A Buyer's Market
Half an hour before scribes and cameramen landed, three posters are put up at the basement hall of a Noida hotel. In the centre is a large horizontal one, in saffron, white and green background. It has 31 clenched fists printed; the messages are in bold fonts.
'92% of the homebuyers voice POSSESSION'.
'We demand quick delivery of our homes'.
'Delay compensation'.
'New builder with strong financial strength.'
'No Japyee (JAL)'.
'No Liquidation (JIL)'.
JAL and JIL are related. That is at the heart of the problem.
Jaiprakash Associates Ltd (JAL) is the promoter for Jaypee Infratech Limited (JIL), which developed the spectacular 165-kilometre long Yamuna Expressway connecting Noida and Agra. JIL also promised spectacular houses along the Expressway - "planned, integrated, modern residential" cities and those that include "landscaped parks, gardens, multiple clubhouses with swimming pools, fitness, recreational, institutional facilities, amenities and commercial developments".
People rushed to book. Parent JAL was a reasonably known name in the echelons of corporate India with businesses in engineering & construction, power, cement, hospitality, IT, sports, education, besides roadways and real estate. In the minds of homebuyers, it was "too big to fail".
JIL's website, which hasn't been updated in years, boasts of its success in selling: "Our company's projects at the Jaypee Greens development at Noida include Jaypee Greens Klassic and Jaypee Greens Kosmos and Jaypee Greens Kensington Park, which are located in 'Jaypee Greens Wish Town', while our Jaypee Greens Aman development is located nearby. Collectively, these developments were approximately 88 per cent sold on a square foot basis as of March 31, 2010, and we expect to commence handover of completed units by 2011."
JIL borrowed from banks and other institutions, mopped up advances from homebuyers before starting construction. A majority of homes, however, still remains unfinished even after seven years. The company has run out of money and faces an uncertain future today. While lenders (financial creditors claim total Rs9,783 crore) are pressing for liquidation, a majority of homebuyers don't want the money they paid (advances from flat-buyers total about Rs12,000 crore) refunded - they would much rather have the projects taken over by a competent developer and completed.
JAL, meanwhile, has put in a bid to finish the projects JIL couldn't - one that, many homebuyers say, is frivolous considering that JAL itself is distressed. The Reserve Bank of India (RBI) wants to pursue insolvency proceedings against the parent company. While the Supreme Court would now decide the direction JIL's projects would take, nine homebuyer associations from Jaypee Wish Town are upping the ante.
They called a media conference.
"Homebuyers have completely lost faith in Jaypee. We feel it is a no ability, no intent bid. Why are they still interested? Because there is a large piece of land left. If Jaypee is retained as the developer, they cannot sell a single unit in the market. They have no credibility," says Aaditya Gutgutia, Associate Director at Edelweiss, and a homebuyer.
Gutgutia booked an apartment in Jaypee Greens Kensington Boulevard in August 2010 and estimates it would take another two years of construction work before it could be handed over. The nine associations have 5,000 members and everyone has a distress story to tell.
The script is similar elsewhere. In the National Capital Region (NCR) itself, other defaulting developers include Amrapali and Unitech. Indeed, there is a fair bit of such sprinkling across India. Around 2010, exuberant developers promised deliveries in three years but failed in execution. Excess supply, a bet on the wrong sort of projects and customer segmentation, cost escalation on raw material all played its part - so did mismanagement and diversion of homebuyer's capital by some unscrupulous developers. According to data and analytics company PropEquity Research, about 3,97,461 residential units are stuck today between NCR, Mumbai, Bangalore, Hyderabad, Chennai, Pune, and Kolkata.
The result is what Gutgutia emphasises. The residential real estate market is characterised by a lack of trust and confidence in developers. Sales nose-dived. About 340,000 units were absorbed on an average between 2010 and 2013, PropEquity's research states. That number plummeted to 194,000 units in 2017. About 450,000 units were launched on an average between 2010 and 2013. The number shrunk to 138,000 units in 2017. For the first time in many years, residential prices fell in the second half of 2017 by a weighted average of 3 per cent across cities versus the year-ago period, property consultant Knight Frank noted. A similar decline was reported in the first half of 2018 compared to the same period in 2017.
A Turnaround?
Nevertheless, there are subtle signs of a turnaround.
Regulatory changes such as the enforcement of the Real Estate (Regulation and Development) Act (RERA), which seeks to protect homebuyers by mandating that developers deliver projects on time and with quality, may have given them new hope. The numbers reported over the last two quarters point to green shoots, even though from a very low base. New housing launches are starting to happen, which reflect a return of developer confidence.
PropEquity reported a rise of two per cent in new launches to 35,211 units in the quarter ending June 2018 over the previous. Units absorbed rose 15 per cent in the same period, to 49,945 units across nine major cities. Meanwhile, unsold units shrunk two per cent and stands at 616,461 units now.
