India Real Estate Market Outlook. Have Builders been too Sluggish to React? Hyderabad - March 2009

1.0 Coming to Terms with Hard Reality

Builders are like middle aged women. It takes a woman courageous effort, to come to terms with the harsh reality of aging. You can continue to live in a make believe world for months or even couple of years?but natural aging just can't be stopped.

Those who read the signals and adjust their lifestyle, carry on with minimal impact, on their lives. Those who refuse to read signals and adjust lifestyle, end up in medical care.

90% of women are smart enough to admirably adjust and are prepared well in advance. (Salutes to women on Women's Day!!). However, more than 90% of the builders react sluggishly to realities of the market which could affect, if not personal but definitely their financial health.


2.0 Reading Signals Early and Reacting Swiftly

In a booming market, builders were quick to react by resetting prices upward, every week. The possibility of making larger profits drove them to be extra alert! When market trend shows negativity, it is rightly expected that the same builders would be quick to act, to cut losses. After all, cutting losses is MORE IMPORTANT than making quicker profit. (In boom, whether one reacts quickly or not, there is profit, always. Its only the quantity of profit that varies. But in a sliding market, money gets burned. And that could be deadly)

And this is exactly where builders have gone, dreadfully wrong. Even now, many are in a "make believe world". Comforting themselves, with grandiose vision of early boom! Unfortunately, they are unaware that they are shooting themselves in the leg. And soon, the self inflicted injuries may aggravate.

Cutting losses by aggressive pricing in anticipation of worsening market, should have been the mantra 9 to 12 months ago. But the opportunity was lost due to the blind belief that boom is perpetual and negative trend, a flash in the pan. Builders offered small cuts from August 08 onwards which had absolutely no impact.

There were opportunities as late as September 08 to offer aggressive pricing and convert leads to Sales. But once the negative trend firmed into solid slide, NOTHING could work. Its only in December 08, after a whole year and a half of negativity, that few builders started to react with larger cuts. But the horses had bolted in September 08 itself. And builders who reacted late, know that the stable is empty.

For the smarter builders, the market has indeed given an opportunity to prepare itself for the future. Those who have learned the lesson that procrastination will cause misery, may be quick to act during a slide, after the next boom!

3.0 Truth Hurts

Developers are not expected to focus on the larger economy or keep track of business and employment trends, world wide. The primary business is to build and sell. And in the melee, they are either unaware or if aware, ignore emerging trends.

Their outlook is very narrow and is intensively latched to generating sales at rates, that are not clued to trends. Even when there is appreciable fall in month to month sales, they choose not to look at the root cause.

During last year, we had the opportunity to advise four developers on pricing as well as downsizing. The exercise reached nowhere with developers shooting down proposals which was based on emerging trends and established facts. These developers could have been winners and built projects, instead of losing crores, if they had acted diligently.

Since the market situation changes fast, suggested rate will have to be reworked and tinkered every month. What is saleable in May, could be too high in November of the same year.

4.0 Case Studies

Project 10Km from Gachibowli - Suggested pricing was Rs.2800/sft in May 2008. (Off course the rate is no more acceptable, today) Struggled with high rates and even now carries on, with the overheads mounting.

Project near Guchibowli - Suggested rate for Villas under Rs.150L, a hot rate at that time in January 2008. For large plot with large Villas. But was priced close to 200L. Also we advised to reduce plot sizes to have Rs.100L villas, which was not agreed. Developer remained adamant and the plots too remain adamantly unsold. Meanwhile, money continues to get burned, since land was purchased partly with Blade fund.

Project 2Km from Narsingi - Suggested pricing level was Rs.2200/sft in April 2008. Actual launch by developer Rs.3150/sft. Naturally Struggled to book at the price and has been forced to bring price down drasrically

Project near Guchibowli- July 2008. This is one project where the developers correctly decided not to launch, after discussions thus avoiding hardship and saving money

5.0 Ungainly Sales & Marketing Set Ups

In boom time, any Tom, Dick and Harry in marketing/sales could be a hero. What is surprising was the profligacy of some developers to appoint too many people. And in such scenario, inefficiency spread, like wild fire.

No more than one good guy is required to handle sales of 300 to 400 apartments whether its boom or bust time provided there is management and ground level support. Its absolutely wrong to expect sales to happen, by adding many more staff. If the sales comes down, its due to market situation not because there is insufficient staff! Nor is it because the efficiency of the Manager has come down. Its no use barking up the wrong cabin, while the rate cat is in the Chairman's Chamber.

6.0 Current Outlook

With the economy showing no signs of recovery and elections scheduled to be completed by Mid May, we can not expect any change in the trend which remains negative. As we had commented earlier, till there is appreciable upswing in economy, job security and new job creation, it would be foolish to expect Real Estate Sector to recover early. Global indicators currently point to couple of years of hardship, unless certain positive triggers happen, in between.

The buyers are absolutely uninterested in housing loan rate cuts and freebees. They are interested only in "reasobable" capital cost. The price of properties will eventually settle at position of cost plus reasonable profit. And this is that part of finely wrapped real estate anatomy, which most developers still feel shy to look at. Its time for them to gather courage, lift the veil and take a deep, hard, close look!

