Four months ago, I wrote a column forecasting that 2022 was going to be an exciting year for Mumbai real estate. There was going to be a rush of supply, intense competition among developers, and aggressive prices. It's premature to make a verdict but so far it seems to be broadly playing out.
The supply rush is a consequence of temporary government initiatives that lowered project costs for developers meaningfully. As it was temporary, everyone scrambled to get approvals for their projects. Lack of project feasibility amidst weak builder reputation had previously ensured that limited new inventory was hitting the market. Redevelopment – where a small building is replaced with a bigger building, found a lot of chatter but minimal execution. All the pent-up interest over the last five years got an outlet in 2021 as stakeholders recognised the new reality.
The government initiative ensured that the municipal corporation saw its 2021 revenues from builders rise 3-4x in comparison to the revenues of the last five years. For developers, it ensured permission from the municipal corporation to construct more than a whopping 150 million square feet. Perspective: In the robust year of 2021, sales in Mumbai were 40 million square feet.
There are reports which indicate that 2021 approvals in terms of square feet are 1.6x (90 million) of 2019. Frankly, it’s hard to comprehend that number. If revenues in a year where discounts are offered are up 3-4x, it is impossible that square feet approved is up only 1.6x. A back-of-the-envelope calculation suggests Mumbai real estate in 2021 in all likelihood saw inventory approvals of a stunning 6x in a normal year – a supply surge that has rarely been seen before.
The fascinating aspect of this supply surge is that it is poised to come up in prime locations where muted construction activity had kept prices relatively lesser unaffected in the price fall that has occurred over the last two years. A recent report by Sourabh Taparia of UBS, a stock brokerage, points out that in a wealthy suburb of Bandra – home to superstars Shah Rukh and Salman Khan, inventory coming up will be 6.6x of the sales in 2021. The story in other locations is not very different. Keep in mind that the competition for developers isn’t only from other developers but from the secondary market as well which traditionally accounts for 2/3rd of all demand.
There will be consequences. At a micro-market-specific level, it is almost certain that there will be aggressive pricing by the lower-rung developers with an inadequate track record in delivery. It is likely that most of the good deals will not be advertised publicly. Deals will be done behind closed doors where the gap between the quoted price and the transacted price will be wide.
For the top-rung developers that have demonstrated a good track record and have brand equity, the journey may be very different due to the growing tendency among home buyers to opt for safe names. Vivek Bathija, a broker focused in Bandra, says “While the key builders will be able to largely hold on to their prices, it is certain that a price battle will have to be fought by 80% of the developers.” Even within the top-rung developers, there are challenges. Select names have undertaken too many projects and may not have the wherewithal to manage all of them simultaneously.
What does it mean for Mumbai real estate? At a pan-Mumbai level, the new upcoming inventory is 3.8x of sales in 2021. Existing inventory meanwhile is already 111 million square feet. Now, all real estate is local to an extent but the performance of aspirational / benchmark markets tends to have an impact on adjacent micro-markets that thereafter have the potential to cascade down further. Then questions like - Why should I pay Rs 30,000-35,000 per square feet in a particular location if at a slightly higher price one can purchase in the vibrant Bandra?
In such a scenario I suspect we will see a realignment of prices across the city for a majority of projects over a period of time. Good projects backed by a credible developer in distant suburbs may be better positioned than weak builders in prime locations. Credible builders from other cities, like Prestige Estates, who are making an entry into Mumbai will need to invest more effectively in branding and marketing. They need to be prepared for the long journey by showing greater value in their initial projects.
During 2015-2020, there was a demand problem in Mumbai real estate while in 2022-2024 there may be a supply problem. For home buyers though - the stars are all coming together. They just need to choose wisely.
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