I. Introduction

The residential real estate property is one of the essential commodities which experiences a steady demand, and the Indian real estate sector has been considered[1] as the most attractive destination by the investors across the world. As a result, the Indian residential real estate sector has been vital element in the country’s economy and a minute change in the real estate market has a potential to affect the economic development of the country. The variation in the real estate market majorly depends upon the prices of the residential real estate property due to various extrinsic and intrinsic factors that affects the demand and supply of the real estate properties. Further, the real estate markets have a distinguished feature wherein the prices of the properties are heterogeneous that differentiates it from other markets. Therefore, the determination of real estate prices needs a due deliberation to analyse the dynamic factors affecting variation in the prices of properties.

Therefore, the researcher in this chapter analyses the factors affecting the determination of real estate properties to discuss the reason for increasing overpricing and malpractices in Indian residential real estate sector. Further, the chapter examines the existing regulatory framework for preventing and controlling the increasing overpricing and malpractices. Further, the researcher assessed the responses of the buyers and builders to highlight the factors considered by them for price determination of real estate property in the light of overpricing of real estate properties.

II. Valuation of Real Estate Property

The valuation of real estate property basically[2] deals with the value of a property at a specific period. The value which is determined through an appropriate and authenticated valuation process is usually considered as a market value of the property. The valuation of property is a mechanism through which the valuer inspects and evaluate the features of the property and thereby, determines the value of the said property on a particular date and time. Such evaluation and determination of the value of the property is an essential as well as significant factor for taking the investment decision by the prospective buyer of the property as well as for the investors who wish to fund the development of a real estate project. The real estate property has unique nature, wherein, unlike other consumer goods, the benefits attached with the real estate property are generally realised over a span of time. Therefore, the valuation mechanism helps the investor to evaluate the future benefits attached with the ownership of such property.

The property valuation is an effort to ensure a just and fair monetary evaluation of a particular property at a particular given time. Usually, the value of a property is based upon its physical location therefore, the property valuation is a subjective process due to the unstructured and informal procedures of price determination of the property. Similarly, the real estate property does not have the convenience of a public market unlike other financial assets such as stocks and bonds. Hence, it is difficult to establish a universal market valuation mechanism. Further, the trading frequencies of real estate properties are comparatively lower than the other financial assets and the overall dynamics of the real estate sector depend on the price of property, hence, the valuation of real estate property has a great significance for determining the appropriate price of the property.

Moreover, the property valuation is an entirely[3] different procedure[4] than the method of valuation of other financial assets. The valuation of financial assets does not consider the change in location, heterogeneity of its production as well as the trading pattern of the financial assets while the property valuation majorly depends upon location, heterogeneity of its production as well as the trading pattern.Therefore, the property valuation involves the inspection and evaluation of social, economic, legal, political, and environmental factors influencing the significant elements of the value of property i.e., Demand of Property, Utility of Property and Transferability of Property.

III. Demand of Property

The expectations of any person from the ownership of the property, supported by the financial ability, to satisfy his desire is an essential element for creating the value for the property. The supply of specific goods or services are worthless and ineffective without the appropriate demand for such goods and services. The economic theories suggest that the demand for a property maybe created by lowering the prices and on other hand the prices may also be raised by boosting the demand for property in the market. Such increase in prices affects the prospective investors or buyers to buy the property at higher prices or opt for an alternative available in the market. Further, the important element for creating a demand for property depends upon the paying ability of a person towards the particular property. Such effective demand or purchasing ability of a person exclusively depends upon his capacity to spend enough disposable income toward satisfying the needs and desires. For example, a person may desire to own a property with world class amenities[5] and extraordinary technological facilities but, if he does not have sufficient disposable income to satisfy his desire, then the demand which is created would be treated as a false demand or an irrational demand. Such irrational or false demand would not affect [6]the valuation of the property.⁸ Therefore, the demand, which is an essential element for creating the value of the property needs to be examined to identify rationale of such demand for effective valuation of the property.

