Not long ago, real estate in India was a seller’s market. Developers, even the ones with a terrible reputation owing to delays and quality of construction, were never short of eager beaver buyers. Indians embody the ‘roof over our heads’ aspiration like few others. That meant developers decided what the market wanted. They set the size of apartments, the price and the designs. The customer’s choice was smothered by a demand frenzy.
Not anymore. Developers are right-sizing, right-pricing, re-designing, even delivering apartments on time. Besides discounts of 8-10%, developers have taken to offering freebies such as gold coins, cars, furniture and even free foreign tours to attract home buyers. They are also offering easy or deferred payment plans. In some cases, booking amounts have been slashed to as low as Re.1.
In other words, developers are giving unprecedented attention to customer care. Home buyers in India never had it so good. Parth Mehta, MD, Paradigm Realty, says demand exists. But customers end up buying only when they are assured of correct pricing, product, payment plan, performance and most importantly, permissions from authorities, he says.
Building smaller homes without changing the per sq ft prices is another strategy that is gaining popularity. By reducing the size of houses, builders are trying to make the pricing attractive for buyers, according to Shishir Baijal, chairman, Knight Frank India, a real estate consultant.
What happened? Rising consumer activism has played a critical part in the new business paradigm. The Indian property market has always had plenty of buyers taken for a ride by unscrupulous developers. But they never had an appropriate forum to seek redress. The onset of Real Estate Regulatory Act or RERA has changed that. While a regulator under RERA is yet to be set up, the Act has already managed to usher in some form of transparency and discipline in the sector.
Buyers also decided to bunch up and take on developers. Individually, they realised they could do little against the clout of developers and the battery of lawyers at their disposal. They have been approaching Competition Commission of India, the National Consumer Dispute Redressal Commission (NCDRC) and even the Supreme Court to seek recourse.
Courts expectedly have sided with the buyers. In July, the Supreme Court asked Unitech to deposit Rs 5 crore by August 5, 2016 for delaying the completion of a high-end residential project Burgundy it had launched on the Noida-Greater Noida Expressway near New Delhi. In a separate case, the court asked Supertech to return money to investors. Courts and various consumer forums have also ruled against developers such as DLF, Unitech, Jaypee Group, Supertech and Parsvnath Developers in recent times.
Empowered buyers could not have happened at a more terrible time for developers. The sector is gasping for breath. Developers in India’s key property markets — Mumbai, Bengaluru, Chennai and the National Capital Region (NCR centred on Delhi) — are struggling with sluggish demand, an avalanche of unsold inventory and delayed or stalled projects. Even easy payment plans, freebies and deep discounts have failed to improve the sentiment of buyers. “Homebuyers’ confidence in real estate developers is at the bottom right now,” says Mehta. Given that the property market is inherently cyclic, developers could have dug in and waited for the slump to pass. Not this time. Declining sales have piled on the debt of developers, mainly in Delhi-NCR.
The net debt of the top 13 listed developers tracked by Kotak Institutional Equities stood at Rs 55,100 crore at the end of March 2016 compared with Rs 50,800 crore a year ago and Rs 41,400 crore at the end of March 2014. Two companies — DLF and Unitech — account for 56% of the total debt. The challenges developers face now are unprecedented, according to developer Niranjan Hiranandani.
The bad news doesn’t stop here. According to credit ratings agency Crisil, India’s top 25 real estate companies have as much as Rs 30,000 crore in borrowings maturing in the immediate future. Rating agency India-Ratings Research has revised its outlook on the real estate sector to negative for FY17 from stable. Developers cannot even hope for a demand resurgence soon. A report Knight Frank India shows new launches in the country’s top 8 cities fell 9% year-on-year during the six months to June 30 to less than 107,120 units. This is the lowest in three years. Given the changed dynamics, builders are having to adjust to the ‘new normal’.
Apart from focusing on customers, builders are also doing away with unnecessary clauses that hindered the sales process earlier.
Ashok Chhajer, chairman, Arihant Superstructures offers an example. The company launched a project at Kharghar in Maharashtra at Rs 6,555 per sq ft while the rate for other under-construction projects in the vicinity was over Rs 8,100 per sq ft. But the company did not put any cost escalation or lock-in clause in the agreement with buyers. Chhajer says the company managed to sell 210 apartments in May.
Some builders are collaborating with each other to bring projects back to life. They have begun to share land, labour and other resources.
Bengaluru-based Cornerstone Properties, one of the large land owners in the city, has been developing residential and commercial assets by partnering builders such as Sobha, Embassy Group, Brigade Enterprises and Mantri Developers. “The joint development model helps builders concentrate on construction funding which is cheaper than the funding for land acquisition,” says BP Kumar Babu, chairman, Cornerstone.
Some developers that have worked on redevelopment and have requisite permissions are finding that better value can be realised if they partner builders with credible brands. In Delhi, Tata Housing has signed a development management agreement with NCR-based developer Lotus Greens to build a housing project in Noida, marking its entry into the region. Mumbai-based Radius Developers recently tied up with Deserve Builders to develop an integrated township spread over 40 acres in Chembur suburb of Mumbai. The company has total 20 million sq ft of proposed development including four such joint ventures in place.
These events have happened at a time when investors are changing tack. Funds are increasingly investing at the project level in the form of structured debt, which is tailored to suit borrower’s needs, with less equity, but gives lenders more control as they are unwilling to take major risks on projects.
“Investors now prefer to enjoy lower return but higher capital safety,” says Shobhit Agarwal, Managing Director, Capital Markets and International Director, JLL India.
Developers are also opting for pre-fabrication technology to control costs, maintain quality and speed up construction. Under this method, parts of the building like the walls are built in a factory nearby and then transported to the site and assembled. The technology allows a building to be completed in 12-15 months compared with 30-36 months using traditional methods.
Some builders, especially in NCR-Delhi, which is the worst effected market, have been trying to get rid of the flab by selling their non-core assets. DLF, the largest Indian real estate firm, also has the highest level of debt — Rs 23,800 crore as on FY16-end. Over the last three to four years, it has sold a 17-acre land parcel in Mumbai’s prime Lower Parel area, wind energy business, insurance business, cinema business and the luxury hotel chain Aman Resorts. Its promoters are now about to sell their 40% stake in a unit named DLF Cyber City Developers and the money raised will be put back into the company, making the development side of its business debt free. Similarly, Unitech and Jaypee group have been exiting non-core businesses.
Even so, wooing the buyer is the cornerstone of the revival strategy of builders. Developers have turned to social media to reach out to their potential customers. Digital marketing is gaining acceptance with developers who have realised that homebuyers are finding it convenient to explore various options virtually before physically checking out the short-listed properties. The real estate customer is having the last laugh, it seems.
Credits ET Realty