Can you walk us through the impact of the slowdown on the real estate sector as a whole? What are the current demand trends?
I would divide it into two parts – one is the commercial and the other one is the residential. The commercial is doing exceptionally well. CY2018 was one of the best years. I think 2019 will surpass 2018. Rental continues to grow between 1% and 3% every year. US corporates continue to outsource more and more to India and hence the demand for the commercial space. We have seen private equity investing into this sector even more in the first half of 2019. The REITs Embassy has listed it.
I am hoping in the next two or three months, there will be others who will come and list their respective portfolios on the REIT and that part of the market is going very strong, very stable and will continue to remain solid. The trouble is in the residential segment, If we divide this segment into two parts — the affordable and the mid housingNSE 3.46 % luxury premium. The affordable housing is doing very well. There is no problem. In the last 8-10 days, we have launched some of the schemes and we have seen 700-800 apartments being sold in seven-eight days. For the right developer, right ticket price and right location, there is a huge demand.
The one caveat that I will put on the affordable housing is that many developers think it is only about the price. They are going to be mistaken. It is also about the design. While there is a lot of hot selling affordable housing, there is an equally unsold inventory on affordable housing and that is because these designs are improper. They do not have the right ventilation or the lighting and they are inhabitable. So developers thinking that it is only a price game, are mistaken.
The guy going for affordable housing still has an aspiration and wants a better quality living. So one cannot say this is only about money and this is what people are going to get for a lower sum. The B part is on the mid-housing premium luxury. There, developers like Mr Joshi and others are doing very well. They are launching their schemes. They are selling because they have the right corporate governance, financial discipline, delivery, focus on the customer and right design. They are doing well.
The larger problem is that majority of the developers have really huge amount of debt and issues on corporate governance and financial indiscipline. Much of the money that came in was taken away from the project for other things and that is where they are really struggling. So just to summarise, commercial segment is doing very well. That market has also got consolidated. There are no more than three or four dozen developers across India who do commercial projects.
On the residential side, affordable is doing well but do not think that just because it is affordable, anything goes. If the design is not right, it will not sell. The B part where the problem is that the corporate developers are doing well but the guys who are less disciplined and have too much debt exposure, are struggling and that is a large portion of the developer community.
I see ghost buildings all around in Mumbai. Towers have been constructed and are getting constructed, but there is no demand. and yet construction is happening.
Yes, absolutely correct. What you are saying is largely true in central and south Mumbai. You are right in asking why are the buildings still getting constructed? These are mistakes of good times. These buildings had started in 2011-2012 and because these are high rise buildings, it is taking seven, nine years for these buildings to get completed. In the interim ,period the market has changed and moved away from premium luxury to more mid level affordable housing segment. But the developer could not have left the building incomplete. They had debt pressure; lenders were putting pressure on developers to t least complete the building. Once it is completed, there is hopefully light at the end of the tunnel and that is the reason why you are seeing all these buildings getting completed and delivered while there is very little occupancy in the neighbourhood.
But ultimately I agree with the developer, I agree with the lender that the mistake had been made but they had to deliver it. If you did not deliver, you were going out of the match even without playing one ball. At least stay on the pitch and you would hopefully get a chance to defend yourself and emerge as a winner. That is why all these buildings are getting completed.
The second question you may ask is then why are they not bringing down the price and why are they not doing a firesell so that they are able to immediately start the habitation within that vicinity. They have very little leverage left.
At the price that they are currently selling, they are barely able to cover the debt that they have on the building. I think most of these buildings equity is really wiped off. Now either the NBFC or the bank has to take a call that they are willing to take a hit and hence willing to bring down the price or they will have to very slowly come out of this situation. In conclusion, I will say is that it is a mistake of good times but they have to be delivered. The buildings which started in 2011-2012, are getting completed in 2019-2021.
I am hoping that at some stage, the lenders may take a call and say we will need to bring down the price. We may need to take a haircut but ultimately we need to sell these units and bring in the pace and momentum on the sales.