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What
goes up must come down, right? The answer is a little more complex
than seems apparent at first sight. Check out data on real estate
trends in the country, for example. The sector has been witness
to a major boom-powered by cheap housing finance, with banks stumbling
over one another to grab prospective buyers. Real estate prices,
naturally, have risen in synchrony with demand.
It's a momentary surge, you may have heard,
and with just some patience, you could wait for prices to return
to more affordable levels. Should you?
For an answer, check out the mood that top
realtors such as Sushil Ansal, Niranjan Hiranandani and Sumit Dabriwala
are in. And it's not a very jolly mood, despite the current boom.
How come? Simple. There is a twist in this fairy tale: a twin-headed
monster has surfaced and is snapping away at the heels of the troika
and others like them. Steel prices are rising; cement prices are
rising; and real estate business margins are under pressure.
Twin Rise
"In January 2004, I was buying steel at
Rs 21,050 per tonne; today I pay Rs 23,682 per tonne, an increase
of 12-15 per cent over one quarter," says Sumit Dabriwala,
Managing Director of the Kolkata-based Calcutta Metropolitan Group
(CMG). He was buying cement at Rs 2,760 per tonne in March last
year. Now he pays Rs 3,180 per tonne. On average, buildings consume
4-8 kg of steel and 12-25 kg of cement per square foot, depending
on their height (the taller a building, the more steel and cement
it needs per unit of area). Although the exact prices vary from
city to city, the trend is the same across India. Net result: input
prices have gone up Rs 75-150 per square foot nationwide, squeezing
margins and threatening the industry's profitability-unless customers
can be encouraged to pay more.
Sushil Ansal, Chairman of the New Delhi-based
Ansal Properties & Industries, complains about other input costs
as well. "Periodic revisions in the prices of diesel and gas
affect transportation costs and the manufacturing costs of those
items that consume gas such as ceramic tiles," he says, "This,
with the steel and cement price hikes, have increased construction
costs for normal specifications from Rs 500 per square foot to Rs
650 per square foot."
| The Buzz About Town |
| They came swarming
like bees to a pot of honey. It was perhaps the easy availability
of finance that sparked off the housing boom. But mid-way through
the script, something changed. Housing finance became a buyer's
market. Banks and housing finance companies now had to chase
clients with newer, more attractive products and easier procedures.
Somewhere in this mad scramble for marketshare, some players
forgot that essence of banking was prudence. There were instances-fortunately
only a few-of banks and housing finance companies extending
loans in excess of 100 per cent of the value of the asset being
financed.
The Reserve Bank of India (RBI) was quick to step in. Taking
care so as not to upset the booming market, the apex bank
reminded bankers of the need to stick to sound banking principles
while chasing the housing finance El Dorado. "The RBI
caution is not really aimed at banks like ours," says
Rajiv Sabarwal, coo of ICICI Bank. True. Most of the truant
banks were less known, newer entrants to the market. Typically,
prudent banks finance 75-85 per cent of the value of a property.
The sector is largely free from risk and has a low delinquency
rate of 0.25 per cent. Prepayment figures are low too-only
about 80-90 basis points. "Most of our customers are
salaried people. Such customers can seldom pre-pay loans,"
says Aalok Kulkarni, Senior Vice President (Retail Loans),
HSBC. "Given the tax benefits, people prefer not to pay
back loans in advance," adds Sabarwal. "There is
some partial pre-payment, though, usually when someone has
received a bonus," informs Kulkarni. "Or, when someone
gets a pay hike, he increases the amount of EMI he is paying,
thus reducing the tenure of his loan." The boom is expected
to continue, though opinion is divided on whether interest
rates have bottomed out just yet, or not.
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What worries builders most is the fact that
they have already sold much of the property they're still to build-and
these are largely fixed price agreements with explicit no-escalation
clauses. In other words, they have little choice but to grin and
bear it. "We're absorbing the impact," informs J.K. Chandra,
Director (Projects) of the New Delhi-based DLF Group. "But
if the trend continues," he adds, "we will have to increase
our selling price."
