Real Estate: Why India can build hope

Real estate developers had hoped that the election of a stable government would boost their fortunes. It’s been six months since the Narendra Modi-led NDA has come to power, but there has been no noticeable change in demand. Unsold inventory continues to pile up across the country. High interest rates and a sluggish sub-5 percent GDP growth in FY14 have resulted in people holding on to their purse strings. The fallout is that real estate prices have barely budged over the last two years. But sentiment is picking up, and cities like Bangalore have developed a vibrant and healthy real estate market.

As part of the sixth session of the ‘Forbes India CEO Dialogues: The Leadership Agenda’, industry leaders shared their views on the steps needed to revive the sector. Boman Irani, chairman and managing director of Rustomjee Group, Subodh Runwal, director, Runwal Group, Khushru Jijina, managing director of Piramal Fund Management, Ashish Puravankara, joint managing director of Puravankara Group and Sunil Kaushal, chief executive officer of India and South Asia at Standard Chartered, discussed a roadmap to get the sector growing again.

Developers on the panel believed that there would be an uptick in prices within six months, once there is a correction of interest rates. Financiers, however, said that this is at least 12-18 months away.

Excerpts from a discussion moderated by R Jagannathan, editor-in-chief, Forbes India.

R Jagannathan: We have certainly seen a turnaround in sentiment. Is that percolating down to the real estate sector?
Boman Irani: Yes. People have started noticing that there is a strong government, which has made all the right noises. The government started with something as simple as the ‘Swachh Bharat Abhiyan’ (Clean India Campaign) and then made a grand announcement promising homes for all by 2022. People feel good about these measures. Emotion is what drives purchase, and real estate is driven by a desire to improve one’s lifestyle. The fact that everyone is hoping that the GDP will improve and interest rates will come down is adding a lot of positivity on the ground.

The flipside is that our industry has a lot of pundits and they like to make tall statements, often crying foul about prices being too high. This brings down public sentiment. They have still not started making the right noises. For the end user, any time is the best time to buy, provided he finds what he is looking for in his budget.

Jagannathan: Bangalore is driven more by fundamental demand and less by investors, unlike, say, Mumbai. Do you see any change in demand?
Ashish Puravankara: Bangalore has been quite stable for the last 2-3 years. One distinct change that we have noticed is that pre-sales have seen a very good response. Earlier, we would sell 10-15 percent when we launched a project. Now we are selling 40-50 percent in the first three months of a launch, and these are at good prices. The end-user demand is very strong. People who come to the city because of their jobs end up staying back. Hence, there is a lot of demand.

Jagannathan: Mumbai is a different market from Bangalore in that there are a lot of speculative investments. With that in mind, do you think Mumbai would take longer to revive than Bangalore or Chennai?
Subodh Runwal: If you look at Mumbai from a 30-year horizon, you’ll see that real estate has outperformed all asset classes. What we are witnessing now is a temporary blip, but if you look at a good developer, you will see that his projects are still selling out quickly. Recently we had people queuing up at 5.30 am for a project we launched.

Jagannathan: There is demand somewhere, but it is not at the level where it is mass. It is probably there at the top end where demand is more resistant to a slowdown...
Khushru Jijina: Today, we have a stable government and sentiment is back. What has happened in the last couple of years is that the men and the boys are getting separated. Now people only buy from whom they can trust. Foreigners come to us and say that they don’t want to put down money as everything is overpriced. Now, that is a very general statement. You have to look at micro-markets. In the western suburbs [of Mumbai], people can afford to buy houses between Rs 2 crore and Rs 2.5 crore. In the eastern suburbs, a buyer can afford about Rs 1.5 crore. Above this, there will be a slowdown as everything is linked to affordability. Today, the right product at the right ticket size sells.

Jagannathan: As a bank, do you see increased demand for loans, Mr Kaushal?
Sunil Kaushal: From a banking perspective, there are two segments we service. One is for the retail customer and that segment is growing very strongly. There are certain price points at which sales have never dipped. In the up-country segment [tier-2 and -3 cities], there has been no slowdown. That is not the case with the luxury segment. Having said that, macro factors supporting the real estate sector in India are very sound. Developers—yes, the better ones—are seeing this as an opportunity to repair their balance sheets and launch new projects.

Sunil Kaushal

Jagannathan: Do you think that demand will revive if interest rates fall?
Puravankara: Over the past two to three years, there has been a shift in [the kind of ] people launching projects: From those who [merely] own land to reputed developers. Two things that affect buying are affordability and sentiment. When the investor backs off, the end user also loses confidence. When the investor is present, he provides that end boost to the consumer to help him make the decision to buy.

Kaushal: A small cut in interest rates may not matter to a corporate buyer, but it does to the end user. It allows him to service the loan faster as a lot of the interest component gets charged in the first few years.

Jagannathan: Is the new Land Acquisition Act 2013 a factor that is going against the industry? Is the problem at the state level or the central level when it comes to the laws that affect builders?
Irani: I’ll come to the second question first. The Centre controls taxation. If you give people a better income tax benefit to own a home, then you will find more people buying. But largely, it is a state subject. Mumbai has among the highest payouts to the state government and still the end user does not get what he deserves. Out of every Rs 100 that a consumer pays, Rs 38 goes to the government. This has resulted in a price squeeze for a developer and he has no choice but to keep raising prices. We’ve still not come under the ambit of the Land Acquisition Act. So, we are fine for now.