Knight Frank, which reports real estate trends every six months, came up with more encouraging numbers. New launches across nine major cities shot up 46 per cent in the first half of 2018, over the year-ago period to 91,739 units, it reported. Sales rose 3 per cent, while unsold inventory dipped 17 per cent to 497,289 units.
A CREDAI-JLL report pegged the residential sales growth in top seven cities at 25 per cent to 64,080 units in the first half of 2018.
ANAROCK Property Consultants reported that after almost 20 months of subdued action because of demonetisation, the resale or the secondary market where cash transactions formed a chunky component is springing back. It noticed a 10-12 per cent increase in the number of buyers since demonetisation.
Will the green shoots lead to healthier trees over the next year or two? It is anybody's guess but the broad sense is that developers, lenders, and homebuyers have all learnt their lesson - a hard lesson, and one that dials back to well before the Lehman Crisis of 2008/09.
The Great Fall
Big Money chases dreams. In retrospect, much of it appears fanciful.
Around 2000, China was just twice of India's size. While China's GDP per capita was at $959, India was chugging at $463. India, the world assumed, is the next economic superpower.
"A lot of entrepreneurship works on hope and enthusiasm. Everyone was optimistic. We invested a lot after 2003/04, thinking India will be the next China, which it didn't pan out to be. China today is five times our size. Those predictions did not pan out," says Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani.
Today, India has a GDP per capita of $2,135 versus $10,088 of China.
Between 2005 and 2008, close to $25 billion of foreign capital was invested in Indian real estate, the largest influx the real estate business had thus far seen, Sameer Nayar, Founder of property technology company BuildSupply, says. Nayar was Managing Director at Credit Suisse in New York, the head of its Asia-Pacific real estate finance business between 2007 and 2012.
"That capital boosted a pent up demand for buying land. It wasn't that there was an underlying market which was supporting these decisions. The sales were okay but the scale we were talking about had changed dramatically," he says. "If a developer was selling half a million sq.ft., he thought he could sell five million sq.ft. without thinking about how he is going to build the infrastructure, and the organisation to do that."
While the Lehman crisis induced a slowdown for a brief while, the party started again after the 2009 general elections. Developers expanded into multiple cities and regions, even in states they were unfamiliar with. Builders in North India started feeling the pain.
"Land is a state subject. Unless you are strong in that particular market, it is going to be an expensive proposition. You need to liaison with the government, the approval authorities, to secure approvals," Santhosh Kumar, Vice Chairman, ANAROCK Property Consultants, says.
Developers got stuck. In some cases, they couldn't even manage the title of the land. At the same time, their choice of inventory proved a nightmare. The focus of expansion saw land prices shoot up; developers had little choice except for building very expensive homes. About 90 per cent of the demand was for sub-Rs1 crore homes. However, everyone planned apartments at Rs2-3 crore and villas for Rs5-6 crore. There were never any real buyers for this inventory. An oversupply situation started emerging.
As sales, the easiest source of cash flow, slowed, the developer's liquidity choked, too.
"The focus was less on construction; it was more on cleaning up the land which was stuck. They were raising more funds. They had to pay salaries. There were no income from sales; only outflows," Santhosh Kumar tells. It was too late for many to realise. The smart ones re-focused over the past two years, channelising energies in completing construction.
Rise of the Buyer
The hard lessons are changing all stakeholders - the homebuyers, lenders, builders and the government, too.
Let's look at homebuyers first. The excess supply of residential units implies lower prices. That makes the present a good time to buy property. Knight Frank notes that during the past four years, the growth in residential prices in most of the top eight cities has been below retail inflation growth and the gap has progressively increased since the first half of 2016, with the exception of Hyderabad. Prices have dropped in Mumbai the most, by as much as nine per cent, in the first half of 2018 versus the same period a year ago. Huge price drops were also reported from Pune and Kolkata at 8 per cent each.
The point is the new buyer knows what's going on.
"In our projects, we have seen a reduction of 7 per cent in pricing and our profit margins have been hit. Other developers are making desperate sales. Some are giving discounts up to 20-25 per cent of the inventory cost, especially in Noida Extension," Aunirban Saha, Director at Noida-based Saha Groupe, says. "The buyer has understood that the developer is desperate to exit - his interest cost is rising. As a developer, I would like to have the financial closure right now because the market is so uncertain," he adds.
Residential real estate is no longer the playground of NPA-ridden banks; NBFCs have filled that gap but at a considerable price. Saha says that interest rates range from "acceptable to obscenely high". While two years back, a 15 per cent interest rate was considered very high, it could be the starting point today.
"The median interest rate for the builder is 17-18 per cent. If you are a big builder, you can muscle your way into a more reasonable rate. So, longer the project goes on and the fewer closures I have, even minimal profit margins go for a toss. This is why builders are exiting the market," Saha says.
Have prices bottomed out? There are those who believe that real estate prices are not going up for the next two years, or till such time the existing inventory is absorbed. There are also those who say that much of the distress has been flushed out of the system. Prices may not fall any further precisely because of what Saha mentions. With many builders vacating the market, the marketshare for those remaining in the industry would firm up.
