A price cut will not guarantee survival but the odds of it will certainly rise.
My last column ‘The Mumbai real estate bumper sale has begun’ led to a barrage of enquiries seeking details as well as my individual view on the mentioned Omkar 1973 project. On principle, I don’t give a buy/sell on any particular project, but in my view at the range of prices being quoted in the resale market for a potentially marquee project it deserves to be at least explored.
Yet, it told me something deeper about the Mumbai premium real estate market – something that I must acknowledge I have underestimated. First, that there is enormous demand on the sidelines just waiting to get an honourable price. It is local demand as well as global. It’s a testimony to Mumbai’s appeal as a city that even though it has collapsed at multiple levels, there is curiosity among potential buyers.
The second inference is that such has been the discreet and indirect nature of price cuts by developers, that even their prospective customers aren’t aware of it.
Developers have to change that.
Why developers don’t go for price cuts
So why don’t developers just do that and clear their massive inventory through price cuts? There is no easy way to say this – but the industry is a prisoner of its past with regards to its consumer base. Unlike airlines, FMCG companies, automakers, etc. who are able to promote sales by announcing price cuts, in real estate it is almost considered a sin.
The logic goes like this: If I cut prices for new customers, what will my existing buyers think and do? That premise held true previously when the investor audience was a substantial portion of the entire clientele and sales were robust. In recent years the investor segment has dwindled sharply as prices have largely stagnated or fallen – luxury projects may have investors accounting for 20-25 percent of sales; in others, it would be around 10 percent.
Before I start my counter-argument to this premise, it is first necessary to acknowledge that this approach has failed. There are three points that I have for doing away with this practice in some form:
1) Up to 20 percent of all towers in MMR with delivery in 2020/21 have sold less than 40 percent of their inventory. Does one focus only on protecting the meagre sold inventory or try to acquire new sales?
2) The market price often gets reflected in the resale market as investors look to exit from their bets. So even if a developer price remains elevated, most end-users get a sense of the pricing in a project through the resale market.
3) In the absence of any splendid design or architecture, apartments are almost standardised and have become a commodity. Hence the differentiator often pertains with regards to the pricing.
I am aware that suggesting such moves will have implications on the funding structure that currently exists for most developers. But that is a structure which is anyway seeing change as the industry gets consolidated and regulations become more stringent.
I am not espousing the case for a dump sale across real estate either. For many, even a price cut will not work today.
My contention is for the developers who have the right product but are struggling only due to their pricing. The extent of the price correction will vary across developers or location but it will need much deeper research and strategy than has been shown so far.
Role of lenders in keeping prices elevated
Do keep in mind a majority of real estate developers borrow at interest rates of 15-20 percent. Hence, a delay in sales implies that the developer would have to command much higher pricing on the same project next year to retain his financial health. That is a bold position to take: If you are unable to sell at prices today, it is unlikely at a higher price one will see demand a year later.
There has been a certain point of view that lenders have played a role in keeping prices elevated across the board to protect their collateral valuation/cover. There is merit in that argument (I have reservations on that approach but that deserves a separate column in itself)
Yet there are enough proactive lenders who would rather take a haircut today than opt to go bald a few years down the line when limited cash flows bring a project towards irredeemable recovery.
Suvodeep Rakshit, senior economist at Kotak Securities, says “Lenders will be keen on sales continuing even if it is at lower price points, as long as the cash flow to them is steady. Price corrections leading to higher sales should be encouraged even if it means that the profitability of developers may take a hit.”
As I explained in an April 15, 2020, column the median profitability level for the industry has fallen to levels of around 15 percent. They must be willing to give a large part of this away as well and slash prices. Unless the aspect of affordability and value for money is not addressed in Mumbai real estate, there can be no revival in the sector.
A price cut will not guarantee survival but the odds of it will certainly rise. Developers should go public on aggressive pricing and grab the pent-up demand in Mumbai real estate. Some of them may be surprised at the extent of it.
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.