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DEMAND AND SUPPLY OF REAL

ESTATE INDUSTRY IN CHENNAI

LAW OF DEMAND

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The law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant. It states that demand decreases with increase in price and vice versa.

In economics, the law states that, all else being equal, as the price of product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases

There are various other factors that affect the demand for real estate

Based on these factors we can derive the equation for real estate

D = f {D, I, P, Cb, Cr, T, Ti, Ps}

D - demand for real estate

I – income of customers

P – price of housing

Cb – cost of borrowing

Cr – availability of credit

T – consumer’s preference

Ti – investor’s prefernece

Ps - price of substitutes and compliments

DEMAND CURVE

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demand curve, shown in red and shifting to the right, demonstrating the inverse

relationship between price and quantity demanded (the curve slopes

downwards from left to right; higher prices reduce the quantity demanded).

LAW OF SUPPLY

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Law of supply states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa

The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale

However, in examining the forces determining the supply curve, we need to analyze the factors upon which the supply of a good depends

Factors determining the supply of real estate can be stated in the form of a supply function

S = f {P, A, B, Cr, L}

S- supply of real estate property

P- price of property

Availability of land

Efficient builders

Cr- easy accessibility of credit

L- skilled labours

SUPPLY CURVE

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The chart above depicts the law of supply using a supply curve, which is always upward sloping. A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be will be P1, and so on.

INTRODUCTION TO THE REAL

ESATE INDUSTRY

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The Indian real estate sector is one of the fastest growing and globally recognised sectors

In India, Real estate sector is the second highest in employment generation

Contributes almost 5% to Indian GDP which is expected to be 6% in coming years

It comprises of four sub- sectors

Housing

Retail

Hospitality

Commercial

The real industry’s growth is linked to developments in the

• Hospitality

• Entertainment ( hotel, resorts, cinema theatre’s) industries,

• Economic services ( hospitals, schools)

• Information technology (IT) enabled services ( like call centres) etc

Contd...

• Rapid growth in retail, hospitality, infrastructure makes it most lucrative

investment area for next 5 to 10 years

• The advent of the IT sector along with the setting up of large manufacturing

units by multi-national companies (MNCs) has changed the dynamics of

Chennai real estate market

• Apart from generating thousands of new jobs for the local residents,

Chennai has been attracting a large pool of migrants into these sectors from

across the country

WHAT PROMPTS A PERSON TO

TRY HIS FORTUNE IN THE FIELD

OF REAL ESTATE SECTOR?

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The first and foremost is that the real estate business is riskless

The second reason is growing Indian middle class with low propensity to consume

and botheration about the future

Thirdly, the ever growing housing needs filled by low interest

Last but not the least is investing in the sector `where everywhere else does can also

be cited as one of the important factors leading to heavy investment in this sector

FACTORS AFFECTING THE VALUATION

OF PROPERTY IN INDIA

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Recent real estate statistics in India prove beyond doubt that property

valuations have taken a turn for the better

The real estate sector definitely is on the rise, with the growth thrust being

provided by important factors such as

Demographics

Interest rates

Location

The state of the economy

which affect the prices of property in the country

Correct insights in regards to the right time for purchase of property, price

escalations, recessions in the real estate market and other indicators, help in

making valuable purchase decisions

WHAT ARE THESE

FACTORS WHICH DRIVE

REAL ESTATE PRICES ?

