How a resilient realty sector could stymie govt's low-cost housing plan

It will be difficult to provide such housing close to industrial estates due to paucity of land; only option is to buy land close to cities from realtors, giving them an opportunity to make a killing

There is hardly any bad news from the real estate sector despite the Covid-19 pandemic. That is, however, bad news for a government that is planning to offer large-scale housing to workers in cities, once they return to work. 

In a rare acknowledgement of frustration, commerce and industry minister Piyush Goyal advised realtors to sell their projects at reduced prices. "You can be stuck with inventory and default or get rid of whatever you quoted at high prices. Consider it a bad decision and move ahead," he told realtors at a webinar early this month. But his suggestion was hotly rejected by the developers. They have reasons to do so. 

In May, Godrej Properties informed the stock exchanges it had sold over 1,000 apartments across three newly-launched projects in Mumbai, Pune and in Greater Noida. The news sent the stock soaring. Other companies are also sure-footed, only willing to offer staggered payment options to buyers. Tata Housing, a subsidiary of Tata Sons, for instance has launched a campaign to sell completed housing units in its 17 projects that offer buyers the option to book their flats by paying 10 per cent now and the rest by January next year. There is an inbuilt interest cost. “The listed companies work with very good cash flows on their book”, said an analyst.  

Amid sectors tumbling all about, the real estate sector has thus stood firm in the stock market. On Tuesday, when the broader Nifty 50 index was at 7.41 per cent, the NSE realty index was far more impressive at 15.07. 

Strong cash flows: 

There are sturdy reasons why the real estate sector is standing tall. The principal one among those is the ability to hold on to the prices of their inventory. “Except for some minor corrections, I would not expect sharp price corrections despite their inventory being very high,” says Garima Kapoor, economist and vice president, Elara Securities. While minister Goyal may have asked real estate firms to cut their costs by selling inventories, the companies are in no hurry. Other analysts say the reasons why the price line is holding is because cash flows for the companies have not dwindled much. 

Harmit Chawla, MD of HCorp Realty, a real estate advisory firm, says a key metric of how comfortably real estate companies are placed can be judged by their refusal to allow tenants any major leeway in the current downturn. This is also the reason why restaurateurs have had little success in making landlords make deep cut in prices. DLF, for instance, has offered some easing of rentals at its malls in Delhi and Gurugram to its tenants but with the proviso that there shall be a 2 per cent higher revenue share for FY21. This small concession has “enthused” restaurant companies, says this piece in Times of India as a “first”. 

An analyst con-call by Jefferies India that covered DLF, Prestige, Oberoi and Brigade groups, found rent collections remained strong through March and April. “Collected all of March rent and 92 per cent of April…Modest rent waivers provided to food court, retail and small business tenants, rest of the office tenants are asked to comply with lease obligations.” It is not the picture of a sector in distress. Rather the note says work-from-home and attendant “de-densification to ensure employee safety might lead to additional demand”. The real estate companies seem to hold all the aces. 

It is not always easy for the companies too. Chawla says among the unlisted entrepreneurs quite a bit of the cost of their projects is that of land plus other incidentals they pay to government agencies. These are difficult to pin down on to the books, but make it difficult to cut costs. Ashok Gupta, CMD, of Ajnara India agrees with this assessment. “Price correction is not an easy proposition to achieve in reality with so many additional costs and government regulations playing an important role,” he says.  

Kapoor explains that the pandemic was preceded by demonetisation, the introduction of GST and RERA, each of which was a difficult adjustment period for the sector since 2017. So all of them have left the sector more consolidated with companies with better cash management winning out. As a result while the companies complain about their high costs, those are not leading to a rush to exit the business. No listed company is keeling over and only a few of the unlisted ones are. Businesses or families looking for bargains post the pandemic will be disappointed. 

There is a larger implication here. It means the central or state governments have little chance of making available large-scale low cost housing adjacent to industrial estates. “There is no land available within 100 kilometres of Mumbai for such projects,” said an analyst who did not want to be named. 

At Talegaon near Pune, the Maharashtra government had planned a series of low-cost housing projects. The prices of those properties now range close to Rs 20 lakh including stamp duty. “It is impossible to envisage any worker earning less than Rs 1 lakh per month, being able to finance such houses,” said the same analyst. In Gurugram, the state had mandated each developer to construct one room sets with kitchen and bathroom within their apartment blocks. The blocks, once built, were handed over to the Gurugram Development Authority to allocate to poor workers. “Instead, people with ration cards and false affidavits have cornered most of those flats,” says Manoj Gawri, one of the largest real estate brokers in Delhi. The builders, having handed over the flats, have no skin in the game, and as the miles of migrant workers from the town this summer showed, they haven't benefitted from the allotments. 

In order to get land parcels near the big cities, the government’s only option is to buy out the land from the realtors. The catch is that this will be a great earnings opportunity for real estate firms sitting on those land parcels. It is another reason why they often support calls for affordable housing. Speaking at a webinar, MSME minister Nitin Gadkari said it is essential to develop new townships away from the large cities to make living affordable for the workers who wish to return to the manufacturing sector enterprises. In fact the government's plan for smart cities six years after they were conceived has largely fallen through because of the lack of affordable land parcels. 

How is so much of cash sloshing about with the real estate companies? As the Jefferies report points out, rentals have been steady. As the Gurugram experience with the real estate projects also show, it is also the government policies that often make them a winner. And as Kapil Kapur, Director-Sales, Strategy & Business Development, Bullmen Realty notes, keeping prices high assures investors. “During all this time, real estate prices have not fallen, which is an assurance to the investor that real estate is not behaving like other investment options. Leaving aside the likely presence of minuscule distress sellers, the market after the coronavirus situation will see a rise in prices.”

The other reason for the high is the suspected flow of funds from political families, who are happy to let the money remain locked up with some of the developers, giving the latter the breathing space to wait for buyers.

Venkatesh Gopalakrishnan, CEO at Shapoorji Pallonji Real Estate, one of the biggest players in the sector, acknowledged these difficulties. "Sunk costs such as land, premiums and other government charges and interest and other finance charges do have a debilitating impact if there are more than reasonable time delays in the monetisation and sale of units which can be caused to external events such as COVID and also weak demand. It is a vicious circle and longer one waits higher are the holding costs," he said.

As a result, despite the grizzly downturn, the builders are not hurt. Writing in Business Standard, Anshuman Magazine , Chairman and CEO, India, South East Asia, Middle East & Africa, CBRE notes, “The appetite for sustainable commercial real estate is expected to strengthen, especially for those looking at more stable rental revenues. Traction from private equity capital, especially in core assets, will strengthen further due to volatility in other segments.” 

Why should the price of flats and commercial real estate come down under such propitious circumstances?