The Times of India (Times Property), Pune - December, 2007

Will prices go down now that the ULCA has been scrapped in Maharashtra? Kumar Gera analyses the issue

The last few days have seen a lot of debate on the impact of the ULC repeal on end product prices. The question on everyone's minds is whether customers can expect to enjoy lower property prices in the near future.

The media have carried different and contrary voices and opinions on this subject. In my opinion, there is no one single or simple answer to this question and therefore the question lends itself to deeper analysis and investigation. I think the answer needs to be culled out by looking at three different enquiry areas, namely the historical reaction to the scrapping of the ULCA in other states, the dynamics of demand and supply and factors that impact price.

Let's take up the first area of enquiry - the historical perspective. The central government suggested the ULCA repeal way back in 1999. A few states like Karnataka and New Delhi immediately incorporated the same. If we were to look at the impact on end product pricing in these states till date, the trend seen is a phenomenal increase in the end product prices. Back of the envelope calculations seem to indicate that prices actually increased at a CAGR of 30% and some pockets of NCR saw an even higher growth rate in pricing. In fact, NCR and pockets of Bangalore like Whitefield led the country in terms of price increase. Thus historically, there seems to be no case to indicate a decrease in end product pricing in the immediate future post the ULCA repeal.

Demand for all real estate asset classes in India far outstrips supply. This is an understatement. The last seven years have seen India absorb millions of square feet of residences, office spaces, large format retail spaces, commercial spaces, hospitality, etc and going by the projections of IPCs and consulting firms, it looks like India will wear the 'Under Construction" tag for a long time to come.

What has fuelled this demand has been robust macro-economic factors - a strong GDP, an exponential increase in salaries, access to home loans and, above all, a mindset shift of the nation from one of saving and cautious optimism about the future to one which is willing to spend in the present by leveraging a belief in a better tomorrow. There is a strong sentiment that the factors stated above will continue to be the defining contours of the economic landscape for the next five years. Demand for almost all real estate asset classes will therefore continue to be robust.

Looking at the supply side, the supply of land is likely to increase due to the repeal of the ULCA only where there is inherent land available, which has been held back due to artificial reasons. Right at the outset we can discount high concentration high demand neighbourhoods like South Mumbai, Bandra, Andheri, etc, since there is no land available in these places. There may be one stray mill or plot of land but that can really create no impact on the overall trend. The same example can be extrapolated to almost all Tier II cities within the state. Thus supply is likely to remain constricted in these kinds of neighbourhoods across cities and hence prices are unlikely to be pushed downwards due to supply of land in these neighbourhoods.

While the above arguments work in favour of an increase in price, the repeal of the Act will certainly free up substantial amounts of land in fringe areas that were till now not available for development. This will certainly cause the price of land to come down, however, the quantum of the reduction in the land prices is a function of the rate at which this land supply is brought into the market. Many land owners have held this land since the inception of the Act - there are therefore no guarantees that they will all make their lands available for sale overnight.

End product price is a function of input cost plus the developer's profit margin. Land, construction, promotion and overheads all go in to the equation as an input cost. A trend analysis of the non-land input costs reveals a year on year increase specifically for cement and steel (primary inputs to construction) and an exponential increase in manpower costs.

One also needs to consider the increasing customer requirements from the projects, whether they be in terms of the higher cost specifications or the higher cost amenities that developers continue to need to provide. Thus, the decrease in land prices will get offset to some extent by the increase in prices of these other key components.

Looking therefore at the supply as well as demand arguments, one can expect that land prices will drop in the short run; however, given the tremendous demand for real estate, the freeing of the land stock from the clutches of the ULC Act will lead to a steady pipeline of supply for the end consumer. This will lead to a slowdown in the rate of increase in the property prices, which has over the last few years seen increase at extremely high levels.KUMAR GERA IS CHAIRMAN, CREDAI, AND THE CHAIRMAN & MANAGING DIRECTOR OF GERA DEVELOPMENTS PVT. LTD.