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MAJOR DEMAND FACTORS THAT

AFFECTS THE PRICE

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LOCATION

AMENITIES

INFRASTRUCTURE

COMMERCIAL REAL ESTATE

DISPOSABLE INCOME

AVAILABILITY OF LAND

AFFORDABILITY

STRUCTURE

CUSTOMIZATION

LOCATION

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Buildings, real estate and properties, located in commercial and market areas, hold higher value than their counterparts in the residential areas

It is common to find brokers quoting a higher price for buildings in well developed and approved colonies and areas as against those in the lesser developed and upcoming areas

Similarly buildings which are constructed on freehold land tend to command a higher valuation than those on leasehold plots

AMENITIES

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The valuation of properties with better infrastructural capabilities and modern amenities are costlier than those which fail to provide proper

Electric connections

Telephone lines

Water sewerage facilities

Other infrastructures

Community centres

Children parks

Swimming pools

gymnasiums

Parking lots

General stores

Valuation of property is clearly based on the availability of necessities and facilities connected with comfortable housing

INFRASTRUCTURE

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Infrastructural development is one of the most important factors which influence

real estate prices in India

The presence of roads, airports, flyovers, malls and bus terminals and other

facilities in the vicinity of the property, helps in value escalation of the same

It is a known fact that connectivity is one of the most important requirements for

investors looking towards purchasing land or property

This leads to the concept which explains a rise in the valuation of property which is

well connected to

Entertainment hubs

Medical facilities

Educational institutions

Retail markets

Business centres

Along with other day to day facilities

COMMERCIAL REAL ESTATE

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Places such as Noida, Gurgaon, Pune, Hyderabad, Navi Mumbai and

Andheri-Borivili in Mumbai, are striking examples of commercial

development which have affected the valuation of property in these

areas

The development of malls, IT offices and Special Economic Zones

near residential areas help in cutting down the time and energy

wasted in commuting to workplaces and increase the price of real estate

in the area

DISPOSABLE INCOME AND

AVAILABILITY OF LAND

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DISPOSBALE INCOME

Properties which are located in agricultural areas or those dominated by

manufacturing units attract a lower price than those situated near the IT hubs

The valuation of property is in direct proportion to the quantum of disposable

income in the hands of the purchaser or the majority of population in that area

AVAILABILITY OF LAND

In places where there is ample land available for residential purposes or

development of real estate, the graph reflecting the valuation of property shows

a slower rise than in areas where land is comparatively scarce.

AFFORDABILITY

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Affordability refers to the cost incurred by the owner in the process of enjoying

or retaining a property

In layman's term, it is the term which establishes a relationship between

interest rates, property prices and wages

If any of above three variables reach their maximum level in a particular area,

then the inhabitants start looking towards a better lifestyle elsewhere

STRUCTURE

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THE VALUATION OF PROPERTY IS DEPENDENT ON THE

Specifications of materials used

Layout

Design

Durability

Life cycle of the building

FACTORS AFFECT THE PRICE OF A PARTICULAR PROPERTY ARE

The quality and cost of materials during construction

Size

Current rates of labour

Frontage

OTHER PHYSICAL ATTRIBUTES THAT AFFECTS THE PRICE ARE

Roof covering

Height of the building

Type of foundation

Waterproofing

Plinth level also affect the price of a particular property

CUSTOMIZATION

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The cost of real estate becomes higher in the event of builders undertaking

customization of residential space on the lines of the purchaser's requirements

For example, some investors may want landscaped terraces or verandas

connected with their apartments, upgraded kitchens, specifically designed

internal stairways in duplex apartments, higher quality paint and flooring, or

other user defined changes

This leads to an escalation in the ultimate price charged to the buyer

Before making their real estate purchase decisions, investors should conduct

an analysis of these drivers to get a fair valuation of the property that interests

them

Careful investigation and homework can lead to better returns, easy liquidity

and more lucrative investments

SUPPLY FACTORS AFFECTING THE

REAL ESTATE INDUSTRY

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If there is a limited supply of real estate in the market, it will usually push the prices higher

Conversely, if there are a lot of properties in the market, the tendency is for the price to go down

A balanced market will work well for both sellers and buyers

Even if the supply is imbalanced, there are other factors that can make the real estate market performing well

Builders for example are going to adjust their plans to avoid oversupply of new homes in their area

The more they build, the lower the prices would be so they are not going to build and build without regard for the supply factor

Another thing that can balance the oversupply of housing is the availability of land

