Recovery still fragile and patchy

July 2009: Vishal Sharma is the typical middle class Indian home buyer. Careful, diligent and financially savvy. Working at a Noida-based software services firm, Vishal and his wife Kavita, a school teacher, had been on the hunt for an apartment for over two years. The summer of the Year of the Ox proved lucky for them. Office developer 3C Company's maiden residential project, Lotus Boulevard, was coming up in Noida.

"I figured that since it was their first project, they would be extra careful in delivering quality and the bottom line was the price," says Sharma, 31. After a discount on the launch price of Rs 2,850 a sq. ft., the price of the two bedroom apartment he booked worked out to around Rs 46 lakh. The clincher: Sharma signed up for a loan from LIC Housing Finance at 8.9 per cent interest fixed for the first three years.

November 2009: Sobha Developers convened a meeting of some 50 leading property dealers in Bangalore just before the launching of Sobha Cinnamon, a 200-apartment residential project on Sarjapur Road, a spur from the city to tech-to-shampoos behemoth Wipro's headquarters. Sobha was meeting dealers to understand if they would be able to sell flats in the pre-launch period at a price of Rs 3,280 per sq. ft. The mood was one of scepticism. But when bookings opened in January, bulk of the apartments got sold out in three months - at Rs 3,352 a sq. ft.

June 2010: The 3C Company has launched a second project in Noida priced at Rs 3,500 a sq. ft. Sharma wonders if he would have bought at this rate. "Prices have increased earlier than they should have. I have had my share of luck," he says. Between June last year and this year, prices at Sobha's Chrysanthemum project in North Bangalore, too, have risen by Rs 500 a sq. ft. Customers are not hung up on discounts now, insists Sobha Managing Director J.C. Sharma.

Is the Great Indian Home Buyer back in the market? Is it time for fence-sitting customers to buy? And, importantly for realty companies (and their investors), is it back to the boom days of 2007 when new housing projects would get sold out within a month flat in the big cities? Is India at the edge of a step-up era where realty - residential through office, retail through hospitality - comes into being as a robust asset class?

The answer to each of these questions, Business Today found through reporting on the ground backed with research and conversations with independent consultants, is a nuanced yes. And, a nuanced no.

The visible signs first: over the past one year, thousands of buyers across the country have found prices reasonable enough to buy apartments and property, after the economic meltdown of end-2008 and early-2009 resulted in a drastic fall in home sales. Brokerage Credit Suisse estimates monthly apartment sales, in terms of million sq. ft., today, have jumped to 2.5 times from the low of early-2009 and steadily moving up to close the 24 per cent gap from peak sales seen in the second half of 2007.

Low Inventory, High Price
The renewed interest in housing, however, has a disproportionate impact on prices this time around. Because these sales were not matched with new supply or property launches. Data from PropEquity, a property research firm, shows house inventory levels at realty companies at a three-year low in many cities. Aggregate available supply fell by nearly one-quarter to 282 million sq. ft. in March 2010 from the year-ago month, Credit Suisse analysts Anand Agarwal and Abhishek Bansal noted in a May report. In other words, prices were being driven up by fewer apartments available in the market and, perhaps, not because of fresh demand.

That seems evident in a city like Bangalore where rough calculations show that stamp duty collections on land deals in May, the latest month data is available for, have nearly doubled to Rs 3,700 crore from Rs 2,000 crore a year earlier. But "the number of documents registered has not increased as much as revenues have risen, indicating that registration is happening at higher valuations", concludes S.N. Jayaram, Inspector General of Registration and Commissioner of Stamps, Karnataka.

The rapid price rise in the past months has indeed rattled prospective buyers pushing them back to sidelines and resulting in a drag on sales. For instance, in Mumbai, parts of Bangalore, and the National Capital Region, prices have shot up by as much as 30-40 per cent. At these elevated levels, obviously, buyer resistance is creeping in.

"The volumes have certainly dropped in some markets by 15-20 per cent, if not more," says Pranab Datta, Vice Chairman and Managing Director of property consultancy Knight Frank. "Enquiries are still very high, but fewer transactions are being consummated."

In Chennai, which is a relatively more stable real estate market, T. Chitty Babu, Chairman and CEO, Akshaya Homes, and Tamil Nadu chapter President for industry lobby Confederation of Real Estate Developers Association of India, puts soaring prices to rising input costs.

"Labour costs have escalated. Earlier it was a quarter of the builder's cost but now it is already up to 35 per cent, and in two years will reach 50-60 per cent," he says. Expensive raw material and a 10 percent service tax levy only feed into the spiral.

