Real estate becoming unviable due to high construction cost: Tata Realty MD

The development of real estate projects in India is becoming unviable due to high cost of land, capital and construction, along with other economic uncertainties, said Sanjay Dutt, MD & CEO of Tata Realty and Infrastructure Ltd.

Dutt, who also heads Tata Housing, said the government as well as judiciary should hold accountable all stakeholders that are involved in approval and development of real estate project to make things easier.

Real estate projects are on the verge of becoming unviable, he remarked.

When asked about the factors making projects unviable, Dutt pointed out, "Real estate requires a lot of capital in India, first of all to acquire land. In major cities such as NCR, Mumbai and Bengaluru, it (land cost) is almost 50 per cent to 80-85 per cent of the project cost."

He mentioned that it takes another 2-3 years in designing the project and getting all regulatory approvals to start construction and marketing activities.

Dutt said the cost of capital varies a lot, from 8.5 per cent for reputed builders to 18 per cent for non reputed ones.

Elaborating further, he said the developers launch projects at a price based on the current input cost, but the same can rise significantly during the 5-6 years construction period.

"You decide to launch today at a price but you don't know the cost of steel and how much it will change in the next five or six years. That you have to absorb, but you've already sold the project," said Dutt.

He said the builders are forced to absorb increase in costs of construction materials and interest among others.

"So your project is constantly vulnerable to market," he said, adding that the builders do set aside some fund for contingencies but the market setbacks could be much higher.

Moreover, he said the government is bringing reforms at a fast pace for boosting growth of the country.

"There are constant changes and constant changes affect projects," he said and cited some examples where changes in building rules led to increase in cost of projects.

"So you are under constant attack from changes of regulations," Dutt said.

Builders also have to deal with "some global crisis, some economic crisis, some political crisis" which happens in 5-6 years of construction cycle of any real estate project.

"Developers have to absorb all these variances, which are negative variances from profitability point of view, because we are responsible under the RERA (realty law)," he said.

Dutt said there are "lot of risk and uncertainties" in developing real estate projects and the entire responsibility lies on developers for completing the project on time.

"If the government can consider making all stakeholders accountable, it will make a big difference," he believed.

If the government can control inflation and reduce the cost of capital to 5-6 per cent, then the real estate will be more viable, Dutt said.

He also emphasised on better implementation of right to services Act in many states for ensuring timely approvals for real estate projects.

Dutt also pointed about low rental yield in India's housing sector, which is only 2 per cent, while it is about 5-6 per cent across the world.

"Our job markets are highly driven by BPOs and salaries are lower. But in developed economies, there are investment bankers, insurance companies, and the salaries are much higher, so they're able to pay higher rent. But you can't ask a BPO guy to pay 5 per cent yield on a residential apartment. So these are the challenges that we face," he said.

Tata Realty and Infrastructure Ltd and Tata Housing are leading real estate developers of the country. It is developing housing and commercial projects across many states.