Photo by Satyajeet Mazumdar on Unsplash
In my May 12th, 2020 column “The Mumbai real estate bumper sale has begun” I had announced that home prices in the city had started to cracked sharply. Finally. Skeptics had then doubted the possibility that home prices would fall. It wasn’t hard to blame them. The ability of developers to withstand all previous shocks and constantly keep a positive narrative going had convinced many that real estate prices in Mumbai could never go south.
Then it was predominantly the resale market driving down prices with the primary market not falling as much. This created a reasonable price gap between resale prices and developers’ price in projects that still had unsold inventory.
As I have been visiting projects in recent months it is clear that the price gap between resale inventory and developer inventory has narrowed sharply. The only game in town today is pricing and it is no secret that most developers have slashed prices. And some have done it to levels which were frankly unthinkable even six months back.
Why did developers bend this time?
At a recent event I was asked a question that is now commonly posed “After withstanding many shocks over the years and still holding on to prices, why did developers bend this time and cut rates?” It’s a fascinating question and there are multiple answers to it but in my view, there are three core reasons.
The first is that COVID-19 brought such a hit in the resale market, especially among investors, that it would have been impossible for developers to clear their inventory had they stayed their typical course. Besides as some builders lowered their prices, others had to follow suit to remain competitive. The second reason is that access to capital and funding was anyway curtailed prior to COVID-19 due a variety of reasons including the NBFC lending crisis. In order to raise capital and execute projects as per RERA timelines once COVID19 struck – revenues from customers had become even more important.
While there is complete merit in the two reasons, in my view it is the third reason that forced developers to acknowledge that their time was up. And that reason is the clarity with which the Central Government made its intentions clear to the real estate industry. Prime Minister Modi has not hidden his view on the poor functioning and discipline of the players. Yet in my conversations then with several developers, in their eyes it seemed a one-time restructuring package that would bail them out – was on the cards. It seemed a strange hope to have if anyone was paying attention to the persistent messaging of the central government.
It eventually took a scathing message from the Railway Minister Piyush Goyal in June 2020 to remove all doubt that a bailout was even being considered. I suspect after recovering from that shock treatment, the industry then finally interpreted that it had to be on its own. It accepted that it had to go Aatmabirbhar. No longer could it ramble about income tax rules not allowing them to cut prices, FSI premiums being high or profitability being squeezed. It had to do things that every other industry does in a sluggish and weak market – go all out to attract demand.
We are on our own
Over the last three months with the benefits being thrown in from all stakeholders of the housing industry – it is clear that the fence sitters have rushed to the market to close deals. Given the registration numbers it is possible that even new demand may been created as the cost of home ownership in many projects has fallen by levels of 20%. I have no doubt that at the price developers are selling apartments today, there is negligible profitability being earned for most of them. Yet it gives them a chance at survival.
As important as survival is, it is a reminder that for the industry to become vibrant again it needs to spend lesser time lobbying for government bailouts, sops or rescue packages. And spend more time in planning projects keeping in mind foremost customer demand and affordability. Imaginary price points look appealing on Excel sheets but count for little in the marketplace. Undertaking projects that demand unreasonably high price points eventually feed only the coffer of government authorities and land owners.
It is true that state governments and municipal bodies have treated the real estate sector in Mumbai as a funding tap that can be used and abused at will. Yet in the biggest moment of crisis for the sector, there is minimal respite for current projects. The State Government can only provide incentives for prospective projects while the Central Government will not provide a bailout for retrospective decision-making errors. The real-estate sector will have to fight for its own survival. By not helping, the Modi Government has the potential to have done something that no other government has done for the real estate sector: Make it go Aatmanirbhar.