Jagannathan: What reforms are needed for this sector to take off vertically?
Kaushal: First, it should be given industry status. Get a regulator in place. There is an element of suspicion [among buyers] as there is no regulator. That will also allow developers more avenues to raise financing. Today, real estate is considered a second-tier business. With corporate houses entering the sector, it is getting upgraded, but there is a long way to go. If you reduce the approval time, rates could come down, but for taxes to come down in a country running a fiscal deficit is difficult.

Irani: Let me talk a bit about the regulator. CREDAI and MCHI [two industry bodies] welcome the regulator. But this is a four-horse carriage and all four players have to be regulated. There is the consumer, the finance company, the government and the developer. We welcome regulations as long as all four are regulated.

Jagannathan: How has the DLF-CCI judgment impacted the industry? (Real estate company DLF was penalised Rs 630 crore in 2011 by the Competition Commission of India for unfair practices and this was upheld by the Competition Appellate Tribunal in May this year.)
Jijina: I wouldn’t want to comment on this specific case, but there are two sides to the coin. I have been a developer running the realty business for the Piramal Group and now, I’m with private equity. There was a lot of press coverage after the DLF-CCI case, and people are taking advantage of the situation. I know of a project where buyers have not been paying the developer for a long time, and now they are demanding a concession. The moot point is what Boman [Irani] said: For regulation to be effective, everyone must be regulated.

Ashish Puravankara

Jagannathan: Recently, the government liberalised rules relating to FDI and Reits (real estate investment trusts). Do you see increased fund flow as a result?
Puravankara: As far as FDI is concerned, it is a great first step, but will that result in increased fund flow? I am not so sure. What it does is that it allows foreigners to invest in smaller-sized developments, but there are still risks. Bureaucracy and changing regulations still matter to investors and that needs to be streamlined. Once they [foreign investors] see that this is a market where rules don’t change by the day, they will get more confidence.

Kaushal: There has been a lot of discussion on Reits and I would like to add to this. A Reit is always expected to give some premium to a debt instrument. With the current scenario of elevated interest rates, projects are unable to give that IRR [internal rate of return] to provide such high rates of return. For Reits to really succeed, interest rates will have to come down, and quite dramatically. This is a couple of years away. I think inflation will drop quite sharply as commodity prices are falling. And today, globally we are fighting deflation and not inflation. For India, it is a boon—there is no doubt about it.

Jagannathan: When you look at real estate across the country, are there better and worse places in terms of the regulations?
Kaushal: Mumbai is still the market in my mind for the end user.

Jijina: Our view is that Bangalore is on the top. The best behaved developers come from Bangalore. They are more corporatised and they walk the talk. Then come Pune and Chennai; NCR and Mumbai are at the bottom.

Runwal: In Bangalore, it is much easier to get approvals and there is a lot more certainty.

Jijina: While we are a fund, we also have a development arm in Bangalore, and in the last one-and-a-half years, we have launched three projects and we will be completing them in the next year.

Jagannathan: I think there are a lot more reputed builders in Bangalore…
Irani: There are, and their coming together has really helped the market. In Mumbai, we don’t have that discipline. It is a code I would like to crack, but haven’t been able to do so. What’s happening in Bangalore is something I haven’t seen anywhere else in the country. These guys [developers] were very fortunate that the pie increased by such a large amount that they realised there was no point fighting each other.

Puravankara: Bangalore’s population has doubled in a decade. In fact, this evening, the top 10 developers of Bangalore are meeting informally for dinner. They say, ‘Let our sales guys compete, but among ourselves let us sit together and exchange notes’. But it is not a cartel.

Jagannathan: How long do you think it will be before the real estate market sees an uptick?
Puravankara: It will happen once interest rates come down and once investors get back into the market. Once they believe the market will not correct any more, end users will come in, and that is six to eight months away.

Kaushal: In our business, it never slowed down. We are quite hopeful it will open new avenues of investment. With Reits, it is a capital market opportunity. I think the uptick will go hand in hand with the economy and the recovery will start taking hold in the second half of next year.

Runwal: The developer sentiment is extremely bullish. A large block of land was sold recently in Mumbai; there were 18 bidders for it. And they paid cash. This shows the kind of optimism that is there in the market. And, if so many of us are thinking like that, we will see a revival next year.

Irani: I will give the ground reality. MCHI-CREDAI held an exhibition in September where we clocked 600 bookings in four days. Normally, we would register 150-200 bookings. Developers were better organised. We had buses, we took people to their offices and held their hand through the booking process. Developers also gave a never-before and never-again offer during those four days and that helped clock more sales. Flats worth Rs 1.25- 1.6 crore did very well in sales.

Jijina: I will answer in two parts: One for the developer and one for the consumer. Most of the deals we have done in the last year were for refinancing—for land or for stretched balance sheets, etc. But in the last three months, the number of deals I am doing on the private equity side is huge. It shows the kind of optimism in the developer community. For the consumer, we come back to the price and ticket size. My view is that price correction has already taken place because, for the last two years, prices have not moved and that is as good as a price correction. Today, if a buyer goes to a developer with money, he will give you a discount on the spot. When will things start picking up? I am not as bullish as some of the others here are. I still think a pick-up is 12-18 months away.