An Explainer: Absorption Rate
In the past couple of years, we have heard quite often that India’s real estate market is suffering from a piling inventory due to a low absorption rate. But what is absorption rate and how is it calculated?
The absorption rate is the rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the average sales in the market by the total number of available homes, and multiplying it by 100.
This rate of absorption basically indicates the likely time required for the total supply of homes on the market to get sold.
Suppose there are 100 houses available in the real estate market of Noida. In the month of January, some 10 units were sold. So, 10 divided by 100, multiplied by 100, would yield 10 per cent. This implies the absorption rate in Noida's market in January was 10 per cent. Also, from this calculation, we know that it took one month to clear 10 per cent of the stock, so it should take 10 months for the entire inventory to get sold.
If developers achieve the target of clearing their entire inventory in close to a year, this indicates a slow absorption rate. An absorption rate of 20 per cent or above is considered good for sellers. Real estate developers plan new projects based on the absorption rate. A slow rate of absorption is an indication that developers need to exercise caution while launching new projects.
On the other hand, a phase of low absorption rate could be good for buyers. An absorption rate of, say, 15 per cent or lower would mean that the supply is high but the demand is low. That gives a buyer better prospects of landing a good deal.