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Developers reduce unit size to tap affordable segment

  • Developers are constructing compact homes to make the final price of apartments affordable to homebuyers
  •  The average size of 2-BHK and 3-BHK apartments has reduced by 25% and 26%, respectively, in Mumbai

Developers have a new trick up their sleeves to boost sales. In order to attract buyers and make properties look more affordable, developers are now reducing the average unit size to bring down the overall cost of an apartment. The good news for interested buyers is that while they would be compromising on the overall space, the carpet area, the actual usable area which is typically less than the super built-up area that is advertised, will not come down by the same proportion.

Prices have remained stagnant in the last few years, but they are still high for many potential homebuyers. With developers now launching projects that have smaller unit sizes and, therefore, cost less, the idea may find takers. For instance, a 3-bedroom-hall-kitchen (BHK) house with an area of 1,500 sq. ft will cost 75 lakh at the rate of 5,000 per sq.ft, but a 3-BHK apartment with an area of 1,200 sq.ft at the same rate per sq.ft will cost will cost 60 lakh.

According to a recent report by Square Yards, a real estate advisory firm, “The size of new apartments has come down in the range of 15-17% on an average in the last couple of years across the top cities in the country." The report covers projects launched in the last two years in eight cities—Bengaluru, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai, Noida and Pune.

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“To attract buyers with a low-ticket apartment, developers are focusing more on compact or smaller houses," said Samantak Das, chief economist and head of research, JLL India, a real estate consultancy firm.

But the trend is not new; developers have been reducing the average size of apartments for the past few years, especially in metro cities. What’s new is the percentage by which the area is reducing is higher now. For instance, as per the Square Yard report, in the last couple of years, the average size of 2-BHK and 3-BHK apartments has reduced by 25% and 26%, respectively, in Mumbai. The difference in sizes in Pune has been 19% and 26%, respectively, for 2-BHK and 3-BHK flats. Hyderabad is the only city where the average size increased slightly by 1% and 2%, respectively for 2-BHK and 3-BHK flats (see graph).

Though the apartment sizes are becoming smaller, the usable area will not reduce by the same proportion. According to the report, “Carpet area offered by developers in both 2BHK as well as 3BHK flats is now increasing as a percentage of the saleable area of the apartments. This means that developers are bringing in greater efficiencies in construction despite reduction in overall saleable area."

Bringing down the apartment size will work for developers to some extent. “The sales in 2018 grew by 6% year-on-year (y-o-y) and was largely driven by discounts and offers in the affordable housing segment. Developers are constructing compact homes to make the final price of apartments affordable to homebuyers," said Arvind Nandan, executive director-research, Knight Frank (India).

The increase in demand and smaller houses is also related to the incentives the government offers to developers and home buyers, including reducing in GST, for affordable housing. Given that the government, in the recent budget, indicated further reduction in the GST rate for affordable housing and extension of subsidy scheme till 2020 will boost the segment.

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