In an exclusive interview with Firstpost, Vikas Oberoi, Chairman and managing director of Oberoi Realty Ltd, tells us how his company has managed to remain zero debt, why investors hurt the business and how home prices can be made 'affordable'.
Below are edited excerpts from the interview. The accompanying audio below has the full interview:
How has the past year been, and what's the outlook for this year?
The past year for Oberoi Realty has been stable: we haven't grown, but there's been no slide as well. As far as the sector goes, there are a couple of catalysts. (One of them is) obviously government policies. You need land supply, which can only happen when the government improves its approval process and policies towards developers. The second is the global economy, and the country's economy. Both have been challenging. If the government is not proactive in creating supply, there is a shortage of supply; even if demand falls, you see a shortage, so you don't see price correction.
We're in that mode. The global economy and the Indian economy continue to struggle, (but) there's no additional supply, and so you don't see any major reduction in prices.
The third thing that effects it is how you run your business. If you're very leveraged, you're desperate to remove debt. Flat-buyers are wary of developers who are very leveraged because if they go belly-up, a flatowner, who writes the biggest cheque of his life, is also under threat. So this guy only wants to go to people who have a good balance sheet, a good record of delivery. And we qualify there. We're a zero-debt company, we've delivered in the past, so we continue to get people. That's a differentiator for us.
How do investor-driven markets influence the sector?
An investor bridges the gap between an under-construction and a ready product. The developer has a couple of options: if he has the goodwill, he can pre-sell; he doesn't need an investor. If he has his own cash, again he doesn't need an investor. Third, if he is leveraging to bid, cash is still available from institutions, which is cheaper than from investors. My take is that this investor finally becomes competition to you when your product is ready and you are out to sell in the market. So a developer's best bet is to sell it cheaper to an actual user.
Normally, an under-construction apartment at my site would be discounted anywhere between 30-40 percent: if a ready product is selling at 20,00-22,000 per square feet, an under-construction apartment is available at 14,000 per sft. This is an arbitrage I'm willing to give to an actual user. The way I can deter an investor is by keeping stringent policies like a lock-in clause, and so on... We make sure that an investor doesn't spoil the market. We don't want speculators. We would love to give it cheap to an actual user.
Why have builders been unable to bridge the gap in affordable housing?
Affordable housing is not affordable for the developer. The government needs to create a policy where affordable housing is generated. Gone are the days when you can be a Robin Hood. Today, all that the government needs to do is form a partnership with private entrepreneurs who will be commercially motivated to make sure affordable housing is a play. For example, if I have land, and the government comes and tells me that today the floor area ratio (FAR) or the Floor Space Index (FSI, which is the ratio of the total floor area of buildings on a certain location to the size of the land) is 2 but I'll give you an FAR of 4, provided you give me one FAR constructed free of cost. The government can conduct a lottery (to sell those homes) at a cheaper price. It has to be a collaborative effort.
Our stakeholders, our investors, haven't given us their money for philantrophy; it has to make business sense to do any sort of social cause backed by the government. The government has to be prudent in creating schemes that can get an entrepreneur excited.
But why aren't home prices falling at all?
Commodity is cyclical; it's not a major component in the cost of apartments. The major component is land and approval. If a project gets delayed by, say, two years because of permissions, with interest rates where they are, you're looking at a 50 percent increase in land costs. The land is lying vacant. The government needs to come up with a one-window clearance system and an increase in FAR. If you increase the FAR to 2 on the same piece of land, your land cost becomes half - and that benefit can go to flat-buyers. Now, the government can increase it to two with a rider saying that you need to do so much of affordable homes and they can have a mechanism in place so that the needy get it. This way, prices can be brought down.
How has Oberoi Realty managed to stay debt-free?
Our simple philosophy is cash flow is important; we continue to maintain the brand name and franchise in such a way that we get cash from actual users on Day 1. This is the cash we churn into building, we are not taking any debt. Additionally, we do not take one project's money and put it into another project. There's no mismatch of cash. There's huge financial discipline. There's no rocket science in what we're doing, and it works for us.
Hear the audio of the full interview here:
Which of your upcoming projects are you most excited about?
We have the Worli project, which is 0ne of its kind, with Samsung as an international contractor for the first time in India, and Kohn Pedersen Fox Associates (KPF) as our design consultants. It's a mixed-use development of a hotel, office and residence. We've got two projects in the central suburbs -- totally a little over 2 million square feet -- that should start in the next three months. Goregaon in Mumbai has another nine buildings to go. It's a mixed-use development of an office, a hotel and a residential complex. This is a township by itself. It's an 80-acre self-contained development. And we're looking at new opportunities. We've got Pune, where we already have land so we're looking at 2013 as a start year.
How do cities compare in terms of home buyers and government policies?
I feel that the rules and regulations in Mumbai are far superior than anywhere else in the country. Of the other cities, Gurgaon and Bangalore are very good as well, and Pune too is fantastic. Hyderabad has done a great job.
Where does Mumbai score over other cities and states in terms of regulations?
Unlike other parts of the country, Bombay has a Maharashtra Flat Ownership Act, which clearly defines how the agreement should be. Even if the developer were to write something, it can be set aside. And now the Maharashtra government has taken the initiative in creating the regulatory bill. Maharashtra may be the first state to come up with such a bill to make sure customers are also protected.
What does it take to survive in the real estate industry in India?
Real estate is the easiest business to be in. Every business has its set of challenges. You need to retain your staff, you need to make sure they grow, you need to nurture them. That's true of any business. Then there are government-related issues. If you work within the law, I don't think the law is that bad. Yes, one does get frustrated at times, but I don't think it should get the better of your work.
What does Vikas Oberoi do in his free time?
I have a lot of free time. I fly a plane. I love gymming, I love running, I love sport. I have a very normal life. I'm in office at 9.30 am. I quit at 6.30 pm. Actually, I lead a very seamless life.