Even so, the risk from such bullish pricing behaviour by some real estate companies, says one expert, is that several realtors and wannabe developers who are planning to enter residential realty attracted by the current high prices could run into severe pricing pressure when their projects are ready. For instance, says Anurag Mathur, Managing Director at realty consultant Cushman & Wakefield, many realtors have converted their commercial projects into residential ones to reduce their debt-equity ratio.

"Given the longterm nature of commercial projects, the balance sheets of realtors get stretched. On an average more than 70 per cent of future developments have been earmarked for residential development, since the asset class has showed the greatest resistance to the downturn on the back of end-user demand," he says.

Structural Change
Other changes have swept the real estate market in the last two years, too - some helping the finances at the builder firms. One is the increasing share of low rise and so-called affordable housing projects in the market. Take BPTP. The company, says its Head of Marketing Amit Raj Jain, re-aligned its residential project portfolio to low-rise group housing and launched three projects in Faridabad: Park Elite Floors, Park Elite Premium and Park 81.

The result was that in the six months between April and September 2009, the company sold a record 7,019 apartments, equivalent to over 7 million sq. ft. The reason for the hot sales was simple. The homes were priced between Rs 16 lakh and Rs 30 lakh - yes, the apartment size was at times halved - far lower than BPTP's earlier projects, which were priced in the range of Rs 40 lakh to Rs 1 crore. 

Unitech, India's second-largest listed real estate developer, too, has followed a similar tack. Till 2008, Unitech's lowest product price was about Rs 60 lakh. Today, it sells products as low as Rs 13 lakh. "In March 2009, we saw the early signs of recovery post the financial crisis," says Managing Director Sanjay Chandra.

"It started with revival in the affordable segment followed by upper-middle and high-end by October 2009." Almost 85 per cent of the pre-project apartment sales, he adds, came from units priced below Rs 50 lakh garnering the company almost Rs 7,000 crore. That momentum continues. For the current financial year to March 2011, Unitech has a target of Rs 3,000 crore cash flows -75 per cent more than the cash it generated last fiscal year.

Others like Abhisheck Lodha, Managing Director of Mumbai's Lodha Developers, which plans to build the tallest residential tower in the world in central Mumbai, also points out to a subtle change in customer profiles. "We are seeing interest from long term buyers - end users in most of the cases," he says, not investors looking to make a fast buck.

Rising realty prices and increased home sales have also helped developers repair balance sheets dented by debt, levels of which had been pared with earlier financial recasts and equity placements but were still high. "Today, we are in a position to reduce our debt component purely from operating cash flows," says Chandra of Unitech.

Elsewhere, Sobha's Sharma says his firm has trimmed debt on the back of a private placement and brisk apartment sales. From a debtequity ratio of 2:1 in October 2008, the company is now at a comfortable 0.8:1. "In October 2008, we had an inventory of about 2000 units. Now we have less than 1,000 units (inventory) despite launching 700 plus units in three new projects," he says, illustrating how better demand helped.

Correction Ahead?
In the year ahead at least, then, housing sales are likely to be at prices that suit developers unless new supply coming up on ground holds down prices like in Noida and Greater Noida, satellite towns to New Delhi in the NCR. The current declining affordability could put sand in the wheels of a robust recovery and lead to what many fear will be a double dip in the real estate business.

At DLF, India's biggest listed realty firm, group Executive Director Rajeev Talwar believes there is a real chance of the customer being priced out of the market, as interest rates and government levies such as service tax, stamp duties and circle rates, too, increase. Unless the process of government and civic approvals that typically take two years and average construction time of three years are crunched and new projects enter the market, a recovering economy will again put pressure on prices, Talwar insists. "There is no price bubble in India. It is just constrained volumes," says he.

Industry veteran Arun Nanda, perhaps, has sage advice for his fraternity. "The industry players should not price themselves out of the market. There is strong demand and tremendous opportunity for many players in real estate," says the Non-Executive Chairman, Mahindra Lifespaces. At a time when buyers are poised to return, the onus is squarely on developers - to not be in a hurry to jack up prices in a bid to restore their financial health, but to provide more and more consumers with quality homes at reasonable prices.

It's a fine balancing act, but if developers do succeed, it could be a win-win proposition for both buyers and property companies.

- Reporting by Shalini S. Dagar, Manu Kaushik, Rajiv Bhuva and K.R. Balasubramanyam