IV. Utility of Property

The valuation of the property also depends upon the possible extent of the utility of the property. The utility of the property denotes the ability of the property to satisfy the desires and needs of the prospective owners of the property. The property, if fails to generate a perceived utility, it results in lower valuation for such property.[7] For example, if there is a strong demand for the double bedroom housing properties in the residential real estate market of the region, it would not result in higher demand for the single bedroom housing property due to its inability to generate perceived utility. Similarly, the utility of the property also depends upon the supply of competing property in the same market at the given time. The scarcity of the property and the utility of the property is interwoven, as the things which are useful but available in plenty and the things which are scarce but are not useful, both would fail to create the desired demand. Further, the scarcity and utility of the property develops a sense of anticipation among the real estate investors that their investment in the real estate property would generate desired returns on their investment in future. Therefore, the scarcity as well as the utility of the property plays an important role for the effective evaluation of the property for its appropriate valuation.

V. Transferability of Property

The transferability of the right attached with the property plays a significant role for the valuation of the property. The more effortless the transfer of such ownership rights of the property, the higher the valuation of property. Further, the freedom and the ease of transferring the property from one person to another with least restrictions leads to increased perceived value of the property in the market. The increased number of conditions attached with the transfer of property results in reluctance from the part of buyer or the prospective investors to pay higher amount for the purchase of such property, especially, considering the substitutes available in the market. Therefore, the restrictions for transferability, both public and private, decreases the perceived value of the property for the potential buyer. In addition to the transferability of the right attached with the property, the ability to pay for it, which is discussed earlier, are the decisive elements for creating a rationale demand with supportive purchase ability. Hence, along with the demand of the property and its utility the element of transferability of the rights attached to the property is a significant element for effective valuation of the property.

VI. Major Factors Affecting Valuation of Real Estate Property

The valuation of real estate property is influenced by various factors which are attached with the property and these factors are usually considered as the basis for effective valuation of the property by connecting the nature of such factors with the real estate property. The following are certain recognised factors which affect the valuation of the real estate property:[8]

Demand and Supply

The demand of goods or services is inversely proportional to the supply of such goods or services, similarly, the demand for residential property at any location depends upon the supply of such properties in those areas. The more the supply or availability, the lower the demand of residential properties. Therefore, more availability of residential properties reduces the valuation of such property. Similarly, the change in number of populations at a particular location is a key element for determining the demand of a residential property. The increasing number inhabitation increases the popularity of the area, in terms of acceptability of habitation at a particular place, which results in increasing desire for residing at such locality. These increasing desires among the people to be a part of a popular locality increases the price of the property.

 Location of Property

The location of the property is one of the significant factors for determination of the value of residential real estate property. The price of a property at a particular location is influenced by the value of land at such areas. For example, a property which is situated at a prime location holds comparatively higher value than the property which is located at the underdeveloped or a developing locality,due to the comparative difference in the value of land. Further, as highlighted earlier, the value of real estate property is based on demand and supply factor, but it is also imperative to be recognise that the location including State, city as well as the neighbourhood also plays a significant role for the valuation of property. Therefore, it is realised that, if the property is located near the market wherein, the locality has higher population growth, developed infrastructural facilities as well as better connectivity with the popular public places of the area, generates higher demand and therefore, it is more likely to experience the appreciating value.¹⁶ Similarly, it is also pertinent to acknowledge that the commercial potentiality of the property has a major impact on the value of the property which can be traced from the cities like Mumbai and Pune which experience the increasing value of property after the commercial developments. These developments such as malls, multiplexes, Information Technology (hereinafter referred as IT) parks as well as Special Economic Zones (hereinafter referred as SEZ) also boosts the demand for residential properties which results in increasing value of properties having higher commercial potentialities. Further, the valuation of the properties is also directly proportionate to the availability of the disposable income of majority of the buyers or investors of the locality. Furthermore, the scarcity of land at a particular[9] location is also an crucial factor of the location that influences the value of the property. The abundance of land available for the purpose of development of residential [10]property results in lower valuation of the property and vice-versa.

