there is not much possibility of reducing the
prices attached to locations.
The answer seems to lie in developing projects with
smaller apartments. But what made developers focus on larger configurations in
the first place?
The answer can be found in the past.
Types of Property Buyers..
There are 2 types of buyers – those who believe
locational advantage is more important than larger sized apartments, and those
who believe the opposite.
The former opted to compromise on size and continued to
live in the same locations. The latter, with the objective of living in larger
apartments at relatively lower ticket sizes, moved to the suburbs and extended
suburbs.
However, this second class of buyers - while achieving
the primary objective - also compromised on their standard of living.
Not the least of the backlash was long and uncomfortable
daily commutes between home & work place.
Understanding buyer requirements, developers / promoters
started focusing on apartment configurations of 2 BHK and above. Larger
configurations help developers to provide better amenities within & outside
the apartment, and consequently to charge corresponding premiums.
Such properties also require a lower number of buyers
compared to smaller apartments.
Mumbai Residential..
The Formula Crumbles
This strategy worked well till 2008, as the absorption
more or / less equaled launches. However, between 2003 and 2008, property
prices increased substantially &
ticket sizes for the same configurations went beyond the common man’s
reach. Post 2008, property prices rose by another 36 %.
Due to this, a buyer who could buy a 2 BHK in Mumbai
within a budget of Rs. 80 lakh in 2008 needed to shell out another Rs. 10 lakh
to buy just a 1.5 BHK. Similarly, the cost of a 1.5 BHK in 2008 equals that of
a 1 BHK today.
Another problem was that smaller-configuration
apartments were available largely in the suburbs and extended suburbs.
This affected senior citizens who had spent their entire
life in the Island City. Meanwhile, existing structures became increasingly
more dangerous to live in, even as families grew in size.
Lack of sufficient options with smaller configuration
forced these individuals and families into suburban and extended suburban
locations during a phase of life in which life is ideally supposed to be easier
rather than harder.
Fast Forward To Today..
Today, developers in Mumbai are faced with a reduced
demand for larger apartments, and the option of reducing property prices is
limited. The only strategy open to them is to focus more on smaller apartments
and offer reduced prices to the extent possible.
While nothing can be done about non-selling larger
configurations but reduce prices or sit indefinitely on unsold inventory, the
fact is that new developments must be configured for smaller sized units, and
therefore greater affordability, if the Mumbai residential property market is
to see a significant revival.
About the author..
Ramesh Nair
COO – Business, India
+91 22 6620 7575
ramesh.nair@ap.jll.com
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