As of now, the buyers remain king and they are choosing their biggest investment carefully. In most cases, it is no longer an "under construction" property but a completed apartment. One reason is his lack of trust. Second is the 12 per cent GST an under- construction property attracts; there is no GST on a finished apartment.
"The judiciary has become very active and they are putting people behind bars. Developers are running helter-skelter to complete past projects. That is leading to a good amount of ready inventory getting created in the market," Samir Jasuja, Founder of PropEquity, says.
He adds that today 90 per cent of the sale is of ready properties. The 10 per cent in the under-construction market is going to reputed builders, but even here only subvention schemes work.
How does subvention work? The developer partners with a bank; the bank approves the buyer's housing finance and keeps paying the developer. The EMI for the buyer wouldn't start before he occupies the flat or before the property is ready. The price of the interest is borne by the developer on behalf of the buyer.
"Since the developer funds it out of his own cost, you need a good balance sheet to be able to do this. The bank would put the money in an escrow, so it is kind of safe," Jasuja says. In many cases, buyers aren't willing to pay the 12 per cent GST and want the developer to absorb it. Many builders oblige.
Prasoon Chauhan, CEO, Affordable Housing, HomeKraft Infra - an ATS Group venture, says the group charges about 6 per cent GST to the customer bearing the rest - but it is not really a discount.
"We do everything ourselves. The construction is ours, the machinery is ours. We have a lot of GST input credit. We can pass on that benefit to the customer. People think it is a discount - it is not," he says.
Staying Afloat
HomeKraft launched its first project, Happy Trails in Greater Noida West, end of April this year. It sold 250 units on day one.
How did that happen?
"It is a combination of different factors," Chauhan explains. "RERA, GST, Demon is behind us. We are now aggressive in sales and marketing. People have also realised there are very few serious players in the industry. And we have a delivery track record. Closures are, therefore, increasing."
The CEO is correct on all counts. There is, however, another larger point. Developers are correcting the historic mistake of focussing majorly on premium apartments, the Rs1 crore and above ones. Happy Trails falls in a sweet spot, priced between Rs40 lakh and Rs70 lakh. The apartment sizes range between 1,165 sq.ft. to 1,625 sq.ft.
Bangalore-based Puravankara's most recent launch was in March. Provident Park Square, a 2,082 unit project, has sold out nearly half its inventory. The average price: Rs45-47 lakh.
Knight Frank notes the changing strategy landscape. In a recent report on Indian real estate, it says that there has been a more concerted effort by developers to decrease ticket sizes by designing smaller unit sizes: "This redirected focus of developers on increasingly launching and re-pricing projects at lower ticket-sizes that caters to the needs of the bulk of the homebuyers, has been paying dividends."
The consultancy reported that 51 per cent of total supply in the first half of 2018 were concentrated in the under Rs50 lakh ticket size, while under Rs75 lakh ticket size accounted for 74 per cent of the units. Mumbai, where residential real estate prices are highest in the country, saw a significant increase in affordable launches. In the first half of 2018, 78 per cent of all launches were under Rs1 crore versus 62 per cent in the first half of 2016.
Developers are also switching to asset-light business models. Buying land is out of fashion and joint ventures or joint development is the in-thing. Part of the reason is that most of the easy money has disappeared.
The majority of the capital in the global investing pool comes from two primary sources: the US pension funds and the global sovereign wealth funds. The US pension fund community has shut off on India, Sameer Nayar of BuildSupply notes. The reason is that the $25 billion of foreign capital, which poured in between 2005 and 2008, was a washout. A decade later, barely 30-35 per cent of the money may have gone back - most of it is stuck in deals that are unsolvable, whether it is because of a bad developer, bad land, legal issues, or simply bad investing, Nayar says.
Apart from demonstration of credibility, what needs changing for capital to return? A cycle where existing PEs make enough return.
Ask J.C. Sharma, Vice Chairman and Managing Director of Sobha Limited, and he has a list of asks from regulators and the government. More interventions could help the industry stay afloat now and thrive, going ahead. Financing tops his chart.
"The RBI should not consider land as speculative investment," he says. They shouldn't say banks can't fund money for buying land.
His second ask is on rationalisation of interest rates.
"Today, customers can get a loan at 8.5 per cent but a developer gets it at 15 per cent. The risk of the customer and the bank is on the developer. If he doesn't complete, what do you do with the 8.5 per cent? The risk weightage needs to change," he says.
His third point is about construction permits, which takes an inordinately long time in India. This is every developer's grouse. "By simply delaying the approval process, no one stands to gain. Once approved, if the construction process is monitored with the same vigour as approvals, the face of the industry will change. Otherwise, a lot of capital is tied up in the process."
While one awaits a clear market recovery, the ease of doing business - more specifically, the ease of getting permits - is a pipe dream, likely to take much longer to realise. When that happens, developers would be healthier. That would be good news for homebuyers, too.
@goutam20