The lowest price reachable in each project will depend on the cost structure of the project and risk associated with it. Though 2 projects may be close by, we can not expect price X in both, due to structural, specification, land cost, land ownership, approval and funding differences.

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The Real Crash Hits Hyderabad.

In Exclusive Ventures' Report for Januuary 2009, we had mentioned:

"Mere reduction in sft rates by couple of hundred rupees is no more going to enthuse buyers. No amount of advertising and marketing blitzkrieg is going to help. The situation is currently beyond cure by such means."

Well....the cure is finally here! Its simple and straight forward! Crush the price by sledge hammer rather than mere chipping!

February 2009 is witness to the first REAL Price Crash of an existing, under construction Project in Hyderabad. This must be of great general interest to people whether they are looking to buy or not.

Hyderabad Builders have been holding on to high rates achieved in boom time and have been giving small discounts, lately. Obviously, buyers were absolutely uninterested.

The Home loan rate cut to even 8% had not generated any appreciable interest. The buyers obviously were looking for sizable capital cost reduction rather than cosmetic cuts in apartment rates.

Now for the first time, an existing project (APH 220 - right beside Lanco Hills -Betwen Gachibowli & Narsingi), is seeing a solid Rs.700/sft cut at one stroke to Rs.2250/sft from Rs. 2950/sft for Apartment in Risk Free Gated Community with HMDA Approval and Bank Loan, couple of Kms from Guchibowli.

Lets look back and put ourselves in first or second quarter of 2008 to appreciate the magnitude of cut. If someone had suggested such rate to Builders, they would have been ridiculed and shown the door. Builders were quoting Rs.2800 to even 3500/sft in these localities for 4 to 5 floor stand-alone buildings with like Lahari, White Lotus, Western and numerous panchayat approved small buildings etc. Buyers negotiated hard and settled with Rs.50 or 100/sft discount.

Many of our members had booked at Rs.2950/sft at APH220 in Aug-Sept 08 at pre -launch. Booking was taken for 2 Blocks only and they are in active construction since November 08. The revised rates will be applicable to our members who booked earlier. The BIG CUT in Rate translates to more than 12 Lakhs savings, on booking done for 1775 sft flats.


What does this crash mean for the market?

With pricing of Rs.2250/sft beside Guchibowli in Gated Township with 65% open area, the rates of stand-alone apartments in Manikonda, Raidurg, Puppalaguda should be below Rs.1900/sft. In fact, these were booked at whopping Rs.2800 to even 3500/sft as mentioned, earlier.

Also the rate of Rs.2200/sft and above for standalone apartments in Kukatpalli, Nizampet Road, Pragathi Nagar, Miyapur, Chand Nagar etc becomes unsustainable. (Though there were on and off report of lower rate, aa a class, there has not been any major cut in these localities)

With the builders who crash their price first, likely to take new bookings, those who resist will find it tough later, to survive.

This should also cause apartment rates in Kondapur, Lingampalli, Nallagadla, Tellapur etc to come down. For example, stand alone units in Kondapur has been holding on to above Rs.3000/sft levels for long. We should see Rs.2600 to 2800/sft, there.

Bottleneck in Price Crashing & Re-negotiation

With such fall actually hitting market, its time for existing buyers to get down and actually renegotiate.

In projects under early construction stage, there WILL be renegotiation pressure. Builders may crimp and squirm at this. But we are in a supposedly free market economy. When prices boomed, buyers did pay more. When prices crash, there has to be renegotiation. Builders who are able to understand the mechanics of the market will survive.

Many projects WILL find it tough to reduce rates since land is under development agreement with certain percentage of apartments committed to land owners. In such cases, developer WILL HAVE TO re-negotiate terms with land owners first, before they can offer large cut in rate.

Land owners have to be forced to take less apartments, than originally agreed, so that overall rate can be brought down. They will also have to suffer not just builders.

Home buyers who have booked in large townships will get benefited only if the developer is resourceful enough to hoodwink land owners. And they will do this, only if pressure from buyers is too much to bear.

Existing home owners have to show patience and hold on for couple of years. No point in panic selling.

About APH 220

The Project (APH220) is a very solid Property with HMDA Approval, Bank Loan and Construction in progress. Mr. Ram Kotaiah, MD of the Company is highly respected in the market and is Retd Chief Engineer from HUDA. He has rightly decided to move ahead rather than get tied up like others. He said that they did make money in old projects and now its time to give back. The Project will be almost on cost to cost basis with just enough margin to manage and build.

The intention of the developer is to get going with one more Block construction, in addition to the 2 blocks as planned earlier. We need to appreciate the BOLD & DECISIVE STEP TAKEN in tandem with market conditions.

The Project has very good Spec and all Modern Amenities including Club, Pool, Gardens, tennis Courts etc. Project is accessible from Oakridge / DPS School Nanakramguda (2.5KM) . It will also be connected to Guchibowli directly once the ring road from Manikonda touches Expressway (1.5KM).

The apartment sizes range from 1000 sft to 1775 sft, enabling wide seletion and making ownership of a a gated community up-market home, a possibility with budget as low as 25 Lakhs. Check Out APH220. This could be the right one.

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