Structural Features of Property

The components of the structure and construction of the property such as material used for the construction, layout plan of property, design of building as well as the durability of property, affects its valuation. The quality of material along with the construction specifications such as size of property, area for development, dimensions of property, the foundation and platform of the property including provisions for waterproofing as well as disaster management also influences the value of any property. The higher the quality of material as well as the components used for the construction, the higher is the valuation of such property. Further, the cost of real estate property also depends on the possibility as well as the availability of the option for customisation with the buyer. For example, the investors or the buyer may require such customisation or upgradation according to their requirement and if search opportunity is provided by the builder then the valuation of the property is comparatively higher than the property which is available in the same location with the same specification, but without such opportunity of customisation or upgradation. Thus, the customisation of property also leads to its higher valuation.

VII.       Amenities with Property

The availability of various contemporary amenities with the property is an add on advantage attached with the ownership of the property. The properties having better and international standard modern amenities such as door video caller system, Wi-Fi enabled premises, swimming pool, gymnasium, community centers, proper parking management, departmental stores, etc., also attracts investors as it provides the comfort of modern amenities with the ownership of the property. Therefore, the availability of necessities as well as modern facilities increases the demand for the property which results in higher valuation of the property.

Availability of Developed Infrastructure

The infrastructure available at the property is one of the most important [11]factors which influences the value of property. The properties which are appropriately connected with airports, bus terminals and railway stations have comparatively more valuation.[12] Similarly, the presence of flyovers, malls, cinema theatres, etc., results in the increasing value of the property. The well-connected properties with the market and with the educational as well as healthcare facilities lead to higher valuation for the property. Therefore, the level of infrastructural development attached with the property as well as available world class infrastructural development in the locality has a positive influence while the valuation of property.

Affordability of the Property

The affordability of the property in terms of the cost of maintenance for enjoying and retaining the property has a major impact on the valuation of property. The cost of maintenance of property depends upon certain external factors such as interest rates, rate of minimum wages as well as how will ability availability of affordable housekeeping services. Therefore, the increase in cost of these factors leads to increase in the cost of maintenance of property. The increasing maintenance cost triggers the search for alternative locality among the inhabitants which results in decreasing value of the property.

VIII.     Value of Property vis-a-vis Price of Property

The term value has two different meanings; (i) the utility attached with the goods or services i.e., ‘value in use’ and (ii) the power to purchase other goods i.e., ‘value in exchange’.[13] On the other hand, price denotes the value estimated by an individual in terms of the acceptable medium of exchange. It is an amount which is charged by the seller and includes the cost of manufacturing as well as the profit margin determined by the seller. The price can be calculated and expressed in number while the value cannot be expressed in terms of numerical terms. But, in the real estate transactions, the price and the value of the property are linked to each other and referred as one and the same. Therefore, it is important do recognise the difference between value and price of the property because the price of the property may remain to be the same for all the buyers, but the value of the same property may differ from buyer to buyer. Similarly, the price of the property may vary depending on the market trends, but the value of the property remains unaffected. Further, price determination of the property is completely based on the market expectations and understandings which can be traced from the disparity between the market price and the fair value introduced by the State government as well as local authorities.Although, the value and price are usually termed as identical to each other in the real estate transactions but, the valuation of the property has an acceptable and recognised rationale while the price determination of real estate properties is completely market driven depending upon the market expectations.

IX.              Factors Affecting Real Estate Prices

The price of the real estate property depends upon various internal as well as external[14] factors such as population, urbanization, Gross Domestic Production (hereinafter referred as GDP), foreign investment, government policies, governing local authorities, etc., which indicates the market to determine the price of the real estate property. The following are some of the major determinants of the real estate price.

Demand Factors

The demand for the real estate property refers to the desire and the ability of an individual to purchase property or give it on rent. The improvement in the factors such as locality, availability of the jobs, availability of disposable income, etc., increases demand for the property which is a major factor for the determination of the real estate prices. It has been recognised that the rate of employment and the price of the real estate properties are directly proportional to each other.[15] Similarly, increasing trends of urbanisation also generated a higher demand for the urban real estate properties. The demographic characteristics such as population, education, income, family size, ethnicity, etc., are the other influencing factors for the rise in demand for urban real estate properties. Further, the rapid growth of population also results in increasing demand for the real estate properties, especially, in the country like India, wherein, it is expected that by 2030 India would require a minimum of 25 million new residential properties. Therefore, the increasing demand of the real estate property is a major factor for the price determination.

