Price cut will be key to survival

Published: March 16, 2009

Hari Prakash Pandey - Deputy General Finance Manager for HDILDespite the cut in interest rates, we do not see much pick-up in real estate demand. Everybody said that interest rates were high and hence there was no demand. But the demand did not pick up despite a cut in home loan rates. Prices should be brought down to a level where people come back to the market again. Until that happens, no fiscal stimulus package will be able to revive the sector. Builders whose land cost is high have been caught because they lose the flexibility to make amends in their business model.

The growing middle class was more or less ignored during the boom period. Do you see it coming back as prices get benign?
In Mumbai, almost 85% of the middle-income class was out of the market in the past four years. Their affordability and income has still not increased two or three times. People working with PSUs and government organizations have seen their salary grow from Rs 20,000 to maybe Rs 35,000 in two years. They were never part of that windfall increase. Now it is these people who will come to the market. It is for these buyers that the developers will have to build. But how flexible is the model, balance sheet strength and land cost of each builder will be a determining factor. Many builders in IT and the high-end segment are stuck because their target audience is most affected by recessionary factors.

Tell us about the response you received for your recently launched residential project at Kurla?
When we spoke to people, the response was that the price at which we have launched (Rs 5251) was prevailing in 2005. In the past two-three years, the prices went up due to a variety of reasons. They were as high as Rs 8,500. But now, a lot of people from different age groups and work profiles have come in. We are now launching a couple of other residential projects, like one in Andheri, another one in Kurla. We are looking at launching more residential projects as there is huge demand potential, but at the right price. The recessionary effect has not yet impacted the lower and middle-income sections as much since these people are not very highly leveraged.

Would you be increasing the prices of the Kurla project?
No. These are difficult times and that is why we have trimmed our margin expectations. We want to sell projects and not hoard them. There is a demand at a particular price point; so we will cater to it. Even after lowering the prices, we are making money. But we know that the extent of margins will not be that high compared to what we were making during hey days of the real estate boom. It is important to change according to the need of the hour and we have recognised that. If a project can get me Rs 300-400 crore with a margin of 20-25%, it is better than going for high leverage with interest costs hovering at 14-15%. In a downturn, it is better to cut prices rather than abstain from selling.

As a buyer, I am afraid about project completion. How should one tackle this?
There could be two ways of looking at this issue. First of all, it’s an overall economic condition and does not pertain to a single developer. In situations like this, one has to measure the associated risks. As a builder, I am not sure whether the buyer’s job would be secure. So I may ask for higher down payment. For example, in Kurla, people have asked us whether we will be able to complete the project by 2010. It is precisely because of this reason that prices are almost 30% lower than the market price. It is not that builders have not completed projects. The onus lies on both the parties. Such fear was non-existent in 2005-06. It is because of these worries that builders are not commanding a premium on their projects. Depending on the stage of the project and the risks, the premium would vary. Brand name and past track record should be given importance in current times.

People do not want to take risks due to job insecurity. How do you intend to bring back buyers?
Price reduction will play an important role. It will help to reduce leveraging as well. If I price the Kurla project at Rs 75 lakh, no buyer would come. However if I sell it at Rs 35-40 lakh, people would definitely buy. The other thing is perception. The real estate sector has become tainted. If you benchmark the current share prices with 2007 levels and expect a similar fall in the real estate prices, this cannot happen. But we accept that there are regulatory anomalies in the sector.

Do you think that such situations call for the intervention of an external regulator?
Being a free market, one cannot have a control over prices. However, some basic reforms need to be carried out. For instance, there are issues over registration charges, stamp duty charges, lack of transparency, approvals and title insurance. Although prices have fallen, the registration fees continue to be as high as 1% of the agreement amount.

What measures have you taken as a company to beat this slowdown?
First of all, we are keeping a tab on our liabilities, be it construction costs or interest payments. We are ensuring constant inflows even at the cost of taking a hit on margins. We need internal accrual to put less pressure on our working capital needs. So we are concentrating on residential projects. We are maintaining the highest standards of corporate governance to ensure that our shareholders are not kept in the dark. This will help to avoid confusion and instill confidence in people’s minds. With the drop in prices, we are looking at revenue generation in the long term.

What are you expecting in the future?
I see some more correction ahead. Property should not be bought because the interest rates are low. The buying decision should be based on one’s own financial position, the industry in which one works and age criteria. A highly leveraged position could be risky in the current scenario.

Source: Economic Times

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