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Mumbai authorities will rue the demolition of the real estate industry

In Mumbai, it is the state government and the BMC that have made homeownership so prohibitively expensive.

April 15, 2020 / 12:18 IST
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On February 5, 2020, I wrote a column titled ‘Mumbai real estate is on its death bed. It’s time to bury it’. While I was certain about the forecast I must confess I didn’t expect the burial to happen so soon. COVID-19 has ensured even the real estate industry is forced to acknowledge that reality.

Even prior to the outbreak of the deadly virus the entire industry at a pan-India level was struggling. Data from Liases Foras, a non-broking real estate advisory company, showed that 7,112 developers from its database of 11,838 are in the category of ‘high-default probability.’ If a check is done today it will reveal that the vulnerable list has risen even further to at least two-thirds of all developers. Further 64 percent of the total supply in the market currently is under construction. In a scenario wherein projects had just commenced activity it may have been easy to fold and abandon them. However, the average construction status for projects is at a 66 percent completion rate. That means most projects are in the final stages of completion. Given that significant investment has already taken place it is likely that developers will have to cut prices, sell apartments and complete the project.

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The obvious question thereafter is – how much can prices really be slashed by? The median profitability level for most developers is around 15 percent. Even if developers are forced to slash their entire margin, that would translate into a price cut of 10-15 percent.

Will that spur demand? That’s an easy answer — no. In a phase where businesses and salaries are being de-rated by a higher amount, it will be naïve to expect that a 15 percent price cut by developers will stir demand. The onus then lies on the one institution that is responsible for milking the industry dry and actually making houses unaffordable or a significant burden on the population.