Wednesday, July 20, 2016

Real Estate; "Ye Kya Ho Raha Hai!"

I am pretty sure that this is great time to go out & buy a house. And if you do, then in 10 years you’r going to look back & say, ‘ You know I’m glad I listened to Donald Trump’”… Donald Trump

No need to introduce who Mr. Trump is, probably by next year who knows, he will be the first builder to reach at most powerful position in world i.e. USA President & yes this can happen only in USA.  As imagine a builder contesting for Prime Minister’s post in our country; no party can win with that builder tag, though money from real estate is welcome by all parties sure! Leave apart what Mr. Trumps opinion or views are about making USA a pure breed country (take my statement as pure mean USA citizen centric & not Nazi definition of pure), but no one can doubt his success or mastery in real estate; his sheer confidence in real estate is what above quote reflects! Coming to our State’s or say Pune’s real estate, I doubt how many builders can match Trump’s confidence in current status especially about the appreciation which is key word for real estate. As when I look around faces related to real estate most of them remind me character of Tinku Talsaniya from the 90’s famous TV series, “Ye Jo Hai Jindagi”; it’s used to be in always confused mind & with  popular dialogue, “Ye kya ho raha hai!” means “What’s this happening around!”

If you look around in Pune, with due respect to all my fellow developers who won’t like what I am going to say about the scene in real estate, yet keeping myself quite won’t change facts; so first let’s see what’s happening here? Last two years were probably worst in real estate as leave apart rates appreciating there is no much bookings happening; when I say no bookings means the way projects used to get full, most of them right on launching! It was because people use to think if they book at launching rate then in period of two or three years i.e. project completion time, their money would get double, which is the best rate of interest any finance scheme can offer & the genuine buyers also used to book with same fear that if they wait then they will have to shell out double amount. On the top of it the investment remains safe in form of a lock & key form flat or office or shop, again which is something far safer than just some share certificate or FD certificate piece of paper. But what has happened recently has surely not expected by anyone & that’s not about appreciating the price of a home but there is no sale! This is something nobody is able to understand as unsold stock has gone all time high, even with prices not rising as well at some places even decreasing flat prices also sales are not happening. Its alarming as in real estate entire calculations of finances was depending up on only thing i.e. price appreciation; right from land buying to TDR, everywhere people were ready to shell out some extra bucks by thinking that they are going to earn it back at the end.

It’s this tendency of heavy appreciation anticipation which used to reflect in every deal associated with real estate, may it be purchases of material like cement or steel or various Govt agencies earning revenues via hundreds of avenues in form of taxes or premiums, all have the same logic, ’Hey what’s big deal, are you not earning out of every sq ft, so lets us have our cut!” And builders also never minded it as that was fact. I have experienced flat prices rising three fold than the rate at launch, by the time project gets completed & what’s credit of the producer i.e. the builder or the product in this price rise, nothing is the truthful answer! Because it’s just lesser options available in the market, in combination with more demand than supply & somewhere yet affordable to the pockets of the end user in the market. So everyone was happy as whatever rate increase was there yet there was end user in the market who was ready to pay that final price & live in those houses. This was making all segments associated with real estate, right from financers to suppliers & in end the builder happy with the profit margins which no one was keeping even track & as it’s said, no reasoning is necessary when you are successful, so no one was interested in finding why it’s happening! Though it’s a fool’s logic in my opinion, as rather its success only which should be analyzed if you want to repeat it, but then the real estate has never had shortage of fools, only thing is under the mask of heavy appreciation in pricing, the true faces never got revealed! Nobody was neither interested in trying to know what is real market’s need nor trying to find out newer means of reaching out to the customers or new construction techniques as everything was being sold without doing any of this! The race to acquire land was on rampant amongst the developers & many even started quoting double for the land per sq ft in comparison to the present market rate, just by keeping in mind the flat rates three years down the line! Even private financers too were also happy to fund real estate developers as “do saalme double” i.e. “get assured double return on principal amount”, was the key word in private financers! The bankers also were happy as home finance became prime lending business for every bank; in general all happy happy scenes were around! It’s like Gold Rush in California & everyone wanted to become a builder, this happened not in just Pune but mostly with all the cities or Metros in State at least!

