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LAW OF DEMAND
2
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
3
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
4
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
5
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
6
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?
8
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
9
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
MAJOR DEMAND FACTORS THAT
AFFECTS THE PRICE
11
LOCATION
AMENITIES
INFRASTRUCTURE
COMMERCIAL REAL ESTATE
DISPOSABLE INCOME
AVAILABILITY OF LAND
AFFORDABILITY
STRUCTURE
CUSTOMIZATION
LOCATION
12
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
13
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
14
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
15
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
16
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
17
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
18
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
19
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
20
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
21
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
24
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
25
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
26
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...
27
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”