Track2Realty Exclusive: Every project is launched with the presumption of existing demand in the given catchment area. If that be the reason the sector should not have been sitting over a record inventory. Track2Realty tries to explore what defines demand and how the flawed concept of demand leads to demand-supply mismatch. It is a grey zone for the real estate which hits where it hurts the most to the developers, yet most of them try to justify launches and shrug off the subject.
Demand-supply mismatch is something that has been debated enough in the real estate market. What actually defines the demand? Probably different developers have different answer to it but what can be vouchsafed is that what leads to this mismatch is often the lack of scientific research & reliable data and hence the projects are often conceptualised on developers’ gut feeling and perception. Today when the piled up inventory is on the top of every developers mind the question is all the more relevant since any scientific approach to define demand may lead the sector to a seamless business cycle which, in turn, can also meet the housing shortage in the country.
A Mumbai-based developer recently hired a research agency for some data on the specific micro market before the launch of a project. Not convinced with the report vis-à-vis the competitors’ launch price and other details he smartly commissioned the research of another micro market through a third party asking for his own data as well. To the amusement of the developer, even his own data was provided wrong by the said research agency. Clueless, the developer had no choice but to launch the project on an assumed price point and assumed segment of housing demand.
The experience, or rather lack of it, of this Mumbai developer clearly indicates that in the absence of scientific research and reliable data the developers have no choice but to launch projects with a pipeline visibility than the ground reality of the current market dynamics. Since the ground level data is often missing, the consultants and property analysts too are often clueless as to what is the right advice to the developer in terms of demand in the given market. What actually defines demand?
There is no scientific methodology evolved in the Indian real state that could explain how to assess the demand in a given market. No wonder, all economic theories go for a toss when the perception borne out of peer pressure to launch in the same micro market finds that the catchment area is not attracting buyers for some inexplicable reasons. Wikipedia defines real estate economics as the application of economic techniques to real estate markets. It tries to describe, explain, and predict patterns of prices, supply, and demand. The closely related field of housing economics is narrower in scope, concentrating on residential real estate markets, while the research of real estate trends focuses on the business and structural changes affecting the industry. Both draw on partial equilibrium analysis (demand and supply), urban economics, spatial economics, extensive research, surveys, and finance.
The main determinants of the demand for housing are demographic. But other factors, like income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes, and price of complements, all play a role. The core demographic variables are population size and population growth: the more people in the economy, the greater the demand for housing. But this is an oversimplification. It is necessary to consider family size, the age composition of the family, the number of first and second children, net migration (immigration minus emigration), non-family household formation, the number of double-family households, death rates, divorce rates, and marriages.
In housing economics, the elemental unit of analysis is not the individual, as it is in standard partial equilibrium models. Rather, it is households, which demand housing services: typically one household per house. The size and demographic composition of households is variable and not entirely exogenous. It is endogenous to the housing market in the sense that as the price of housing services increase, household size will tend also to increase.
DLF, which has to its credit selling the projects fastest, believes if the developer is serious then there will be less demand-supply mismatch and projects will cater to the right segment at right price point to be sold in the right market. Agreeing that market conditions do affect the projects’ sales pattern, DLF spokesperson Sanjey Roy nevertheless maintains that marketing channel should not be blamed for faulty research, market feedback or project planning in totality.
“We have our panelled brokers who give us constant feedback on the market before the launch of any new project. We supplement it with a proper in-house research of the market, the catchment area, competition and other market forces. Once the feedback is taken from every possible end and data collated and analysed, there are hardly any chances of demand-supply mismatch,” says Roy.
However, not many developers seem to have this much confidence with the market feedback. It has also gone wrong as brokers prefer to sell high-end projects nowadays, leading to plethora of luxury launches while the demand exists in affordable and mid segment housing in most of the micro markets across the country.
Rahul Gaur, CMD of Brys Group agrees that research is a missing component in the Indian realty. He, however, blames the entire eco system for the vague defining of demand in any given market. According to him, instead of market defining demand nowadays competition or rather a rat race is defining the demand which leads to cluttered over supplied pockets of real estate growth.
“In certain locations appreciation potential is huge and also housing shortage suggests that developers should launch more projects over there. But, on the contrary, over supplied and saturated markets get more launches which defies the conventional wisdom of demand-supply economics. For example, there is more focus on established locations of Mumbai whereas some of the suburbs are still very lucrative market. Similarly, in Delhi-NCR there is a rush towards Gurgaon and Dwarka Expressway whereas Noida is much lucrative market,” says Gaur.
“Are research/reports reliable enough to bank on for property launches,” asks a developer requesting anonymity. “Institutional investors are too strong to influence such research/reports to enter the project or market at the rock bottom prices for gaining the maximum out of the appreciation potential. Developers are indeed groping in the dark to find a solution to this demand-supply puzzle added with the true potential of the given market.”
That probably justifies why certain markets are over heated with maximum launches and record inventory since the institutional investors have deep pockets and pipeline visibility make them calculate the right ROI (Return on Investment) at the right time in the right market. But the very same influencers in the research/report do little justice to the developers’ cause or the home buyers’ need of a house.
Analysts even suggest that since demand for property is not always a derived demand, the end result too is decline in absorption in over supplied markets and fewer project launches where the real demand exist. For example, to say that a periphery location of any urban centre is ideal market for affordable housing project may seem to be a sound advice on paper. But if the location is 3-4 hours drive from the commercial establishments of the city and there is no public transport connectivity, it is not the market for affordable launches as the price range of affordable category for the urban working class is not the affordable price range for the local habitation of that micro market.
The moot point is when the Indian real estate will grow out of experiment stage to scale up the mature level of defining demand in the right context. Unfortunately, no one has got an answer and the lack of research and absence of reliable data is making demand-supply imbalance even more acute. That, of course, is not a good news for a business that has the standing inventory of nearly four years in hand.