Supply Factors

The price of real estate property usually depends upon the price of similar properties available in the locality. Similarly, the shortage of seller in a particular area boosts the price for the real estate property. On the other hand, if the number of sellers is more in a particular area than the proportionate buyer of the real estate property, it results in price depression by the seller of the real estate property. Although, the supply of real estate property depends upon availability of land, restrictions on the use of land, characteristics of the land, rules and regulations framed by the local authorities, etc., but it is a crucial factor for price determination of the real estate property.

X.              Real Estate Price Bubbles

Real estate price bubble refers to the temporary situation wherein the real estate market experiences rapid growth in the price of properties without sufficient support of the economic fundamentals. This increase in the price of property is based on the false assumptions and expectations of the real estate participants which ultimately sustain only for a short period of time. The price of the properties is derived without the base of sound economic fundamentals therefore, when the bubble bust the economy is worst affected. The price bubble does not sustain for a longer period, but it results in swift upsurge in the price of the assets that generates an initial expectation in the real estate market for further rise in the price of property. It implies that, the price of the property does not match its intrinsic value in a situation of real estate price bubble. These price bubbles have a negative impact on the development of the economy due to uneven distribution of resources towards the suboptimal use and distortive prices of assets. The insufficiency of the land in the urban area and increasing population are the primary reason for the price rise of real estate property in India which triggers the situation of price bubble. Therefore, the identification of existence of price bubble is a challenging task in the country like India with unavailability of proper data and heterogeneity of the real estate market. However, there are two major factors that causes the price bubble in the real estate market i.e., increasing number of benami transactions and the use of black money in Indian real estate sector.

XI.              Controlling of Overpricing and Preventing Malpractices

The residential real estate market has a distinct characteristics which are highly imperfect due to the information asymmetry that exists in the real estate market wherein the homebuyers are most vulnerable towards overpricing of residential real estate properties in India. The determination of the price of the land starts from the release of the land by the government for residential purposes, wherein the change in land use is known to a small group of insiders who intentionally buy such lands at throwaway prices and later sell them to the higher prices to the builders. The next significant element for price determination[16] depends upon various intrinsic and extrinsic factors that influences the price determination by the buyer and builders. Similarly, there are various malpractices in the real estate market in relation to benami transactions and anit-competitve practices. After considering the significance of real estate sector in the development of economy the Government of India has taken various steps to prevent and control the malpractices in the real estate market. Therefore, it is essential to examine the significant regulatory mechanism for controlling the malpractices such as overpricing, benami transactions, anti-competitive practices, etc. in the Indian real estate sector.

CONCLUSION

Real Estate has two major components i.e., real estate market and real estate economy. These components have continuously been considered as a benchmark to look at and decide the role of real estate sector towards the comprehensive improvement of the country. The term real estate market alludes to different understandings for different individuals depending upon their desires and necessities. In economic sense, the real estate market may be recognised as a market that materialise the demand and supply related to the real estate property and in other words a market which encourages the arena for exchanging in real estate property properties. It is ordinarily a segmented market which is categorised into different sub-markets based on the generally acceptable parameters which decides the measurements of each of these segments. These different sorts of real estate properties are separated based on their individual utility and ease of use. The properties related to housing are categorised under the banner of residential segment whereas the properties related to office, shop, multiplexes, shopping centers, etc., are covered under commercial segment. The real estate market is an interesting mix of such categories of real estate properties wherein each of these categories is distinct from each other and has uncommon characteristics of its ownership. It is generally observed that the adequacy of the real estate market depends upon the reflection of development and improvement of deeply interrelated market, the establishment [17]of which stands on the development of its each separate component. The real estate sector is an essential component of extraordinary economy wherein it impacts the choices of the individuals and the firms.

