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July 30, 2014
The Mumbai real estate market is reeling under a peculiar situation where there is oversupply of housing in segments where demand has pretty much evaporated and high demand in segments where supply has dwindled.
There is an overflow of premium projects as well as a dearth of takers for these. On the other hand, affordable housing is in great demand and yet faces an acute shortage in the market.
According to a Jones Lang LaSalle (JLL) report, the higher-income segment in Mumbai has an excessive supply of houses priced in the range of Rs 10000-30000 per sq ft; the middle-income housing units, priced at Rs 5000-9000 per sq ft are running short by 20-30 per cent and the low-income category looking for housing options in the range of Rs 2000-3000 per sq ft face an acute shortage of 90 per cent.
What is it with the Mumbai real estate market that is leading to such huge gaps between demand and supply? Is it limited land bank or delay in approval of budget housing projects or government policies? Real estate experts say that it is a combination of all these and several other factors.
Why are there few takers for luxury projects in Mumbai Metropolitan Region (MMR)?
Poor buyer sentiment: Buyer sentiment in Mumbai market is affected by a lot of factors including the economic slowdown and hope for a price correction, which is difficult to happen in a market like Mumbai where the construction cost is high and land supply is limited. Those looking for properties for end use are deferring their purchase decisions in the hope that home loan interest rates will fall down. This is creating an overall fall in the demand of luxury projects in MMR.
High number of new launches creating a glut: 99acres.com listings reveal that there are as many as 730 under construction projects in Mumbai offering housing units in the price bracket of Rs 60 lakh – Rs 5 cr. Of these, as many as 40 new projects have been launched in the last three quarters. Many projects are delayed due to slow moving demand and critical funds not being made available therefore. Buyers, on the other hand, appear to be in a wait and watch mode having deferred their home purchase decisions.
Economic slowdown: Due to strict monetary regulations and high inflation, RBI’s new norms for lending to the real estate sector and property prices touching peak levels, prices remained stagnant in most of the Mumbai’s established localities like Bandra, Andheri, Santa Cruz and alike while there has been decent capital appreciation in the suburban locations. High land valuations and inflated rates: Mumbai’s land mass is barely 480 sq m and its buildable area is even less-just about 200 sq km in which over 12 million people dwell.This leads to higher land valuations and inflated property values.
Resale residential market losing its ground: According to a report by NDTV, most new launches in the first quarter of 2014 happened in Mumbai’s Western and Central Suburbs. Since demand for affordable housing is extremely high in these belts, absorption was healthy too. However, transaction volumes in the resale market of these areas were very minimal possibly because of the high premium that resale properties were being sold at.
Why is there an acute shortage of affordable housing in Mumbai?
In 2008, about 2.3 million households in Greater Mumbai and close to a million households in rest of MMR could not afford a basic housing unit. As a result, numerous households continue to reside in extremely congested conditions in chawls and in dilapidated buildings. It is estimated that by 2025, over 4.4 million families will not be able to afford a housing unit. This will be driven by increasing population growth and long term appreciation in property prices.
Rising population growth: Mumbai being the financial hub of India attracts a lot of people from other parts of the country for employment opportunities. Continued migration is expected to increase the population of the MMR region from to 33–34 million by 2025. To meet the housing needs of growing population, Mumbai requires 2.1 million houses with an annual demand for about 2 lakh homes. However, private developers provide barely 25000 houses every year. So, there’s a huge gap between the demand and supply.
Rising property prices: Huge demand and limited supply increases the cost of the property, which makes it further unaffordable for lower income and middle income groups. These groups have an average annual income of around Rs 90000–Rs 3 lakh and Rs 3 lakh–Rs 5 lakh respectively and can afford housing units in the price range of Rs 15–Rs 30 lakh. Whereas, most of the areas in Mumbai, where the supply of property is high, provide housing units in the price range of Rs 10,000 – 30,000 per sq ft, far beyond the affordability of most of the households in Mumbai
A few affordable housing projects in MMR: In comparison to premium housing, budget or affordable housing projects in MMR are fewer in number. There are a handful of developers launching such projects including Tata Housing, HDIL, S Raheja, Matheran Realty, Haware Builders, Neptune Group, Poddar Developers, Usha Breco Realty, Nirman Group, Sriram Properties, Karjat Land Developers, Panvelkar Group and Recharge Homes. Affordable housing development continues to be a challenging proposition for private developers as project financing and project delivery take a long of time.
Constraints for the real estate developers
Unavailability of urban land in Mumbai: Mumbai’s land mass is barely 480 sq m and its buildable area is even less-just about 200 sq km. Over 40 per cent of Mumbai’s land is built-up area while 52 per cent of its land is of coastal wetlands, forests, water bodies and agricultural plantations. Thus the city suffers from an intense lack of urban land parcels for development of affordable and budget housing projects. The city also suffers from rapid, mostly unplanned construction. Then there are no declared green belts as is the case in Delhi. For instance, any development within the Municipal Corporation of Greater Mumbai (MCGM) limits requires the authority’s permission while those outside its boundaries requires the permission of both the concerned municipality and of the Mumbai Metropolitan Region Development Authority (MMRDA). In the case of the latter, a developer also needs to obtain a certificate of Non-Agricultural land or the project approval can be obtained through a formal request for conversion. All this take a lot of time, resulting in an atmosphere not encouraging for a budget housing realty market.
Rising construction costs: The prices of affordable housing are largely dependent on the construction cost, as it forms 50-60 per cent of the total cost. There is acute shortage of land in Mumbai’s prime areas like Andheri, Bandra and Santa Cruz. The developers have explored peripheral areas having huge land parcels at reasonable rates and new localities such as Ambivali, Boisar, Palghar, Vasind and Badlapur are developing as budget housing destinations. But since these areas are away from the city center, transportation costs of raw material and labor spirals. Moreover, raw materials, including steel, cement, sand, bricks, to name a few, have witnessed price escalation of 20-50 per cent in the recent past. Labor shortage in these sub-urban peripheral areas has also impacted the construction costs as it has led to a considerable rise in wage levels.
Limited financing avenues for developers: Real estate developers have limited financing options including Non-banking financial companies (NBFCs) and Private Equity (PE). High cost of finance from these sources in terms of high interest rates charged leads to a hike in the prices of the final product – the projects. Moreover, affordable housing projects in Mumbai can only be constructed in areas far away from the city as the land cost is comparatively cheaper here. But transporting raw materials here increases the overall construction cost impacting the cost of the housing units.
Financing constraints for low-income groups: A lower income household in Mumbai has an annual average income of Rs 90000–Rs 2 lakh. These households can not avail of home loans in absence of good income flow and or any asset. Data reveals that around 20 per cent home loans go to households having an average annual income of Rs 3 lakh–10 lakh. In absence of financing options like home loans, it is impossible for such household to even buy housing units priced around Rs 10 lakh.
Delay in approvals from multiple local authorities: The process of real estate development is particularly affected by the efficiency of urban local bodies, which undertake city planning, deliver utility services and regulate controls on development through approvals. Development projects in Mumbai like other cities undergo a lengthy approval process, which result in delay in projects, eventually increasing construction costs, which are borne by the user or the buyer. In such a scenario, it is difficult to deliver housing units that fit the pockets of the lower income and middle income group.
Real estate experts feel that government initiatives like single window clearance for affordable housing projects, financial grants to builders venturing in budget housing market and inclusion of mass housing zones in city plans and developing them within a planned schedule can help bridge the gap between the demand and supply for budget housing options in MMR.
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