The writing on the wall is clear. If you can
land a good apartment in an earlier-built building, buy it. The
new ones going up are likely to be rather more expensive-even if
the current boom diminishes a bit.
Cost Escalation
Builders are not at all happy with the state
of affairs. According to Niranjan Hiranandani, President of the
Maharashtra Chamber of Housing Industry (mchi), and leading Mumbai
realtor, cost-push escalation is affecting more than just the housing
sector. "Today, when we are talking of 'India Shining', this
unjustifiable increase in input costs will only lead to heartburn
for the common man," he complains.
Kumar Gera, President of the Confederation
of Real Estate Developers Association of India (CREDAI), echoes
the sentiment, "This escalation in costs will make housing
unaffordable for the common man." Sanjeev J. Aeren, Vice Chairman
of the New Delhi-based Aerens Developers & Engineers, worries
about the profitability of the real estate business, but also voices
broader worries about 'development' overall. "More than 300
industries depend on this sector," he groans, "Consequently,
the increase in input prices will not only slow down growth in the
economy at large, but also affect the revenues of both the central
and the state governments."
From a market perspective, it's all rather
curious: if demand is strong even with rising prices, all's well,
isn't it? The bulk market is extremely price-sensitive, say builders,
and they fear that the housing-for-millions dream could fade. S.
Kumar, Managing Director of the Chennai-based Navin Builders, for
example, worries that price hikes cannot be passed on if the purchase
is not need-based.
Supply could get squeezed too, builders warn,
as projects with their cost calculations in disarray get shelved.
"There is always a time-lag before the impact of a price rise
is felt," says Kamal Sagar, CEO of the Bangalore-based Total
Environment. "Consequently, some projects at the planning stage
may be put on hold," adds N. Sachitanand Reddy, Chairman of
the Andhra Pradesh Centre of the Builders Association of India.
Much Ado?
Some, of course, dismiss all the bellyaching-preferring
to let broad market factors work their way to equilibrium. Steel
analyst Taher Badshah of Kotak Securities, for example, doesn't
think that the steel price rise will have a major impact on the
housing sector. "The price per square foot is determined by
the demand and supply of houses," he says. Adds cement analyst
Manish Saxena of Icici Securities, "The average price of cement
in real terms (adjusted for inflation) has been on the decline over
the last five years."
| The input prices have gone up but there's no sign yet of the
demand slackening |
Also, not every builder is equally gloomy. "Demand
is inelastic within a given price band," says Dabriwala. Someone
who takes a Rs 10 lakh loan can just as easily take a Rs 12 lakh
loan. "Given the easy availability of finance and the steady
demand, the industry is likely to continue in its present expansionary
phase," says Rajni Ajmera of the Mumbai-based Ajmera Group.
Navratan Lunawath, Managing Director of the Chennai-based Arihant
Foundations and Housing, agrees with this line of thinking. "We
have started seeing demand for residential premises after a long
slump," he observes, "It will take a long time for this
demand to peter out, even if the cost of construction goes up."
What everyone agrees on, though, is that the
small-time builder cannot sustain himself for long. "Some smaller
developers will undoubtedly be tempted to cut corners in this scenario,"
suspects Raj Kumar Khaitan of the Kolkata-based Pioneer Properties.
"The squeeze on margins will definitely lead to a shakeout
in the industry, which is very fragmented now," adds Dabriwala,
"And with competition getting keener by the day, only big developers
with good brand equity will survive. And this corporatisation can
only mean good new for buyers."
Jagdish Chandra Sharma of the Bangalore-based
Sobha Developers also feels that something positive might yet emerge
from this. "Every adversity is also an opportunity. Let's face
it, the price rise has forced us to streamline our cost structure
further. I think the current scenario provides quality-conscious,
long-term players an edge. Those who had entered the business merely
to cash in on the boom will not be able to sustain in the current
scenario. Only those who are in for the long haul will survive."
So where does that leave our debate? Yes, input
prices have risen, and will probably rise further. Yes, property
prices too will rise. But there is no sign that demand will slacken.
If anything, it should strengthen-and tilt the business towards
better organised players. Conclusion: don't dilly-dally. Buy that
house now.
-additional reporting by Shilpa
Nayak
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