A 39-cr SoBo flat? One swallow does not make a summer

Reeling under massive debt and huge inventory, India’s realty developers are slowly turning to premium projects to monetise big land reserves. But are they on the right track?

That property demand from middle-income households has fallen in Mumbai over the last two years is not news anymore. But is the luxury market holding up any better? News about a South Mumbai (SoBo) flat selling for Rs 39 crore created a buzz in the media, but it seems to be more the exception than the rule.

The slump is catching up with the super rich too. According to a report in The Economic Times, 60 percent of Mumbai’s 3,300 luxury apartments priced between Rs 10 crore and Rs 100 crore remain unsold due to regulatory uncertainty, surging prices and an oversupplied market.

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[caption id=“attachment_336683” align=“alignleft” width=“380” caption=“Since most developers sell flats in the per-construction phase, the market price is easily manipulated by as much as 50 percent by the time the flat is ready for possession”]  [/caption]

Here are 5 reasons why the Mumbai luxury market - homes priced in the Rs 30-40 crore range - is struggling to find purchase.

1. The new millionaires in 2007-2008.

To understand the dynamics of the luxury market, one has to go back to the 2007 period when an economic boom globally had created several millionaires in India, especially in the corporate sector. Following the bounceback from the recession, ‘super luxury’ become the buzzword in India. Be it cars or homes, the focus moved to exclusive offerings that would make ’luxury’ pale in comparison.

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“These Rs 1 crore plus bonuses (received by executives) were used as equity for Mumbai’s ultra-luxury segment,” Pankaj Kapoor, MD at realty firm Liasas Foras, told Firstpost. Once, developers saw a new surge of millionaires, they decided to cash in on this economic boom by exploiting private equity and additional floor space index, he said. The launches targeted at the high net worth individual were prompted by this very confidence in economic growth, upward mobility in income levels and NRI wealth pouring into the Indian market. However, the super earners are no longer increasing and the demand of 2008 has vanished in 2012.

2. Mismatch between buyer aspiration and supply of luxury apartment

The ideal location for a luxury house would be within the heart of the city, not on its periphery, said Anuj Puri, Chairman and Country Head, Jones Lang LaSalle India. However, given the space crunch in Mumbai, most builders began offering premium housing in congested, crowded areas of Mumbai. “Behind every premium apartment one would see a slum, and this is going to push the buyer further away,” Kapoor said. View and calm ambience were what the super earners were looking for, not a Worli slum, Kapoor exclaimed.

3. Rentals yields are only 2 percent of capital investment

Even though there are various reports of 4-5 BHK premium flats being sold in Mumbai for Rs 20 crore and above, the end user is not the consumer but an investor, who only constitutes 15 percent of the real estate demand in India. “The demand needs to be local, not foreign. There is absolutely no local demand for these high-end flats because the rental yield is less than 2 percent,” explained Kapoor. Hence, while property rates continued to escalate in Mumbai, people settled for leave and licence agreements and invested their money in gold. The stock exchange is volatile, which created uncertainty and people preferred investment in gold stocks.

4. Exploitation of FSI

The 2009 boom was largely led by exploitation of the old development control regulations (DCR). Earlier DCR norms permitted areas like staircases, passage, lifts, AC plant rooms, etc, to be counted as free of FSI (floor space index), and developers calculated their profits based on the extra areas they could exploit in the building by selling them to buyers. But with the new proposal to restrict this additional construction - flowerbeds, pocket terraces, decks, voids, etc - to just25 percent of the total built-up area and charge builders 100 percent premium for it really upset their construction plans. Builders had two options: To either reconcile their profit margins downwards or reduce the area of the flats which had already been booked. This led to a further slump in sales.

5. NRI demand is limited - no matter what property dealers tell you

One of the main reasons why prices never go down in Mumbai is because 70 percent of the transactions take place in black - be it your super rich, a business tycoon or an NRI. Around 27 percent of NRIs choose to invest in Mumbai, said a survey conducted by Sumansa Exhibitions, organisers of the Indian Property Show, as they look for quick capital appreciation. But even this demand is restricted to the Rs 2-5 crore category, another property consultant told Firstpost. The Napean Sea flat which reportedly was sold for Rs Rs 1,20,000 per square foot ( Rs 39 crore for a 3,320-square-feet flat)" is a one-off deal and does not reflect general market sentiment," he said.

So if every thing is pointing towards negative growth and slumping sales, why are these developers not losing any money?

The answer: The capital invested is not theirs but private equity. The kind that is is no hurry to exit and is willing to wait for returns. Fifty percent of ultra-luxury projects are being developed through joint development agreements with land owners. And in most cases, the developers do not pay a penny for the land. This is why it does not hurt them when they have to liquidate stock.

Secondly most private developers had bought land parcels at very low rates , which is why they are charging 10 times their cost of purchase for the apartment and can even afford to hold on to the property when slowdown hits. Even if a small percentage of the apartments in a particular site is sold, the builder makes his money.

And finally the most important reason for the surge in prices is speculation. Since most developers sell flats in the pre-construction phase, the market price is easily manipulated by as much as 50 percent by the time the flat is ready for possession, a Delhi-based builder told Firstpost. “The three-year period between obtaining a license and selling the ready flat allows the builder to reap in enough profits just by mere speculation,” he said.