Sucheta Dalal :“Correct balance of supply demand and prices needed in realty”
Sucheta Dalal

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“Correct balance of supply, demand and prices needed in realty”  

March 10, 2010

Pallabika Ganguly (ML): How do you see the real-estate industry moving after the slowdown?

Vijay Wadhwa (VW): After the slowdown, the correction in prices in good locations helped to kick off sales. As the situation improved, developers slowly increased the prices of the properties by 10%-15% to cover their losses. But among the many, a few of them spiked up the prices over 25% due to which they failed to report good sales figures.

For example, for our new project, ‘The Address’, we launched it at Rs8,901 per square feet plus Rs50 per square feet floor rise in January 2010 and till date have sold almost six lakh square feet because the price was acceptable to consumers, location is good and planning is right. At present we are offering it at Rs9,090 per square feet plus Rs50 per square feet for each floor rise.

ML: What did you learn during the slowdown? How did the Indian realty market face it?

VW: We have realised that this is an industry and not a speculative market. In over 40 years in this business, I have seen the real-estate industry going through seven slowdown phases. There are three components, which are the main elements that lead to a downturn—supply, demand and prices. If any one of these elements goes awry, the spark goes off from the industry. As the slowdown entered India, we decreased our property prices, and properties in good locations reported sales due to reduced prices.

However, this time, it was the psychology which played a major role in the slowdown. As the money from international markets stopped flowing and with the slowdown especially in the US, Indian banks also tightened their funding as they thought that the bubble would burst. Everyone started to think alike with the banks and the American housing bubble burst.

I remember Deepak Chopra’s words—if all the butterflies flapped their wings at the same time, it can create a great massacre. That is what happened to the industry because it is like a butterfly and we all are connected to each other. In Mumbai, the projects at good locations have witnessed sales, in other cities where there is too much supply and purchasing power is less, it will take time to revive. 
ML: How did you survive in the recession?

VW: We handled the situation very carefully as we had to keep the ball rolling. We met our suppliers and contractors to work out a solution to the slowdown. We came down to negotiating where we had to pay only the labour charges and the remaining payments (margins) for their work later. At some sites we slowed down our work a bit but did not stop it. We got regular flow from our rental properties also.

The next thing we did was to asses our existing asset portfolio carefully. For example, we owned a club at Borivali (a Mumbai suburb). We thought of developing a residential project there. This was a sensible decision given that during the slowdown, the club did not yield the desired returns. In January 2009, we demolished the club; we launched ‘Aquaria Grande’. We relocated our office from a prime residential area in Bandra (a Mumbai suburb) and redeveloped the site into a residential project, ‘Vasukamal’. We corrected our prices of the property twice and even passed on some benefits by way of easier instalment terms to our buyers. We also came up with an 20:80 payment scheme to induce sales by which a buyer had to pay just 20% initially and the rest on possession. The interest factor on the purchaser’s home loan was taken care of, till possession. A combination of all these helped us to maintain the essential cash flow.

ML: Affordable housing was the trend during the slowdown and now the industry is again looking at constructing high-end flats. Why did the affordable home segment vanish?

VW: In Mumbai, developers started affordable housing because they had to survive on cash flow during the recession. However, affordable housing in this city cannot be sustained because the land itself is very expensive. Many developers jumped into it, to show that they are with the times and started selling properties in peripheral areas of Mumbai from Rs1,800 to Rs2,000 per square feet. If one is building a 22-storey building and if we consider the cost of construction, municipal taxes and architect’s fees—excluding the land cost—the cost of development won’t be less than Rs1,800 per square feet. They (the developers) thought that they will average the losses with sale of other projects. But as the industry started reviving, they increased the prices of the same properties between 15%-20%. I think with that much increase in prices, they can survive, complete and deliver the projects on time. Otherwise, completion and delivery of the project is an issue of concern.

ML: What is your company’s business model? Like most real-estate players, are you also looking at raising funds through capital markets?

VW: We follow the mantra of re-investing the profits gained from our existing business into new business. We also have support from institutions, banks and investor funding. Instead of going into joint ventures or an initial public offering, we like to share the profits with our investors truthfully.

Currently, we are not looking at raising any funds from the capital market. Our business is
well-geared and we are comfortable with the well-built commercial assets that remain on our balance sheet.

ML: Are developers stressing more on loading?
Increasing loading is an unhealthy practise in the real-estate industry. The greed to buy expensive lands is making developers to increase the loading in their projects. A reasonable loading of 30% and a little more in high-rises, which includes common passages, staircases and lifts, can be explainable. For example, in our various developments, we try to provide spacious lobbies not only at the ground floor but practically on every landing, adequate lift space, wider staircases for which we think that the loading is explainable. However, a practice like just adding a percentage in the name of loading is offensive. 

ML: What is the total area of your new development?
We are adding over 12 million square feet in new projects.

ML: You have four commercial projects under construction, how do you see this market moving?

VW: Among our four projects in Mumbai, ‘Platina’ is at a prime location at the Bandra–Kurla Complex and is almost leased out while Narain Chambers at Vile Parle is complete. We are leasing it at Rs250-Rs300 per square feet and Rs180-Rs200 per square feet, respectively. Though supply in the commercial segment is in excess, enquiries for projects at good locations have picked up. In Mumbai, people are mainly setting up their front offices at Lower Parel and Bandra -Kurla Complex and prefer to set up their back offices at Kurla, Vikhroli or Goregaon (all Mumbai suburbs).

ML: What is the story behind your project called the ‘Address’?

VW: The 18.18 acres of land where we are now constructing the ‘Address’, earlier belonged to Ravi Modi. We wanted to buy the land since the last seven years. In 2003, we initiated the negotiation for Rs120 crore but it (the deal) did not happen. A few years later, we heard that the owner has finalised the deal with a developer at Rs720 crore but due to the slowdown in 2008-09, the deal broke down. In September 2009, we again initiated the talks for the deal at Rs450 crore but the negotiations did not turn into a reality. We arrived at a final amount of Rs571 crore.


-- Sucheta Dalal