MUMBAI REALTY - TEETERING ON BRINKMANSHIP
By Ruma Dubey
Anoop and Aarti are starting a new life and are looking for their new home. Urvashi and Raj have lived in a joint family for 5 years and are scouting around for a home. Shilpa and Virendra want to move to a bigger home as their family has grown. Abbas is looking for a second home, a place in Mumbai where he can invest his surplus NRI money.
All these people are at different stages of their lives, different income groups and all are looking for a home in Mumbai. Yet, no one seems to be buying. All are waiting – waiting for the prices to come down and waiting to get the best value for their money. Builders are also waiting – for the market to revive, waiting for NRIs, waiting for the interest rates to fall and waiting to sell the existing inventory.
Thus Mumbai realty is today a game of waiting. No one seems to be budging but it is now teetering on brinksmanship. Who will blink first is the question.
Last week, Knight Frank put out a report which quantified this ‘waiting’ game. It stated that Mumbai realty is currently sitting on an unsold inventory of 80,000 flats which forms 37% of the total residential supply under construction. This is over and above 50,000 to 1,00,000 flats lying vacant but not put for sale. Absorption numbers in FY 2012 are estimated to have dropped by more than 60% from 2007 and 35% from FY 2011 to an estimated 45,000. Yet, prices remain high. Knight Frank expects the prices to come down due to falling demand, piling inventory and uncertain macroeconomic factors.
Two months ago, property research agency Liases Foras stated that average property prices are 15% higher in Mumbai and 30% higher in the Mumbai Metropolitan Region (MMR) over their previous peak in June 2008 and it has stated that it will take roughly 44 to 58 months to clear the unsold stock in MMR. They expect prices in Mumbai to correct, in a phased manner by around 33%.
At the moment, builders might not yet be in a mood to bring down the prices but the hard truth is that money in their pockets is indeed getting tight. In quarter ended June 2011, inventory sold in Mumbai was valued at around Rs.5,046 crore of which only Rs.2,802 crore was received as payment. And the September quarter would have been worse off due to further hikes in interest rate. So for how long can these builders afford to sit on unsold inventory when their costs are mounting?
Lately have you heard of any land deal happening? When things were good, companies were buying large plots of land at exorbitant rates but today, though NTC put up land for auction, there were bidders but the rate is nowhere near what it got in 2006-07. NTC was planning to generate about Rs. 5000 crore by selling land at about eight mills admeasuring about 55 acres within Mumbai city limits. At a recent auction at Poddar Mills with a land about 2.4 acres at Worli, NTC received nine bids from various developers and the highest bid was for just Rs.280 crores. If one may recollect, Lodha bought 22.5 acres of land at Wadala for Rs.4053 crore, which means it paid Rs.180 crore per acre and today, Poddar Mills, which is in a much better area could get only Rs.117 crore per acre. So who says there is no price correction?
Will the prices come down? The builders, small ones might probably not be able to hold on to their prices; they might not bring down the prices but might short change the buyers by cutting down the quality of the property, in terms of amenities. Or we might see ‘negotiations’ wherein 25% upfront payment might get a lower rate or something to that effect. And the big builders? They have immense holding power. Yes, they too have debt on which they are paying huge interests, yet they will not get down the prices. The logic is simple – they run realty companies today like Ponzi schemes.
Talking about Ponzi schemes, these builders have land, so they announce projects. Affordable housing projects are out and hence every builder with land announces super luxury projects. They announce the project and assuming that even if they are able to sell 10% of the proposed project, they demand an upfront payment of 20%. When flats are worth Rs.5 to Rs.10 crore, 20% is a lot of money. That money is then put into other projects announced earlier and to be handed over shortly. For eg: a builder might have a super luxury project in Goregaon which needs to be handed over by 2013, so they announce another project in say, Parel and money collected there will be used to fund the Goregaon project first. And to fund Parel, whose handover date might be 2015, they might announce a project in Worli in 2013. As long as these builders own land, this way, money is put from one project to the other and every new project announcement becomes a scheme to fund their previous project. This way they don’t need to borrow and thus keep their business running. And where is the need to bring down the price at all? Infact as they keep on completing the project, they feel justified to hike the price. And this is why expecting prices to come crashing down would be naïve. Yes, we might not hear new project launches; that’s about it.
When the 2008 Lehman crash happened, Dubai realty crashed and today, many projects are abandoned, prices down by over 50% and those which are built and ready to move-in are ghost towns with no buyers. This can never happen in Mumbai as demand is simply too huge. Even a 15% price correction will bring in buyers by the drove and the excess inventory will vanish within the wink of an eye.
Today also the builders are having the last laugh; their profits margins might not be 80 to 90% like earlier but it remains above 40%. Which other business can boast of such margins, that too in such difficult times?