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Dear real estate players, act on Piyush Goyal's advice

Developers should cut prices, advertise and attract demand. The grand posturing of holding rates is only hurting them.

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It is not easy to send India’s real estate industry into shock. The tasks involved in the construction business make most developers thick-skinned and almost insensitive to any feedback. From any quarter.

That changed on June 3. At a webinar hosted by NAREDCO, a real estate association, Railway Minister Piyush Goyal unleashed easily the most audacious take-down of the industry. He bluntly told the developers to cut prices and sell. He dismissed any hope of a bailout for the industry and said, “If any of you feels that the government will be able to finance in such a way that you can hold longer and wait for the market to improve, the market isn’t improving in a hurry. Things are seriously stressed. And your best bet is to sell.” It threw a shocked industry into disarray.

His tough talk almost made the prime minister’s powerful speech on February 13, 2019, to CREDAI appear soft in comparison.

In a recent column, I had written that the industry hoping for a government bailout was merely indulging in wishful thinking. The Modi administration has not hidden its dislike for the industry. The reasons are not unjustified. For the longest period, the sector was a wild beast that exploited customers almost at will. The stature of the customer didn’t matter.

Incidentally one of the betrayed customers is Goyal himself. As he mentioned in passing at the webinar “I’ll never buy in an under-construction building. I have suffered so badly.” He is merely echoing the thought of many prospective home buyers. That is the reason why ready apartments conventionally sell at a premium.

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Let’s now come to the part about Goyal exhorting the builders to cut rates and sell.

First – A big misconception that exists in the public view is that developers make supernormal profits today. In reality, most of them actually don’t. Government levies, taxes, FSI, etc often account for 30-42 percent of a total project cost for a developer in a location like Mumbai. The biggest gainer from real estate projects is the government and municipal authorities. The state government and municipal bodies have the ability to give a helping hand and it is a tragedy that they have plundered the sector to near death.

Second – Does that mean the developers cannot cut rates? No, it doesn’t. The inflated cost structure was known to all the developers prior to commencing a project. Inadequate planning and market scoping cannot be an excuse for the failure of a project. The model of doing projects through a ‘Cost +’ structure have to end in locations like Mumbai where affordability is clearly a challenge.

Third – A shakeout is healthy for the industry. Weaker and inefficient hands have to exit. It is a shame that for a sector of such importance the barrier to entry was almost negligible until a few years back. Only when a limited number of strong players survive, will this industry show maturity in its product.

Fourth – Real estate is almost a commodity today. Put 10 buildings in front of buyers, most won’t know which is by which developer – with the exception of say, Hiranandani and Oberoi. With no serious effort in architecture and design means that often the only battle is to be fought on pricing.

Fifth – Developers are citing a section of the Income Tax Act as a reason to not cut rates. The section makes it expensive and complicated for the buyer and developer if a transaction happens at a price below the ready reckoner price. That is a weak argument that will not stand the test of any meaningful scrutiny. In most locations of Mumbai, market rates are well above the ready reckoner rates. There is ample space to cut rates. Even if it is done at a level lower than ready reckoner - it isn’t always complex.

Vinod Shah, advocate and redevelopment consultant says, “the said section clearly allows for 5 percent difference in the transaction value and the ready reckoner rates, and allowance will further increase to 10 percent w.e.f April 2021 as per the new finance bill.”

Will slashing prices by all developers work? No. In cases of developers without a track record who are working on under-construction projects, it’s unlikely that even sharp price cuts will now work. For the rest, holding on to existing prices is only going to lead to a slow death.

Developers should cut prices, advertise and attract demand. The grand posturing of holding rates is only hurting them.

When not busy with his newstoon platform Snapnews, Vishal Bhargava is a real estate enthusiast who views and reviews new projects. The 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: Jun 4, 2020 05:45 pm

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