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Mumbai’s real estate industry should introspect its Pepsi experiment

Pepsi may have made millions by putting fewer chips in a Lay’s bag but developers’ ploy to shrink apartment sizes won’t help them for long, as homebuyers will want value for their money.

Last week a prospective homebuyer asked me to evaluate a “luxury” project that he was thinking of purchasing an apartment in. It was located in an up-market area of Mumbai and had a bouquet of amenities like a swimming pool, gym, space for indoor games, etc. “If you are looking for luxury then this project is not for you,” I told him.

I had a simple reason for my view—the apartment had a size of less than 650 square feet. Now I don’t care if a developer builds a helipad in the project, in that meagre a size, it is embarrassing to even claim that it is ‘luxury’ of an apartment.

In fairness, this is hardly an isolated case. Apartment sizes have been shrinking across segments over the years. Neither is this a phenomenon confined to India. Between 2008 and 2018, the average size of apartments in the US shrunk by 5 percent. The bizarre market of Hong Kong has slashed home sizes even further. Bangkok had to impose minimum size requirements.

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In the Mumbai Metropolitan Region (MMR), there has been a gradual lowering of apartment sizes. Data from Liases Foras shows that apartment sizes have shrunk by 22 percent since 2011.

While the average size of an apartment earlier was 919 square feet (carpet, always carpet), it is now 717 square feet. In some locations the cut has been sharper— apartment sizes in Navi Mumbai have shrunk by a third. On the other hand, a market like Thane has seen home sizes drop only marginally.

The biggest apartments are in South Mumbai where there is a flurry of luxury projects — it often means large apartments — though even there, the size of apartments has been slashed by more than 30 percent. The smallest apartments are in the Panvel market that is seeing rising developer activity on the back of planned infrastructure growth like the international airport, trans-harbour link, etc.

Small apartment, small price, small response

The strategy is simple: identify a sweet spot in terms of price that will work as a budget for a homebuyer. Factor in the costs involved as well as the desired profit level for the developer. Based on these, derive the eventual size of the apartment. Thereafter sell small homes labelled as affordable homes / compact homes / cozy homes / millennial homes, etc.

The formula is so amateurish that one project has apartments the size of two Toyota Innovas. Pepsi may have succeeded by giving 5 fewer chips in a Lay’s wafer packet and making millions but the housing industry seems to have taken it way too seriously.

The problem isn’t just home sizes. Layouts are far from optimal. It is remarkable to see the number of projects with small apartments where every square foot ought to be carefully planned but yet blunder by producing inefficient layouts.

Unsurprisingly, the result has been weak sales. RERA data at an MMR basis has its limitations but it is easy to infer that products that have squeezed 1BHK and 2BHKs mindlessly have been rejected by consumers. Developers lowered the ticket price but most of them lowered the value proposition for a homebuyer even further.

Credible builders, to an extent, have got away with it, so far, as consumers ride on the shoulders of developers who provide superior assurance of at least completing the project (pathetic benchmark but true). But it will not sustain, as residents realise a certain size combined with an efficient layout is necessary for livability.

No surprises about the desperation

The desperation on the part of developers is understandable. As margins get squeezed by increased municipal levies, apartment crunching is an easy and unsophisticated way to believe profitability can be retained. Now the levies by the government cannot be lowered for a durable period as the municipal body itself is headed towards bankruptcy from 2022. That is the year the compensation from the central government in lieu of octroi removal for goods and services tax (GST) introduction stops.

With this in mind, the only option is the one that most players have avoided confronting— boosting efficiency internally, from the pre-construction stage to completion. Developers who have changed their way of working and processes often say newer practices have resulted in cost savings of 10-15 percent. This has allowed them to be aggressive on pricing in a weak demand environment, thereby pushing up sales.

Nimish Gupta of advocacy group RICS says that “it is well established in developed markets that wastages in the construction process is as high as 15 percent. This could be due to issues on design coordination, material and labour wastages, poor change management, weak quality and closure issues. It is even more pronounced in India where professional management is missing at most levels and reliance is on ‘jugaad’ ”.

Jugaad may have worked well earlier but not anymore. The solution does not lie externally in a bank bailout. For many, it lies within. A few have made the upgrade already. For the vast majority though, developers should plan better and become cost-efficient. They may then be able to sell homes at realistic prices. Remember: make homes for a living, not just surviving.

(When not busy with his newstoon platform Snapnews, Vishal Bhargava is a real estate enthusiast who views and reviews new projects. Views are personal.)

Vishal Bhargava When not busy with his newstoon platform Snapnews, is a real estate enthusiast who views and reviews new projects. The views are personal.
first published: Sep 13, 2020 11:10 am