Is the worst over for the real estate sector?

Published: September 7, 2009

New Delhi / Bangalore: Nitesh Shetty, a developer of high-end properties in Bangalore, has no qualms over dropping the premium tag—and prices—in some of his projects as demand for affordable housing picks up pace in India.

“Demand lies here and we need (to) adapt accordingly,” said Shetty, founder and managing director of unlisted realty company Nitesh Estate Pvt. Ltd, which is building the Ritz-Carlton hotel in the country’s software capital.

The builder has revamped the second phase of his luxury Forest Hills project in the Whitefield suburb, renamed it Flushing Meadows and halved prices of residences to Rs20-30 lakh. Another project called Hyde Park was changed on the drawing board itself to target the middle class.

Industry experts say demand for affordable homes—loosely defined as costing Rs30 lakh or less—is the only silver lining in the current economic slowdown that has hit the real estate industry.

Sales of houses started dropping in the first half of 2008 and contracted severely after that. This was compounded by a severe liquidity crunch in the last few months of the year.

After October, most projects of big developers, including DLF Ltd and Unitech Ltd, India’s top two realty companies by market value, were delayed. Projects such as Godrej Woodman Estate, Godrej Properties Ltd’s maiden project in Bangalore, failed to meet their November deadline.

“It was like you go to sleep on a Sunday night and Monday morning there is a slowdown,” said Kumar Gera, chairman of the Confederation of Real Estate Developers Association of India, an industry lobby group. “The most savvy developers never expected the slowdown the way it was.”

This compelled most developers to refocus their efforts from premium housing to providing cheaper options to attract buyers.

An August paper on affordable housing in India by research agency Knight Frank said this segment has a potential market size of Rs3 trillion by 2011 and is expected to see a requirement of at least two million units by that time.

Supply is lagging far behind demand, though. It is estimated to be some 427,000 units in 2009, according to PropEquity Research, an online provider of analytics, data and deal flows in the Indian real estate industry. This number is projected to rise to 670,000 houses in 2012.

Price correction

Residential sales, which contribute at least 30% of a developer’s revenue on an average, started waning in the August-December period in 2008 due to high prices and fear of job losses among buyers.

DLF sold just 77 units in November-December, against average sales of 400 units a month.

Faced with such a severe decline, many firms started cutting prices at the end of last year.

“Prices were way too high and should have been cut by mid-2008. But developers waited till Diwali and when sales still didn’t pick up, they started price cuts,” said Unmesh Sharma, an analyst with Macquarie Research.

Bangalore-based Sobha Developers Ltd, for instance, announced an 8% price cut on all projects.

The second round of corrections started in early 2009. DLF and other developers either slashed prices in existing projects or launched new ones at lower prices. Developers of luxury real estate such as Orbit Corp. Ltd slashed prices by 30-40%, and others cut prices by 20-30%.

DLF led the way when it reduced prices in some of its projects in Bangalore, Hyderabad, Chennai and Gurgaon by 20-30%. Gera pegs the price drop in various micromarkets at 10-40%.

Adding to the pressure were buyers who had bought apartments in the projects earlier, when the prices were significantly higher. They came together in online forums to lobby for a price reduction or an exit option with a full refund. DLF offered an exit option to buyers in the Garden City project near Chennai by refunding their booking amounts.

But that aside, the price cuts were beginning to work.

Revival in demand

According to Sameer Jasuja, founder and chief executive, PropEquity Research, the revival started in January-February, with affordable housing giving the sector the fillip it needed.

“For the first time, developers realized there is no market for luxury housing and that they had to come out with cheaper products,” said Jasuja. “Launch of affordable housing made demand happen.”

The revival in residential real estate seems to be on, agrees Rajiv Talwar, group executive director of DLF. The company plans to launch 1,000-1,200 sq. ft apartments in the Rs25-30 lakh range.

The revival was mainly due to the change in the product strategy of developers, said R. Nagaraju, general manager, corporate planning and strategy, Unitech. The firm reviewed its business model and started launching projects that were more affordable.

In February, the developer launched Uniworld Gardens II in Gurgaon, on the outskirts of New Delhi, with a price tag of about Rs28 lakh. All the 750 units were sold in 45 days.

“The response was way beyond our expectations,” said Nagaraju. “It gave us the confidence that this model will work and we started launching more such projects across cities in the National Capital Region, Chandigarh, Kolkata, Chennai, Bhopal and Lucknow.”

Unitech now plans to build 20,000 affordable homes by 2011 across the country in the Rs10-30 lakh range, and has launched a new brand for affordable homes called Uni Homes. “Demand first came back in markets such as Gurgaon, Mumbai and Chennai, where developers had cut prices and projects were launched at lower prices,” said Macquarie’s Sharma. Bangalore and Hyderabad would take longer because many buyers are from the information technology industry and are dependent on its revival, he said.

The high-spirted rebound has encouraged developers to again pitch for premium housing.

Lodha Group, flush with sales in its mid-segment housing business, Casa, recently opened bookings for two upmarket residential projects. Lodha Primero, a residential tower in Mumbai with prices at Rs2-3 crore, sold 100 flats in two months. In July, it re-opened bookings for Lodha Aria, a project originally launched in March 2008.

Pujit Aggarwal, managing director of Orbit, is ecstatic after the company found buyers for all the 13 apartments in Orbit Haven in tony south Mumbai, priced at Rs40,000 per sq. ft, between March and July.

Orbit had launched Haven after an eight-month gap.

Ajit Krishnan, partner, real estate practice at audit firm Ernst and Young, said the downturn has made developers more cautious. “Now they will build and sell only what people will buy.”

