In May 2020, I wrote a column that recommended real estate developers to be bold and go public with their discounts. The reason for that view was simple: as someone who tracks pricing of various projects in Mumbai, it was known to me that prices for many projects had fallen and discounts were being offered in abundance. The only problem was that customers who were looking to purchase real estate weren’t aware of these discounts.
The discounts by developers were so discreet that even their prospective customers didn’t know about it. Whether the quantum of discounts would have been enough is debatable but it is undeniable that in the interim the situation for developers worsened further.
Three months later, the Maharashtra government has provided an opportunity for the industry to do a rethink on their hide-and-seek strategy on pricing. The state government on August 26 finally did the most obvious and logical move to give a helping hand to the industry – they slashed the stamp duty rate from 5 percent to 2 percent until December 31. The rate will rise to 3 percent between January and March 31, 2021.
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Investors cheer move
Stocks of real-estate companies like Oberoi Realty, Godrej Properties, Sunteck Realty etc surged after the announcement. Only a naïve developer will think that the sentiment displayed by traders will be matched by prospective homebuyers. A cut of 3 percent will spur action only from a limited set of buyers who had already narrowed down on their choice to close a deal.
The rate cut will hardly suffice to move the needle and lead to any meaningful revival in a market like Mumbai Metropolitan Region where unsold inventory is almost 3,00,000 units. Real estate in markets like MMR and Pune has been badly hit and is far from recovery. Registration data shows that activity in these locations is now only around one-third of the transactions done in pre-COVID times.
Moreover, the short window provided by the government is not enough to attract demand from the passive fence sitters. A survey done by NoBroker last year showed that 61 percent of consumers take 3 months or more to finalise a property. Up to 44 percent consumers reported taking over five months to decide on the property. If developers follow the same old practices in a COVID-19 year, it will be unrealistic to expect that the time taken by consumers will be the same. Throw in the added element of approvals by lenders for a home loan becoming stringent and taking longer.
To break out of this cycle and move the needle, developers must use this stamp duty cut as a launch board and slash their own rates further. They must embark on the move suggested by Railway Minister Piyush Goyal. And do so publicly.
Every project is different and is at varying phase of struggle. Some are beyond redemption and some are heading there. A stress-testing study done by Liases Foras put 33 percent of projects in MMR at a high and very high execution risk. No amount of price cut can possibly salvage these projects.
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But on an average a 10-12 percent price cut by developers and a 3 percent stamp duty benefit has the potential to garner modest demand that can very well be the difference between survival or not. I appreciate the position taken by many economic commentators that job losses and income erosion has been so severe that even this may not be enough. There is merit in that argument. But it can only be assessed when tested by developers.
The yields of price cuts
And in my view sharp price cuts publicly by credible developers at reasonably advanced stages of construction have the potential to spur demand. A delay in doing this is only driving prospective customers towards the secondary market where price discovery has been efficient.
Lenders must take the lead in making this happen as well. Any inertia by developers in doing this must be dismissed. Reckless lending exacerbated this crisis and is poised to cause carnage unless bold action is taken.
They should treat this as an opportunity for course-correction and push developers to be aggressive in attracting demand. A de-rating of prices has already happened below the radar. It is time to bring it above the radar. And thereby benefit from it.
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I am aware that most developers in Mumbai now work on thin margins. They must sacrifice these margins today to live to fight another day. At some point in the future a far-sighted administration will slash FSI cost for developers and restore viability of projects in Mumbai.
For now, though, the only card left for developers is to go for price cuts and grab the demand. Give customers an offer they can’t refuse.(When not busy with his newstoon platform Snapnews, Vishal Bhargava is a real estate enthusiast who views and reviews new projects. Views expressed here are personal)