Only small-sized apartments can save Mumbai real estate

Mumbai has a high residential inventory of 67,000 units, equal to sales of 34 months. While the underlying demand is strong, it is not being converted into transactions due to the high property prices. From a developer’s point of view, low absorption is a source of worry; however, due to high costs of land acquisition, raw material, labour, finance and new costs such as fungible FSI, lowering prices beyond a point seems difficult. Is there a way to end this stalemate?

[caption id=“attachment_1116543” align=“alignleft” width=“380”]  AFP[/caption]

It is important to understand exactly where the problem actually lies - in high property price or high ticket size? While property prices are largely location-driven, ticket size is a combination of size of the apartment and property price. As per the developer community, there is not much possibility of reducing the prices attached to locations.

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The answer seems to lie in developing projects with smaller apartments. But what made developers focus on larger configurations in the first place? The answer can be found in the past.

Demand Type Drives Supply Type

There are two types of buyers - those who believe locational advantage is more important than larger sized apartments, and those who believe the opposite. The former opted to compromise on size and continued to live in the same locations. The latter, with the objective of living in larger apartments at relatively lower ticket sizes, moved to the suburbs and extended suburbs.

However, this second class of buyers - while achieving the primary objective - also compromised on their standard of living. Not the least of the backlash was long and uncomfortable daily commutes between home and work place.

Understanding buyer requirements, developers started focusing on apartment configurations of 2BHK and above. Larger configurations help developers provide better amenities within and outside the apartment, and consequently to charge corresponding premiums. Such properties also require a lower number of buyers compared to smaller apartments.

[caption id=“attachment_1228957” align=“aligncenter” width=“597”]  Less than 1/4th Offering in Lower Configuration[/caption]

The Formula Crumbles

This strategy worked well until 2008, as the absorption more or less equalled launches. However, between 2003 and 2008, property prices increased substantially and ticket sizes for the same configurations went beyond the common man’s reach. Post 2008, property prices rose by another 36%.

Due to this, a buyer who could buy a 2BHK in Mumbai within a budget of Rs 80 lakh in 2008 needed to shell out another Rs 10 lakh to buy just a 1.5 BHK. Similarly, the cost of a 1.5 BHK in 2008 equals that of a 1 BHK today.

Another problem was that smaller-configuration apartments were available largely in the suburbs and extended suburbs. This affected senior citizens who had spent their entire life in the Island City. Meanwhile, existing structures became increasingly more dangerous to live in, even as families grew in size.

Lack of sufficient options with smaller configuration forced these individuals and families into suburban and extended suburban locations during a phase of life in which life is ideally supposed to be easier rather than harder.

Fast Forward To Today

Today, developers are faced with a reduced demand for larger apartments, and the option of reducing property prices is limited. The only strategy open to them is to focus more on smaller apartments and offer reduced prices to the extent possible.

While nothing can be done about non-selling larger configurations but reduce prices or sit indefinitely on unsold inventory, the fact is that new developments must be configured for smaller sized units, and therefore greater affordability, if the Mumbai residential market is to see a significant revival.

Ramesh Nair is COO - Business, Jones Lang LaSalle India