Bengaluru which has been the fastest growing city in India over the past many years and an IT hub has seen a steady growth for the real estate sector. There was also an increase in demand for high-end residential apartments. But is the demand scenario likely to continue going forward? JC Sharma, Vice Chairman & Managing Director of Sobha and Suresh Kris, CFO of Brigade Enterprise in an interview to CNBC-TV18’s Latha Venkatesh and Sonial Shenoy discussed the outlook for realty in the city.Sharma said there has been a dip in demand for the high-end housing but has been compensated by demand for lower-priced or small-sized products like two-bedroom apartments. So the prices haven’t really dipped, he added.However, IT sectors contribution to the city's real estate has now dipped from 40 percent to 30 percent, said Sharma.Kris also agreed that volumes for small-sized units have now gone down. The city absorbed around 14 million square feet (sq.ft) last year of commercial space and is expected to absorb around 17 million sq ft this year, he said.Talking about unsold inventory, Sharma said with the entry of outside players coming in with bigger projects, inventory could become an issue but does not see is impacting the prices as such. The Level of inventory could vary for each individual player, he said.Kris too does not see reduction in prices because of more supply; in fact he sees a 10-12 percent hike in prices. According to him demand too has gone up although the pie of that demand will be different for each individual developer. Property developers usually do not suffer losses because of supply issues, he added. Prices are unlikely to go down even tough construction costs have come down said Sharma because prices are mainly dependent on three components -- price of land, which never goes down, labour costs that has been on a rise and hike in approval costs. All these will keep prices high, he said.
Below is the transcript of Suresh Kris and JC Sharma\\'s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: What is the overall picture for real estate, in most of the other cities we are seeing prices fall, your quarterly numbers indicate at least a flat to sometimes an occasional incline, your big priced demand area has been the IT space, will it continue to give you demand? Is there enough robust growth in that sector to continue to give you your EMI payers? Sharma: The big picture is the volumes have been falling as far as we are concerned primarily on account of fall in volumes from other cities. Bangalore has been holding firm and has been showing growth as far as we are concerned and for most of the A grade developers are concerned.
This year what we have seen is that in first two quarters, January to June sort of a thing, even in Bangalore especially for the products which are priced above Rs 1.5 crore or so, there has been a dip in the demand, which has been made up with the smaller units of 1,000-1,200 sq ft, two bedroom apartments where people are now going. So prima facie, looking at the world economic scenario, instead of prices coming down, people are getting into the lower priced ticket sized products where demand continues.So overall square footage as well as volumes in Bangalore this year should be better and should keep growing. As far as the IT sector is concerned, earlier it used to give us 40 percent plus kind of volumes. Now it is hovering around 30 percent. So that is where there has been a dip in the demand from this particular segment.
Latha: Going by the kind of inflation we are seeing, even vague inflation has dipped considerably, I mean people are reporting only single digit compensation increases. So, will your prices fall? I mean how long will you be able to sell smaller units to your clientele? Will at some point, you will be forced to price down your larger units?Sharma: I do not think so because if you look at it, basically, there are three components for pricing the product. One is the land price where you do not find that prices can ever come down as it looks it.Latha: But, construction costs should come down.Sharma: Construction costs of late with the steel prices coming down have come down. We are getting steel at Rs 40,000 or below now.Latha: Labour and cement?Sharma: Labour has gone up and cement in South especially, it is much higher priced than what you see in the North or in the Western market. But, the labour cost continues to keep rising. The approval cost continues to keep rising and the timeframe it takes to get the approval also keeps going up. Also the developers in Bangalore do not enjoy the kind of margins like the Mumbai developers. So, I do not think from that angle there is a pressure for developers to reduce prices.Of course when you find that the demand is getting compressed, some players may resort to some kind of discount sales.
Latha: Coming to the financial part, would you endorse what Sharma is saying? Are you seeing also this consumer downgrading if you please, volume growth but in smaller size units?Kris: Volume growth can be justified based on the commercial demand normally. Last year we had about 14 million square feet absorption in Bengaluru which is the highest in the world.Even when you have about five multiplier effect, then the total demand for residential could be around 70 million square feet. This year people are predicting around 17 million sq.ft of commercial space, that means around 85 million sq. ft. of residential demand is there. So, obviously about 15-20 percent growth, that is for residential is also there whereas the reported figure is only from the organized players, maybe from top 10 players in Bengaluru.
Now we have the developers from other states also where you do not have demand like Bombay, Delhi or Hyderabad, Chennai-people are also coming to Bengaluru for their development. Obviously what will happen - the pie where we have entered about 50 percent or something may drop to 40 percent whereas the individual score on to that will obviously increasing.Latha: Yes, Godrej properties announced commercial realisation of one of their projects today?Kris: Exactly, so when you see the demand for Bengaluru, yes it is increasing but how much pie you want share depends upon the segment you are. When you are in the high segment growth, obviously there could be some kind of dip. When you are in the midmarket, then due to the increase in demand you cannot expect price increase per annum. Reasonably, it could be around 10-12 percent increase per annum. Sonia: You were talking about how demand may still be there in the Bangalore market but what about supply issues because for example a market like Mumbai, there is years worth of unsold inventory which is lying in the Bombay market and we are facing huge supply issues, what about Bangalore itself, what is the situation there?Kris: Earlier we had only the Bangalore players because you have additional players from other cities, obviously the supply side is increasing whereas demand is there. Basically demand is based on the commercial as well as the migration demand. So we have demand but that would be possibly because of participation by other developers from other states. Obviously there is an increase in supply of the stocks. Sonia: Would you concur with that view that a 10-12 percent price increase looks likely for the Bangalore market?Sharma: You have asked two questions, one about the likelihood of prices coming down or not or whether you have a problem about the unsold inventory.As far as the unsold inventory issue is concerned, the whole of southern market which probably today constitutes more than two-third of India's volumes in tier-I cities, you have less than one-third of the inventory. Now when we look at the inventory part also, we need to see that last quarter, I started a project with close to 7,000 units, so the launch was with 7,000 units and most of the guys will consider that as an inventory for Sobha but we are doing it in a phase wise where we would have started with only 2,000 units first and we have sold a significant portion of that. Remaining is not available and it would be the sold inventory.
So one has to look at that today developers are launching bigger projects, larger projects so there will be an issue of inventory but whether they carry the finished stock inventory or not. In our view when we are going to deliver this year 4 million sq ft plus a residential space, there may not be 100,000 sq ft of finished stock inventory, we will be carrying. So we don’t have to worry about that and this applies for most of the A grade developers.Coming to the prices, in Bangalore you still get products between 4,500 and 5,500 sq ft, almost 90 percent of the total inventory. At that price point, I don’t see that prices can come down, volumes may come down maybe due to the economic reasons but for developers to sustain at these prices itself is extremely difficult. It may not go up double-digit but it will not come down at least under all circumstances and likely to keep going up, maybe 1.5-2 percent on a quarterly basis.
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