Inventory Overhang Leads To Cost Correction

As the real estate zone continues to struggle with slow pace of sales, the number of unsold flats has increased across several plans in metro cities. This has resulted in a significant addition to the stock of unsold inventory which is agonising for planners.

Inventory overhang, also known as Months of Inventory gives an estimate of the amount of time it would take to vend all the current listings in a region, provided that there are no new listings. This can indicate the popularity of a project in given location as well as the overall situation of the market. It can thus be one of the key boundaries to consider while investing in a project.

If there is more that 12-14 months of inventory in a project, for example, it means that flats in the project are selling at a low speed. This also refers to an oversupply of residence vis-à-vis the demand in the project. In such a situation purchaser can negotiate easily and get a lucrative deal from sellers. This therefore becomes a purchaser market.

On the other hand 6-8 months of inventory indicates that a planner is selling flats in a project quickly. As the demand for the residence unit is high, sellers have an edge over purchaser in such a scenario. This is a sellers’ market. A seller listing his land in such a market condition is sure to get multiple offers from purchaser. This will enable him to sell the unit at the best price and earn a healthy return on investment.

Does Inventory Overhang Lead To A Cost Correction

As the unsold inventory mounts pressure on planners, residence-purchaser adopt a wait and watch strategy as the believe that the land cost should come down in the near future. However, this has not been the case in current times, land cost have largely remained stable across many mini-market in cities as well as suburban regions. Planners have not been able to lower the cost owing to high input and property acquisition price. Moreover, time taken in getting approvals leads to delay in construction, which in turn limits the possibility of cost correction.