5 strategies for developers to deal with unsold apartments

Vinit Deo Posiview ConsultingTechnically, unsold apartment inventory refers to all unsold apartments - whether under construction or completed. This is a scenario, in which no Builder/Property Developer wants to be in, reasons being:>> Cash flows are disrupted since the builder would want to use the proceeds from the sale to service his loan.>> He could use this money to pay out his vendors i.e. Architects, Contractors etc.>> He can use it for making other investmentsContemporary market scenario:Many industry reports cite real estate as one of the fastest growing sectors of the Indian economy, which contributes about 5 per cent to India's gross domestic product (GDP).Demand for real estate is expected to grow at a compound annual growth rate (CAGR) of 2 per cent between 2013 and 2017 across top 8 Indian cities (ibef.org).Due to the increase in corporate expansion, demand for office space was up 58% for the period of January - March 2014 as compared to the same period the previous year. With rise in housing requirements, demand in residential real estate is not far behind demand in commercial real estate sector. In terms of Foreign Direct Investment (FDI), real estate is currently the fourth-largest sector in the country. FDI in the sector is estimated to grow to US$ 25 billion in 10 years.Despite, all the growth in the sector and increase in investments, the problem of unsold apartment inventory persists to a large extent. This could be attributed to the fact that there is a huge demand and supply gap in residential real estate sector. For instance, in Mumbai alone, the unsold inventory of residential apartments accounts for a staggering 2,13,742 units, which made the quarter-to-sell ratio (QTS) 12 till June 2014. The term Quarter-to-sell (QTS) is used to describe the number of quarters required to exhaust the existing unsold inventory. 12 QTS thus mean that to exhaust the existing unsold apartment inventory of Mumbai, it will take three years if the consumers continue to buy apartments at the same rate.Regarding unsold apartment inventory there is another big concern, the difference between the price of existing inventory held by the developers and new launches. NCR is reported to have the widest gap at 31%, followed by Hyderabad at 17% and Pune at 14%.What are the causes?When any business does not function efficiently, one of the most visible results of this inefficiency is lack of customers. In the services industry, this will be visible in reduced interest in the services offered, and little revenue-generating work on hand.In the case of product-oriented companies (such as real estate development firms), the evidence lies most visibly in piled-up inventory. Excess inventory is generated when a company is left holding more of its products than the market is willing to absorb. Major causes of this could be:->> Prices are too high so as to entice buyers.>> Infrastructure surrounding the project is not appropriately developed.>> There is economic slowdown and hence people exercise caution.Although it’s easier said than done, here are some of the steps that a developer can take to tackle this problem strategically:1. Don’t let inventory become a Cash Flow problemIt takes anywhere between 2-4 years for the inventory to reach the completion stage, subsequently causing the investment of the developer to pile up in inventory for that period of time. After a certain level, this begins to create a stress on the overall cash flow of the firm. Today several Financial Institutions can finance against completed inventory between 15-25% depending on the standing of the developer and the status of the project. There are also Private Equity Funds which offer solutions in the form of bulk buying of unsold apartments, sale and buy back etc.2. Consumer’s perspective / Buyer’s perspectiveMarketing and selling completed inventory poses its own set of issues and opportunities. The biggest advantage being better standing of the completed projects in the eyes of the buyers as compared to other under construction projects in the area. This can transform into both slightly better pricing as well as higher sales velocity. However on the flip side, since the buyers have to arrange for entire financing on their own plus the burden of home loan at one go, they don’t get the benefit of planning their cash flows over a period of 2-3 years like they do for an under-construction project. Buyers need to be told that they are getting three big benefits due to buying completed apartment: savings in service tax, tax deduction from first year, savings in rental assuming they are shifting from a rented place.The developer should try to reduce the financial burden of the buyer through schemes like giving furnished / semi furnished apartments, all inclusive package deal instead of a per square foot rate, group buying for corporate clients etc.3. Reinvent the Marketing PlanFor a real estate marketing plan to succeed in today’s highly competitive environment, there are myriad factors that come into play. More marketing activities need to be deployed than ever before and these new activities require specialized know-how and specifically trained and qualified manpower. Real estate is a product driven industry, in which the rules of the game have changed drastically over the past decade and will continue to change.Today, maximizing engagement with the target market is a huge task in itself. For a project launch to succeed, a developer’s clients need to have top-of-mind recall for the brand and the product. In the past, the resources available to a developer were limited to print advertisements, radio jingles, hoardings, word-of-mouth promotion and, of course, brokers. Today, clients need to be wooed across a much wider spectrum.4. Social Media PresenceNot to put too fine a point to it, a developer who does not have a well-defined social media strategy today is a dinosaur doomed to extinction. Neither long-standing reputation nor excellent track record will help if these elements are not reflected online across multiple channels.Today, approximately 243 million Indians spend a significant part of their lives online, with the advent of e-papers, news portals, social-media platforms, blogs, etc; hence, the manner in which information is disseminated has changed both in terms of direction and speed. Platforms like Facebook and Twitter may have started off as mere social networking media, but today the power they wield in the world of business is beyond dispute. Companies across all the domains are investing massively into making their presence felt on various social media platforms. It is literally a battle to stay relevant in a world that does not acknowledge the existence of anything anymore, if it cannot be found online.5. Staying ahead of Real Estate portalsThe proliferation of these portals certainly spell good news for end users, because it gives them a detailed oversight of what the market is offering than ever before. However, it is a different story for individual developers. The uniquely democratic business model on which property portals thrive hinges on showcasing as many projects and properties as possible. While developers can (and do) pay for higher ranking within this avalanche of options, the scope for focused branding and project-specific marketing on these projects is very limited.Today, forging a distinct and prominent online identity is very essential long-term function for developers; but more importantly, an effective online strategy plays a critical role in the success of a specific project launch. In contemporary market scenario, developers who lack a well-defined online marketing strategy invariably find their projects selling at a far slower rate than their competitors.The author of this article Mr. Vinit Deo is Chairman and Managing Director of Posiview Consulting.