Piramal, Godrej, Hiranandani chiefs say supply shortage, increasing development costs and delay in getting approvals are keeping real estate prices high. They insist that developers will not sell piled up inventory at a loss

Despite the stagnation in the realty sector and talks about a necessary price correction doing the rounds, the big city developers don't see a chance of prices coming down. At the CII real estate summit on Friday, Ajay Piramal, chairman, Piramal group, Adi Godrej, chairman, Godrej group, and Niranjan Hiranandani, managing director, Hiranandani group, suggested that prices could go up even further.

"I don't see any correction happening, because the government is not giving any approvals and supply is getting delayed," Mr Piramal said. "No builder wants to lose money and the costs have significantly gone up."

Mr Hiranandani said, "Whether it is real estate or any other industry, the prices go down when surpluses are created. Though demand is rising, no surplus is being created because of a delay in getting government approvals and archaic land laws, which make acquisition a difficult and lengthy process. Add to that the rising prices of items like steel, and we have inflated costs."

This view was reiterated by Mr Godrej, who said that prices will go up because the sector was facing a capital crisis and that developers would hold prices up to ensure profits.

However, there is no talk about meeting the huge housing demand with the present price structure. Mumbai may need some two million houses to accommodate its growing migrant population and people from slums, according to Liases Foras. Despite the staggering demand, as many as 92,000 units remain unsold in the city because prices are way past the affordability level.

"I will not comment on the piling up of unsold inventory," Mr Godrej said. "But I can say that with no new approvals, there is still a huge gap between demand and supply, especially in the metros. So it is unlikely that prices will go down. But people will not get rid of inventory at a loss."

However, many reports have been coming in about impending corrections. Crisil reported at the beginning of the year that by 2012 there is a chance of a 10-15% price correction. Other experts, too, believe that prices must come down or else the sector is in for a debacle.

"The ideal market velocity (rate of property off-take) must be 3-3.5% per month for Mumbai. But it is only 1.57% now, because sales have suffered due to price rise," said Pankaj Kapoor, managing director, Liases Foras. "This means that only 1.57% of a project is being sold in a month. At this rate, it will take 63 months to sell a project. The time taken will affect valuation, and the delay will result in further imbalance."

Mr Godrej said that he did not expect a slowdown like that in 2008. "In 2008, the costs were very low, which was reflected in the recession. That time, we saw a drop in property prices. The situation is not the same this time," he said. Godrej Properties was among the few developers who managed not to suffer massive losses, or incur debt as did some other giants like DLF or Unitech. Mr Godrej said that rising input costs have not affected margins because this has been passed on to the customer.

The developers will continue to hold back, to ensure that they don't have to sell their inventory at a loss. But if the customers are put off, the situation will only worsen for them, as the chances of softening the crisis through increased sales will be minimised further.