For an industry that is going through a rough patch, there is a lot of optimism among the developers. Mr J.C. Sharma, Managing Director, Sobha Developers, describes the construction industry as ‘the industry of tomorrow.’
“Migration to the city cannot be stopped. India’s prosperity, availability of disposable income to the country’s middle-class cannot be stopped. Aspirations of the middle-class cannot be overlooked. The India story is still intact. There is a matured market for automobiles, electronic items, mobiles, etc. And there will be one for real-estate too,” says Mr Sharma in an interview.
Excerpts from the interview:
What is the current real-estate industry scenario?
The primary market is holding up. In the secondary market, some people who have booked apartments might have sold. Three variables are crucial for the industry to become vibrant again — interest rates have to come down; prices have to come down; and real income has to go up.
The year 2008 can be called a year of aberrations — high prices, inflation, etc. For developers to reduce the prices, our input costs have to come down. The market has its own dynamics. Once inflation and interest rates start moderating, developers will get the comfort to pass on the benefit of pricing to end-users. If there is softening of input prices and land prices, things could change.
What about the demand for apartments? Has it come down, and if yes, how much has it come down by?
Demand has come down. How much is not known, though. Rs 50 lakh is the price point for which demand is existing.
There is a deferment of demand. Real-estate is not a perishable product. For developers, delay only means holding costs.
The market is still unorganised. That is a problem.
At Sobha, this year, we will do as well as we did last year. Between years 2006-07 and 2007-08, the latter was better. This year (2008-09) could have been better. The first half was good, but the second half, with two CRR hikes and inflation continuing to be in double digits, you get worried about the impact on the market.
With repo rate and CRR hikes, what is the kind of funding problem that the developers are facing now? Is it difficult to get bank finance now?
Small players face greater problems. Small players don’t have access to funds and customers. They are not able to deliver.
Organised players have better access to capital and customers. Customers prefer bigger players, which is good for the industry. Consolidation will happen. Large developers have better access to superior technology and capital, can buy loans cheaper, execute projects cheaper, expand the market and pass on the benefits to customers.
In such a scenario, big players will become bigger, and small developers smaller. Small players are selling their projects to big players.
How easy or difficult is it to get PE funding now?
Very difficult. In the real-estate industry, funding through one’s own internal accruals, cash deposits, bank debts and customer booking is ideal. PE funds look for IRR at 25 per cent, while internationally the libor rate is 3.5 per cent.
Can you tell us about Sobha Developers’ plans this year? Are you launching new projects in the immediate future and where?
We are launching a villa project — Sobha Scarlet — in Mysore soon. It will feature 83 villas in 13 acres. Two more launches have been planned — at Chennai and NCR — which will be by the end of this financial year.
We will be submitting plans for our hotel on St Mark’s Road in Bangalore this year. It is a five-star hotel project, for which we are awaiting approvals.
We currently have 10 million sq.ft in various stages of construction.
What do you think is the outlook for the real-estate industry?
The industry has a good future. Currently, it is in consolidation phase. Every one has to pass through a tough phase, and whoever has a better understanding and better skills will succeed. As we move forward, project sizes are getting bigger.
Interest rates will come down by 2 per cent in a year. Inflation will fall to 7-8 per cent in six months’ time. The situation will become tailor-made again.
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