Some regions do not have plenty of space for new housing so the risk of oversupply of properties in the market is not that high

DEMAND VERSUS SUPPLY

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The higher the demand for real estate, the

higher the prices would be

Localities situated in central part of Chennai

are already matured and established, thus the

scarcity of land is one of the major reason

pushing the demand up

Demand for real estate in a particular

area is inversely proportional to its

supply. As the supply or availability of real

estate decreases, the valuation of

property increases

Changes in population are the key drivers

for demand. Along with an increase in the

number of people inhabiting a particular

area, the popularity of a particular locality

in terms of people wanting to be a part of

the locality also increases its price

IMPACT OF RECESSION ON REAL

ESTATE

Incompletion of previous projects

Bad debts

Less demand in all segments

Cash starvation

Incompletion of previous projects.

Bad Debts.Less

demand in all segments.

Cash starvation.

BARRIERS IN GROWTH OF REAL

ESTATE

Skill Shortage.

Non Availability of Statistics.

Overvaluation of Property.

Highly Fragmented.

Lack of Transparency.

EXPECTATIONS OF CUSTOMERS

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Budget of the customer

Loan amount sanctioned to the customers

Income returns from the properties

Locality of the property

Proper drainage system facilities

Location of schools, hospitals, markets, bus stops from the property

Privacy of living

Quality of building

Availability of space for car parking

Location of the floor of the house

Vastu of the building

Patta and other approval for buildings

Safety

Approach to building

Approachability of brokers

Gifts for the purchases of house

Down payments and EMI

Location of the recreation and nearby religious places

CONSTRAINTS OF BUILDERS

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Accidents that recently happened in that particular locality

Excess budget

Lack of ventilation in the building

New government policies

Inflation

Location of the recreation and religious centre near by

Fluctuations in GDP of the country

Income of the people

Demographic dividend

Ambience of the property

Saturation of growth of the property

Rescission in the IT and manufacturing sector

Changing customer preferences

Level of water table in that locality

Location of schools and colleges, office near by

Expenses sent on approval

Expenses on free gifts and marketing

CONCLUSION

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REAL ESTATE PARCELS ARE UNIQUE AND FINITE

You cannot fill a real estate supply shortage by manufacturing more identical

units

Each piece is different and there is a finite supply

It's not a manufactured commodity

Though you might be able to create more condos in a give space, the space

itself is unique and cannot grow to accomodate a short supply

REAL ESTATE CANNOT BE MOVED TO FILL SHORTAGES

If there is a shortage of land for homes in a given area, you cannot move in

more land to alleviate the shortage

Real estate is where it sits. For this reason, it will always be a local commodity

influenced by local conditions

Conclusion contd...

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OVER-SUPPLY MEANS LOWER PRICES:

Because of the first two items above, you can usually expect there to be a fall in prices when there is an over-supply of homes or land in a given area

You cannot move the overage to another area to keep prices stable

UNDER-SUPPLY MEANS HIGHER PRICES:

If there isn't enough land or homes in a given area, then prices will almost always rise

Even if there is the ability to construct more homes, the time delay cannot fill the demand and prices will rise

Hence, economic theorists believe that when you have a large supply of something, such as housing, prices for that something often decline. Conversely, if supply of something like housing is limited, prices for that housing often increase. However, you could have a large supply of housing and if it's also in high demand prices might also rise.

Conclusion contd….

Today, India is one of the fastest growing economies of the world

Expected to be the 3rd largest economy by 2025 and the largest economy by2050

70% of the future employment opportunities will be created in the cities

It contributes to country’s infrastructure by buildings, roads, flyovers, highwaysetc

India needs Rs.60000 Crores in the next 20 years to meet its infrastructuralneeds of approx. 68 cities that will have above one million population

Overall it can be concluded that a unit increase in real estate sector cangenerate a fivefold increase in national income.

“The real estate sector will be the one that writesthe Indian growth story”