Escaping the debt trap

In the boom years, developers borrowed heavily to buy land and fund projects. When the cash flow slowed to a trickle, they began borrowing even for working capital requirements. The debt kept piling on.

Unitech’s debt at the end of December stood at Rs10,900 crore and DLF’s at Rs15,525 crore. The debt-equity ratio of developers was between 1 and 1.5 (between Re1 and Rs1.50 of debt for every Re1 of equity).

The developers managed a quick recovery, selling non-core assets, raising equity funding and reducing and restructuring debt, said analysts. The debt-equity ratio settled at a more comfortable 0.5-0.6.

By end-June, DLF had lowered its net debt to Rs11,686 crore by selling hotel plots and exiting long gestation-period projects such as its Bidadi and Dankuni townships in Karnataka and West Bengal, respectively.

Unitech reduced its debt to Rs8,262 crore at the end of the June quarter by raising Rs900 crore through the sale of two hotels in Gurgaon and an office complex in New Delhi. It also raised Rs4,385 crore through two rounds of qualified institutional placements (QIPs) in April and June. Its current debt is below Rs7,000 crore, said Nagaraju.

Unitech was one of the first developers to admit it had a serious problem and took its shareholders, investors and the media into confidence. “Because of that admission, we could start taking remedial action very soon,” says Nagaraju. “We were prepared to tap the capital market. Shareholders knew the real picture. So they were willing to participate in the equity issuances.”

Other real estate companies, too, have tapped the appetite for equity among institutional buyers. Mumbai-based Housing Development and Infrastructure Ltd (HDIL), Indiabulls Real Estate Ltd and Sobha Developers raised money through this route. In QIPs, shares are sold to institutions such as banks without involving retail buyers.

HDIL raised about Rs1,688 crore through a QIP and cut its debt to Rs2,900 crore at the end of June from Rs4,143.31 crore at the end of March. Its debt-equity ratio fell to 0.45 from 0.94 and it still has Rs150 crore of cash after the fund- raising. The company has tweaked its business model to focus on cash flow, launched three residential projects and expects to generate Rs1,200 crore from sales, enough for its working capital needs for the next 12-14 months.

The improved demand scenario and the offtake in the residential space will be reflected in the financials (for many developers) only two-three quarters after developers start construction, said Aashiesh Agarwaal, an analyst with Edelweiss Securities Ltd.

Challenges ahead

The revival has seemed easy and developers are already saying prices may bounce back to the peak levels of 2007.

Lodha Group and Bangalore-based Brigade Enterprises Ltd have hiked prices by 10-15% in the past few months. M.R. Jaishankar, chairman and managing director of Brigade, had said in an earlier interview that prices would be back to 2007 levels in a year.

That’s when prices had started peaking. Altamount Road in southern Mumbai was ranked the 10th most expensive street globally in 2008, with space in that area selling for Rs98,500 per sq. ft. Avenue Princess Grace in Monaco was the costliest at Rs7.5 lakh per sq. ft.

It had taken the sector five years after the 1996 downturn to recover, but in the current downturn, the recovery has been faster and easier, said Akshaya Kumar, chief executive, Park Lane Property Advisors Ltd.

“Developers resorted to alternate funding options such as QIPs and private equity funds and have started coming out of the woods,” said Kumar.

But there are hurdles of the past they still have to clear. Unfinished projects, for instance.

As home sales slowed and firms were strapped for liquidity post-October, several projects, such as Godrej Woodman Estate, got delayed.

Of the 1,856 apartment or villa projects scheduled for completion in 2008, 1,089 were delayed, according to PropEquity Research.

Execution of already launched projects will be a huge challenge, said Jasuja of PropEquity Research. “Developers have oversold compared to what they can build,” he said. “Margins are wafer thin (10-20% now compared with 40-50% earlier), so any increase in commodity prices could lead to delays and quality could be compromised.”

The developments too have become more selective. Ernst and Young’s Krishnan said there would be little movement over the next two quarters. “Selective projects will be launched and most of them will be customer-oriented,” he said. “We will selectively launch projects such as hotels,” agreed Talwar of DLF. “Earlier, we had 65 million sq. ft under construction and now we have only 35-45 million sq. ft under construction.”

Companies would also have to work on re-tweaking their business models. To counter the slowdown, several developers have suspended construction of office space and delayed launches of retail projects where leasing activity had considerably slowed.

“What is not sold or leased, why take a decision now on such projects?” said Talwar. “We have decided to take a call later once market conditions improve.”

DLF also denotified four of its proposed special economic zones in Sonepat, Gandhinagar, Bhubaneswar and Kolkata, citing the economic slowdown and slow demand from information technology firms.

And then there are the affordable houses, the ones that propped up the sector in its worst times.

The most-talked-about low-cost housing project came from Tata Housing Development Co. Ltd, when it launched a 1,100-unit township, with each house priced at Rs4-7 lakh, in Boisar, some 60km from central Mumbai.

“Most so-called affordable projects were launched far away from the city where rates are anyway down,” said Pankaj Kapoor, chief executive of Liases Foras Real Estate Rating and Research Pvt. Ltd. “The challenge is to launch homes within the city at lower prices.”

Source: Live Mint

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1 Comment so far

  1. real estate September 9, 2009 11:31 am

    Foreclosure sales have been abnormally low since we learned of the pending implementation of the administration’s Making Home Affordable program. From that point, we delayed the initiation of foreclosure proceedings and sales for customers that may eligible for a loan modification…

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