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[1]Cliff Perotti, THE REAL ESTATE ENTREPRENEUR: EVERYTHING YOU NEED TO KNOW TO GROW YOU OWN BROKERAGE, 1^st ed. 2007, p. 79.

[2]Prashant Das and Divyanshu Sharma, REAL ESTATE FINANCE IN INDIA, 1^st ed. 2014, p. 226.

[3]Ramakrishna Nallathiga, “Housing Policy in India: Challenges and Reform”, REVIEW OF DEVELOPMENT AND CHANGE, Vol. 12 No. 1, 2007, pp. 71-98.

[4]Jenia Mukherjee, SUSTAINABLE URBANIZATION IN INDIA: CHALLENGES AND OPPORTUNITIES, 1^st ed. 2018, p. 83.

[5]A. Bansal, et al., “A Review on Indian Real Estate: Trends, Challenges and Prospectus”, KKIMRC INTERNATIONAL JOURNAL OF RESEARCH IN HUMAN RESOURCES MANAGEMENT, Vol. 1 No. 1, 2011, pp. 39-55.

[6]V.K. Bhalla, INVESTMENT MANAGEMENT: SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, 1^st ed. 2008, pp. 62-65.

[7]Arturas Kaklauskas et al., “Defining the Utility and Market Value of a Real Estate: A multiple Criteria Approach”, INTERNATIONAL JOURNAL OF STRATEGIC PROPERTY MANAGEMENT, Vol. 11 No. 2, 2007, pp. 107-120.

[8]Arturas Kaklauskas et al., “Defining the Utility and Market Value of a Real Estate: A multiple Criteria Approach”, INTERNATIONAL JOURNAL OF STRATEGIC PROPERTY MANAGEMENT, Vol. 11 No. 2, 2007, pp. 107-120.

[9]R. Evalin Latha, “A Study on Socio-Economic Status of Realtors in Kanyakumari District”, INTERNATIONAL JOURNAL OF RESEARCH IN ENGINEERING, SCIENCE AND MANAGEMENT, Vol. 3 No. 4, 2020, pp. 6-9.

[10]Rajeev Gupta, “Real Estate in Gurgaon: Opportunity and Challenges”, INTERNATIONAL JOURNAL OF MANAGEMENT AND BUSINESS STUDIES, Vol. 2 No. 4, 2012, pp. 91-93.

[11]Vandna Singh and Komal, “Prospects and Problems of Real Estate in India”, INTERNATIONAL RESEARCH JOURNAL OF FINANCE AND ECONOMICS, Vol. 24 2009, pp. 242-254.

[12]Thomas M. Springer, “Maintenance of Residential Rental Property: An Empirical Analysis”, JOURNAL OF REAL ESTATE RESEARCH, Vol. 12 No. 1, 1996, pp. 89-100.

[13]Rohan  Bafna  et  al.,  “Prediction  of  Residential  Property  Prices:  A  State  of  the  Art”, INTERNATIONAL ADVANCED RESEARCH JOURNAL IN SCIENCE, ENGINEERING AND TECHNOLOGY, Vol. 5 No. 3, 2018, pp. 24-27.

[14]Hrushikesh Mallick and Mantu Kumar Mahalik, “Factors Determining Regional Housing Prices: Evidence from Major Cities in India”, JOURNAL OF PROPERTY RESEARCH, Vol. 32 No. 2, 2015, pp. 123-146

[15]Sumanta Deb, “Indian Real Estate Market and Potential of House Price Indices as an Indicative Tool: Cases and Concepts”, IUP JOURNAL OF MANAGERIAL ECONOMICS, Vol. 1 2012, pp. 18-34.

[16]Sumit Gothi and Sanjeev Kumar, “Review of House Price Index: Case of RESIDEX for Bhopal in India”, INTERNATIONAL JOURNAL OF ENGINEERING RESEARCH AND TECHNOLOGY, Vol. 2 No. 11, 2013, pp. 1135-1140.

[17]Nilanjan Banik, THE INDIAN ECONOMY: A MACROECONOMIC PERSPECTIVE, 1^st 2015, p. 92.