With the slump in real estate continuing, and not enough clarity on new development plans in key cities, builders across the country are going slow on new project launches. And this slowdown is expected to continue for at least two more quarters, experts say.
The number of new residential projects launched in January-March 2015 was the lowest in the past two years. Launches during the period declined by 50 per cent from 55,500 units a year ago to 24,700 units, as sales dipped significantly, resulting in a huge inventory, according to a Cushman & Wakefield report.
Besides slump in sales, what is hindering new projects is that some major cities are about to roll out new development plans, and since there isn’t enough clarity on those yet, developers are preferring to wait and watch. Especially the smaller builders who are already cash-strapped due to huge inventories.
The big builders, too, are waiting for this uncertainty to pass. Mumbai-based Mahindra Lifespace and Godrej Properties faced difficulty in planning its launches owing to the confusion created by the Mumbai draft development plan 2014 that was unveiled in February, the companies said. Godrej Properties, for instance, had planned a couple of launches in the fourth quarter that were deferred. The draft plan is now being revised after several factual errors were detected.
In Pune as well, the new development plan is yet to be implemented, while Noida projects have been impacted by National Green Tribunal norms. In Gurgaon and Delhi, there is no clarity on land pooling which is in turn impacting new launches.
As Rajeev Talwar, executive director of DLF, said, “Inventory continues to remain high in the northern market, and unless that comes down, developers will go slow on launches. Demand for residences has reduced all over the country.”
Housing sales across top six cities witnessed the sharpest decline in the past three years by 17 per cent in 2014, compared to a year ago, with a total inventory of 647,484 units as on December 2014. The Delhi-NCR market witnessed the highest fall in sales by 43 per cent last year, the lowest in a decade.
New launches of residential projects in 2014 dropped by 28 per cent across six cities with Mumbai experiencing the highest drop at 43 per cent. As of now, Mumbai has 204,070 unsold units, NCR has 192,568, Bengaluru has100,968, Pune has 67,557, Chennai has 47,138 and Hyderabad has 35,183.
Samantak Das, chief economist and director research, Knight Frank, said, “NCR, which has the highest inventory, will take at least 14 quarters for the inventory to get cleared, followed by Mumbai which would require at least 12 quarters. Other cities would take between six to nine quarters ”
The real estate sector has been under stress for the last two years as customers have been cautious owing to interest rates of housing loans remaining high. Uncertainty over an economic revival has also been a factor.
Sunil Mantri, chairman, Mantri Realty, said, “Developers are focusing on completing existing projects and clearing inventory. Unless demand revives, it doesn’t make sense to launch new projects. We expect that demand should revive in the next six to nine months.”
The cost of creating new projects has also been increasing steadily as input costs, including expenditure on securing statutory approvals from state governments, have been rising consistently.
“Whilst market sentiments are positive and inquiries have increased, conversion of interest to sale is low. Developers are increasingly concentrating to deliver their projects and ensure timely exit for themselves as well as their investors,” said Shveta Jain, executive director, transaction services (residential), Cushman & Wakefield. She said developers are taking time to restructure their financial liabilities by ensuring that expensive debts are replaced with cheaper debts and private equity capital is attracted wherever possible.
The primary concern for most developers is that they have either over-leveraged their current projects while they are unable to utilise their land bank or future development capabilities to raise more capital. Therefore, there is concentrated effort towards keeping debt exposure low by lowering the number of launches, except in high demand location where sale activities are high and fast paced.
Among new unit launches during the first quarter, only the high-end segment registered a growth of 26 per cent from a year ago. All other segments saw considerable decline, Jain added. Affordable housing segment units, in fact, reduced significantly by over 80 per cent. Developers are inclined towards the high-end segment where profit margins are typically higher as builders look to offset increasing land and development costs.
The realty industry has also raised concerns over shelving of the proposed Mumbai development plan (DP) 2034, saying this may further delay new launches, which will ultimately result in shortage of housing stock.
However, despite all the challenges in the sector, a clutch of Mumbai-based real estate companies reported good home sales in the three months that ended in March. Three developers - Mahindra Lifespace, Godrej Properties and Oberoi Realty - have performed reasonably well in the current scenario. Their sales were driven by a good profile of projects, credibility and brand value and execution and delivery record, experts said.
Godrej Properties reported a 6.4 per cent rise in net profit to Rs 51.44 crore in the March quarter compared to a year ago. Total income increased 62.66 per cent to Rs 698 crore in the same period. In a muted residential market, Godrej Properties said it has registered its highest ever annual sales in 2014-15 at 3.6 million sq ft, with a booking value of Rs 2,398 crore. It added five projects to its residential portfolio in cities such as Mumbai, Gurgaon, Kolkata and Bengaluru with 8 million sq ft of saleable area.
“It was a tough year for the real estate sector on the whole, and so we are extremely happy with our sales figures. We expect faster growth in the current financial year and hope the policy uncertainty ends,” managing director and chief executive Pirojsha Godrej said.
Mahindra Lifespace’s net profit increased 1 per cent to Rs.30.6 crore in January-March, compared to a year ago. Total income saw a jump of 36.87 per cent from a year ago to Rs 259 crore in the quarter.
While sales remained strong, net profit was weak owing to lower contribution from the two world city projects in Jaipur and Chennai and a one-time provision the company made during the quarter.
“While the overall sentiment turned positive after the elections in 2014, it didn’t really translate into action in terms of consumption metrics. We are satisfied that we managed to do well in those circumstances” Anita Arjun Das, managing director and chief executive, Mahindra Lifespace, said.
Oberoi Realty, known for its premium projects in Mumbai, posted a 33.76 per cent rise in net profit to Rs 103 crore in the March quarter compared to a year ago. Income from operations grew 56.32 per cent to Rs 344.7 crore.
Adhidev Chattopadhay, analyst, Elara Capital, said, “January-March sales at a pan-India level across cities were muted despite marginal price correction across certain pockets. The market in NCR remains under pressure and Mumbai continues to see sales volume only in select projects. However, Bengaluru and Pune remain resilient. Mumbai will continue to witness pressure on residential sales except some projects that have the advantage of a good location and developer brand. High prices in the city will continue to be a dampener.”