If you trace the real estate buying patterns off late, you will find multiple developers coming up with new, fresh projects across India. Then how is the problem of unsold inventories in real estate still persisting? Is it because fresh units with more amenities are out of our budget? Could catering to only HIG (High Income Group) housing be one of the dominant reasons? Before we explore the popular reasons behind so many unsold inventories in India, let's look at what classifies as unsold inventory in real estate.
What is unsold inventory in real estate?
Unsold inventory in real estate refers to the number of properties that have been constructed but have not yet been sold or occupied by buyers. It is a key indicator of the health of the real estate market and can provide insights into the supply-demand dynamics.
According to recent news, the number of unsold inventory in Tier 1 cities in India has finally hit its lowest following the recent rise in residential demands. However, back in the first quarter of 2020, a pandemic-riddled India saw a sharp increase in the number of unsold properties owing to multiple reasons. While common factors like a dip in the economy played a crucial role, other factors were identified too. The section below shares some of the primary reasons behind unsold inventories in real estate.
What are the major causes of unsold inventory in Indian real estate?
From mismatched demand and supply to iconic events like demonetisation and COVID-19, let’s take a look at some of the past reasons that resulted in the increase in unsold inventory in real estate-
- Balance between demand and supply
One of the primary reasons for unsold inventory is the lack of balance between the demand and supply of housing units. Developers often overestimate the demand and end up with excess inventory. - Increased focus on luxury housing
Another factor is the excessive focus on luxury housing projects, which cater to a niche segment of buyers. Additionally, maxing out Floor Area Ratio (FAR) often limits the construction of more affordable housing units. For instance, builders are focusing on spacious 3-4 BHK configurations in a place that can easily house 1-2BHK affordable units. - Preference given to mid and high segments only
Developers often target the mid-high income segments, neglecting the demand for affordable housing. This leads to a surplus of high-priced units while the demand for affordable homes remains unmet. - Delays in transaction processes and handovers
Delays in transaction processes, such as obtaining necessary approvals and completing legal formalities, can discourage potential buyers. Similarly, repeated delays in project handovers can also deter buyers and contribute to unsold inventory. This was more prevalent before the RERA 2016 rules were established to reduce handover timeline by the builders. - The wait and watch practice
Many potential homebuyers adopt a wait-and-watch approach, hoping for prices to drop further before making a purchase. This cautious attitude contributes to unsold inventory. - Growth of sub-urban inventories
Developers often invest in projects located in the outskirts of cities, assuming that people will flock to these areas. However, the preference for centrally located properties, ample employment opportunities, and micro markets in the city speaks otherwise. This can lead to unsold inventory in the outskirts. - High input costs
The high cost of construction materials and land acquisition can lead to inflated property prices. This, in turn, affects the demand and contributes to unsold inventory.
What is the impact of unsold inventory in Indian real estate?
Unsold inventory in the Indian real estate market has significant implications for both developers and buyers. Let's explore the various impacts:
- Liquidation timeline:
Older inventory takes longer to sell, leading to a decrease in cash flow for developers. This can result in financial strain and hinder future projects. - Depreciation factor:
Unsold properties tend to depreciate over time without being utilized. This depreciation affects the overall value of the property, reducing its original purchase value significantly. - Losses for developers:
Developers with a high amount of unsold inventory may face financial losses due to the ongoing maintenance costs and interest payments on loans. - Impact on new inventories:
Unsold inventory puts a lot of financial pressure developers. In some cases, builders of developers may choose to delay or cancel new projects until the existing inventory is sold. This creates further delay in project handovers, resulting in low sales. - Tax penalties for builders:
Builders are liable to pay taxes on unsold inventory after a specific period. This can lead to additional financial burdens and impact their profitability. Pair the loss from unsold inventories in real estate, and builders often find themselves abandoning projects and moving on. - Lower construction quality:
In order to reduce costs and liquidate unsold inventory, developers may compromise on construction quality, leading to potential issues for buyers in the long run.
Could the article help you understand the topic?
How to resolve the issue of unsold inventory in Indian real estate?
The Indian real estate market houses several opportunities for investment. Needless to say, to combat growing real estate needs, the Indian Government and real estate professionals tried and tested a few strategies that can be implemented to address this issue effectively. Some of them are-
- Low home loan interests
One of the key factors that can boost the demand for unsold inventory is offering low home loan interest rates. By collaborating with financial institutions to provide attractive loan options, developers can make properties more affordable for potential buyers. - Catering to the mid and low income segment
Developers can focus on creating housing projects that cater specifically to the mid and low income segment. By offering affordable housing options with basic amenities, developers can tap into a larger pool of potential buyers. - Government initiatives
The government has introduced various initiatives to boost the real estate sector. Reduced stamp duty charges and other incentives can encourage buyers to invest in unsold inventory. - Offline to online transition
With the increase in digital penetration in India, developers can now leverage online platforms to market and sell unsold inventory. This transition from offline to online can help reach a wider audience and generate more leads. - More defined RERA rules
The Real Estate Regulatory Authority (RERA) plays a crucial role in protecting the interests of buyers. By implementing more defined rules and regulations, RERA can increase buyer satisfaction and confidence in the real estate market. - Flexible purchase plans
Developers can offer flexible purchase plans to attract buyers. This can include options like construction-link payment schedules, down payment waivers, or attractive financing schemes. - Additional amenities
Enhancing the amenities and facilities within housing projects can make them more appealing to potential buyers. This can include features like parks, swimming pools, gyms, and community centers.
To sum up, unsold inventory in real estate has recently experienced a dip as market conditions return to normal after a few troublesome years. However, this can be a recurring issue considering the fluctuating market conditions. If you have more queries on what an unsold inventory in real estate is and how builders manage these inventories, we recommend consulting a real estate expert.
