Gazing into the real-estate crystal ball through a book on bricks & mortar  

May 28, 2010

Suhas Mantri, proprietor, Mantri Constructions, speaks to Moneylife on his book of fiction, ‘The Comeback’, which is based on the working of the real-estate industry, and also looks at where the industry is heading. The book is a story on the bankruptcy and survival of a real-estate company

Moneylife (ML): The book is a work of fiction, but according to industry sources, it is a mirror of your life. What are your views on it?

Suhas Mantri (SM): The first part of the book is fiction, events that are taking place in many family-run businesses. The second part—that is, the turnaround story of the company—is a real story. Overall, if we look at the book, it represents stories of many corporate houses. I receive calls from founders of various corporate houses who feel that the book talks about their story. 
  
ML: The book has a fictitious entity, ‘Mehta Housing Ltd’, which took the route of an initial public offering (IPO) to grow rapidly in the real-estate industry. Do you observe the same thing happening now as most developers are rushing towards IPOs—failing?

SM: It is not about rushing towards an IPO. The real-estate industry is a cyclical industry which undergoes a slowdown after a certain period of time. It becomes difficult for a company to give the best performance when it is listed. The management worries on the financial numbers rather than concentrate on other factors like quality, delivery and initiating new constructions. 

I believe there is always an expectation from a listed company to report better revenues compared to a previous quarter and this creates problems for it in the future. 

ML: The book talks about the bankruptcy and survival of a fictitious real-estate company. What according to you are the key measures that a real-estate company should take to ensure its long term survival?
 SM: The main reason for failure of realty companies is the lack of working capital for under-construction projects. Most real-estate companies emphasise on creating a land bank rather than concentrating on the progress of construction. According to me, (the concept of a) land bank is a myth. Huge amount of money gets blocked in buying land. If a developer has sufficient funds for a particular period (for example five years) only then should he think of creating a land bank. Otherwise, a company should concentrate on keeping ample working capital aside.
  
ML: To get funding for projects is an issue for most developers. Many of them are offering 'guaranteed returns' on their properties because it is difficult to raise funds either through the markets or financial institutions. What can developers do in such a scenario?

SM: Such a scenario only arises if the company focuses on creating land banks and neglecting its core business—construction. If the company concentrates on construction and on delivering the project on time, then I don’t think there will be any issue with the funding for projects. Instead, if the company holds on to the land and waits for the land value to appreciate, then it would create problems for the company when it wants to raise funds.

ML: The book explains, the ‘7 step pyramid’ followed by Mehta Housing to come out of the crisis; will you suggest those steps for all real-estate firms?

SM: The ‘7 Steps’ suggested are not only for the real-estate industry, they are applicable to all individuals.  It applies to all businessmen, professionals and each and every individual including housewives.  Some simple steps mentioned in the pyramid are: Assess your spending; take financial protection, if required, to invest your savings in different places where you are confident of returns and bring down all your non-performing assets.

ML: The realty industry has a number of family-run businesses. What will be your advice to the promoters of such companies?

SM: In a family-run business, each individual should be handed over some responsibility so that he/she can be accountable whenever required. 

ML: How do you see the real-estate industry doing in the next two years in Mumbai and Pune?

SM: For the next couple of decades, the real-estate industry will move in the upward direction. However, the real-estate industry is a cyclical one and undergoes a slowdown every three to four years. But the long-term prospects are really dynamic. 

ML: Prices of properties are shooting up, do you think prices will increase in Mumbai and Pune or will they stabilise?

SM: The prices in the real-estate industry depend on two factors—the cost of land and the cost of raw material.  For example, a few components of real estate like direct/indirect taxes, development charges and sanction charges (among others) contribute a major percentage to the increase in prices of properties. The charges for these components increase approximately by 10% to 15% annually.  Hence, real-estate prices will definitely go up in the future. — Moneylife Digital Team