DELHI: A Delhi-based real estate developer’s son was to join his business this August. But owing to the sluggish demand and slowdown in the sector, the family patriarch decided to send him abroad for higher education.
“The real estate sector is at its lowest ebb. Funding is a serious issue. But between funding my future expansions and my son’s education, I would choose the latter,” the developer told Business Line during an investor meet organised to woo buyers.
At a low
After witnessing hectic growth during the last decade, the demand for housing and office space has hit a low. Office markets in India registered a downward trend in absorption in the first half of the year (January-June 2013).
The net absorption across top eight cities during the period was at 10.9 million sq. ft., 15 per cent less than in the same period last year, according to a report by Cushman and Wakefield.
Similarly, a Knight and Frank report says that in the National Capital Region’s residential market alone there was unsold inventory of 1.4 lakh units that is 27 per cent of the units under construction. Nearly 5.2 lakh homes are in various stages of construction in the NCR market.
Developers, who had launched projects anticipating a stupendous surge in growth, suddenly see few takers for those projects, resulting in inventory pile-up. Inventory data published in March 2013 by real estate consultant Liases Foras showed that Chennai had 36 months of unsold inventory, while Mumbai had 39. The situation in Mumbai was after nine months of price correction.
Slow sales have forced real estate companies to think differently. Godrej Properties, for example, has a “good and green” campaign running, where it uses mainly recycled paper for all office work. It is also focussing on cost minimisation through advance booking of executive travel rather than impulse booking of tickets.
Pirojsha Godrej, MD and CEO, Godrej Properties, says: “We launch in a city where we think we can sell, we will be constructing volumes which we think we can sell, we phase our launches in a manner that makes sense, so we are not constructing a much larger area than we have sold.”
Several other realty players are also making use of smart lighting and re-designing their office space. To cut down electricity bills, they have reduced the number of light fittings optimised the use of lighting in conjunction with office features.
Real estate companies are disposing of inventories at some extra discount to maintain the cash flow. In addition, no-frills housing is gaining traction. For instance, Anuj Goel, Executive Director, KDP Infrastructure, has started procuring raw materials such as steel and cement directly from manufacturers to keep costs low. The company is also outsourcing sales activities with specific targets, at extra discounts, to avoid expenses on a large sales team and staff travel expenses. Within the organisation, incentives are getting cut and are now restricted to fixed sums or a performance-based system. Annual increments in the realty sector are now in the 7-10 per cent range against 18-30 per cent earlier.
For FY13, listed real estate companies saw their wage bill increase by 20 per cent. This is lower than the 25 per cent increase seen in FY12 and 57 per cent seen in FY11.
Nishchae Suri, Partner, Head – People and Change Practice, KPMG in India, says, “Cost management is even more critical during a downturn or slowdown. Areas that get impacted immediately include travel for internal meetings, spend on learning and development activities, off-site or team outings, salary increases.”
Many companies have also made better usage of their real estate by introducing flexible work places, flexi time arrangements, and ‘hot desking’ to name a few
“All non-priority spending are under scrutiny,” observes Pawan Bansal, M3M Developers. He said greater emphasis on speeding up construction to improve collections has been a rule rather than exception.
A Cushman & Wakefield’s report on private equity (PE) in real estate investment, reveals investments in the sector were at $276 million in the first half of 2013, 46 per cent lower than the $514 million in the first half of 2012.
Real estate companies are hoping that the Government will announce policies aimed at easing funding.
Pradeep Jain, Chairman, Parsvnath Group, says, “Although there is a slide in sales and inventory is piling up across the sector, it is short-term in nature and will phase out gradually. Overall, it is a fiscal problem where action is required to chuck out the supply side bottleneck.”
Neeraj Gulati, Managing Director, Assotech Realty, said that the sector is looking forward to the introduction of the REIT fund, widening of external commercial borrowing for affordable housing and liberation of fiscal policy to enable adequate funding of the ongoing project.
Until that happens, real estate firms are teaming up with banks and brokers to organise high-profile meets to find buyers for property. While such carnivals were earlier restricted to high-end residential projects, now even commercial property and mixed-use projects are seeing such action. A clutch of real-estate developers is also exiting non-core areas.
DLF, for example, sold its stake in its insurance venture and also its wind energy projects. At least three-four key developers, such as Unitech, Parsvnath and Shriram Properties, are looking to denotify or even sell their SEZ ventures.
Weathering the storm
After the global slowdown in 2008, the Indian real estate market picked up and saw prices rising. Property developers such as Godrej Properties, Prestige Estates and Oberoi Realty had successful IPOs in late 2009 and 2010. However, this boom was short-lived and many regional markets witnessed a slowdown. Developers took on huge leverage to raise capital. For instance, DLF’s net debt soared to Rs 23,000 crore in 2012. High interest was a double whammy, as builders were weighed down by the ballooning debt service costs and buyers, who had to pay high EMI, shied away from purchases, reducing the cash flow.
Small and medium developers who were cash-strapped ended up paying high interest rates of over 20 per cent for bridge loans from real estate private equity funds. Large developers such as DLF sold non-core assets such as wind farms and large land banks to raise capital and repay debt. This led to a decrease in interest expense growth quarter on quarter in FY13, compared with FY12, when interest costs increased throughout the year. Interest costs for companies such as Unitech and Godrej Properties fell over 40 per cent over the year.
The sales reported lag the launches and bookings by a few quarters, due to the way revenue is accounted for by real-estate companies. Data for the April-June quarter from realty companies that have reported results show that almost all of them registered a fall in sales, compared with the previous quarter. Godrej Properties and Mahindra Lifespace also reported higher interest expenses. Profits also fell sharply by 10 per cent overall for the sector, due to lower sales and higher interest expense. With tightening liquidity and no immediate hope of lower interest rates, the next few quarters may continue to be a testing time for many developers. - Meera Siva