No one has foreseen what’s coming but slowly inquiries stopped, pre launch bookings dried up, terms like luxurious or spacious flat being considered as taboo by the flat buyers, clients flow got reduced to such extent that even a full page news paper advertise which costs nearly a million rupees wasn’t generating even fifty odd callers & then suddenly alarm bells started ringing in real estate. The after effects were in form of payment delays to contractors & suppliers, request letters of rescheduling of loan repayments from developers flooded at banks & in response banks curtailed new finances to real estate, private financers were worried about their investments as mostly it was insecure & was on trust. Worst hit were flat holders who have booked the flats as possession dates got prolonged for indefinite time & complaints of angry flat holders went till Hon Chief Minister & he has to issue a circular via police dept to deal with such complaints! Suddenly real estate was no dearer to anybody & everybody started asking “Ye kya ho raha hai!”

In all such scenario many people who are associated with real estate asks my opinion that when there will be good time again for real estate? I am no wizard or master of real estate, as there are far wiser & bigger names to comment yet being in the field for nearly 25 years now, though most of it is related to site, yet what I feel is this was going to happen some or other day. Agreed real estate still is money spinning business worldwide yet the margins was bound to hit the peak, especially in certain cities or pockets. Here after there will be constant demand for homes in Pune no doubt about it but the margins won’t be ever like they used to be. Like any other industry this industry too need to fix its margins or returns & learn to work within those margins. And for that one needs to understand changed rule of games; here after the developers will have to study the market more closely including buyers numbers as well what they actually want & more importantly deliver what they want. No need to rush for every land deal as its last piece of land available on earth, rather the Govt seems to have understood one thing; if they want to make home affordable to common man then they need to cut down the huge profit margins in real estate & for that control the ever increasing land rates. And how you do it; the answer lies in two folds, first increase land potential of existing lands under residential zone, increase FSI, flood more TDR like means. Second is convert more & more land in residential or buildable zone, this may have impact on environment or biodiversity but that’s different topic. With this action plan let’s understand one thing there will be more supply than demand means more options for the home buyers, which wasn’t the case earlier. No more people will be rushing to some individual project or a particular location but they will have options to choose from. Importance will be given to location always but premium for the location won’t be as per what builders claim but as per what the buyers feel right. At the same time more new buyers are migrants to the city so they are not worried even if they stay a bit outside of the city centers as budget also is going to play major role. This doesn’t mean they will adjust to any location far off from work place but they won’t surely pay extra high for just being near to so called city centers like Deccan or MG Road types.

Then comes luxuries of life, let’s accept the super rich were always there in the market with loads of money & they will get what they want but that niche will be too small & getting smaller. More & more people buying home will look after a deal giving value for money & here is where every extra rupee spend from the pocket of the developer is directly will be dent in margin! So right from the land rate to material purchases to finance costs in the form of interest to marketing techniques, the real estate developer will need to change the attitude towards the business. A through professionalism is a must now & on the top of it the developer need to transparent to his customers as well stay committed. More clients will prefer to wait as no more rates are increasing so they can afford to wait & then book once the construction is at least half way complete. This means increased finance costs again but at the same time once the building is visible then it will attract customers on its own is also true so finish up the work as early as possible. No need to start thousand flats at a time but you can plan ten phases of hundred flats; this can be one of strategies. Give a clear message to the land lords no more term dictation by them & certainly gone are the days of down payments. Be careful for what kind of JV’s you enter in land deals & with whom! Same is with private financers, it’s high time that the margins in itself will be here after 18% to 20% so a strict no, to the higher rates finance & look for cheaper finance. Try to find new avenues to reach out for customers & it may be finding marketing partners as well making existing customers your salesmen. Tapping different groups may it be community wise or profession or job wise can be a win win option for both i.e. developer as well clients.

Lastly, think of diversifying in other fields like start ups with the excess money if at all you are generating as creating one more source of income can be helpful. But in doing that again get the basic knowledge you are investing in as most of the real estate guys have miserably failed in every venture other than real estate is history. Remember, as the great Trump said real estate is going to be here forever but to enjoy the fruits you need to assure that you are also going to stay afloat; for that feet on ground & head on shoulder is the Mantra which old wise men have told & high time to follow it for the builders!


Sanjay Deshpande 

Sanjeevani Dev.

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