BW Communities

Build-up To Diwali

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[ON OFFER: Developers are now targeting low-cost homes Two weeks ago, a 1.5 acre property in the up- market commercial enclave of Mumbai’s Bandra-Kurla Complex had only one bidder and was sold at Rs 92 crore, just a fraction above its base price of Rs 90 crore. Mumbai Metropolitan Development Authority (MMRDA) officials conducting the auction were appalled. Though it was a plot reserved for educational use, they were expecting bids in the region of Rs 200 crore. In Mumbai and other cities, such signposts of a sharply correcting realty market are common with consumers adopting a wait-and-watch approach. In Tier II towns such as Jaipur and Kanpur, where prices soared the fastest, the downward trend is even more pronounced. “Though the slowdown has been on for sometime, for the first time builders are now acknowledging that their prices are under pressure,” says Arvind Pahwa, managing director of JP Morgan Asset Management. Initially, the builders were wary of giving overt price cuts on their rack rates and preferred a more disguised price-reduction route. Nirmal Housing, promoted by Dharmesh Jain, for instance has offered to absorb the stamp duty and registration cost on its ‘City of Joy’ project in the eastern suburbs of Mumbai. This translates into a 6-8 per cent price reduction. Another builder put out a full page ad in a national daily recently asking for only 20 per cent at the initial booking stage and 80 per cent on possession, a complete reversal of payment norms in the industry. Diwali Discounts Developers expect the market to bottom out soon, and are hoping buying will pick up during the Diwali season. A combination of price cuts and the festival euphoria will stoke the dismal realty market back to life, builders say privately while maintaining a brave front. “We expect an open admittance of lower prices in the guise of festival discounts during Diwali,” predicts a report by Enam Research. Working on the theory that Diwali onwards there will be an uptake, desperate developers have been borrowing heavily in the informal debt market at extremely high interest rates of 20-22 per cent to complete projects, and make their sales before the market tanks further. The foreign investment flow to developers, which earlier allowed them to hold on to their price line, is also slowing. America’s fourth-largest bank, the Wachovia Bank, that has invested more than $500 million across several realty developers, is believed to be re-examining its investment plans in India. “Builders were earlier reluctant to part with equity and preferred debt deals; but now they are ready to offload equity project-to-project,” said a CEO of a leading private equity firm. “If the market does not pick up by Diwali, there will be a bloodbath,” a realty market analyst said preferring anonymity. Like him, others too are not convinced that things will pick up soon and feel that the stagnation in the market will continue for a cycle of 3-4 quarters. Managing Risks To beat the heat, realtors are diversifying into low-cost homes, a segment they euphemistically call “affordable” housing. They hope that the demand is stronger among low-budget buyers. Others are diversifying into infrastructure projects and non-realty construction. POOR SCENARIO: The rates at Mumbai’s Bandra-Kurla Complex has fallen from Rs 50,000 sq ft to Rs 15,000 sq ft Puravankara Projects, a big Bangalore-based developer, has set up a 100-per cent subsidiary for the “affordable” segment called Provident Housing & Infrastructure, and says it will construct 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Investors see an opportunity in this. Credit Suisse Realty Fund, for instance, is looking to invest Rs 550 crore in a few provident housing projects. “We are aiming at the class of people who are paying Rs 10,000-Rs 12,000. they can own a home by paying an EMI of just Rs 20,000 a month,” says Ashish Puravankara, director of the company. With cheaper, pre-cast technology and simpler architecture, he says his company is hoping to bring down prices to Rs 2,800 to Rs 3,400 per sq ft from the current Rs 4,000-Rs 6,000 range. Building cheaper, budget homes is obviously the popular trend. Delhi-based Omaxe has announced that it will invest Rs 8,000 crore over the next five years in building homes that will cost less than Rs 20 lakh a unit. To stoke demand, developers are willing to go to the poorest segment too, an area earlier described by them as “unviable”. For example, the Punjab government’s scheme for providing homes for the poorest at Rs 1 lakh a unit found ready takers among north India’s biggest developers, including DLF, Parsvnath, Unitech and Ansals. Other initiatives to beat the slowdown include diversification into non-realty construction projects. For example, Raheja Developers has launched Haryana’s first engineering SEZ for light and medium engineering units. A Mumbai-based developer, Sumer Corporation, stung by the slowdown, is bidding hard for a municipal project to repair Mumbai’s pot-holed roads. Delhi’s Omaxe has won 11 bids to modernise and maintain 11 airstrips in Uttar Pradesh. One of the largest of the listed developers, HDIL, has placed all its chips on relocating slums and developing Mumbai’s airport land. Though these construction projects offer an alternative, the margins are thin and gestation time for return-on-investment long. ICICI Bank, the largest lender in the realty market, has admitted to a 35 per cent fall in home-loan sales over the past 18 months. The bank also said there is a 15 per cent jump in the number of borrowers preferring to pre-pay and close their loan accounts to avoid paying higher EMIs. It appears things will get worse for the developers before they get better. gurbir (dot) singh (at) abp (dot) in (Businessworld Issue 9-15 Sep)