Will Lodha's IPO strategy for premium Mumbai project work?

Lodha's aggressive IPO strategy for a premium residential project at prices that appear to be 40-45 percent lower than the ticket prices of other such apartments in Parel and Worli in Central Mumbai is likely to get a positive response from end-users.

Mumbai-based Lodha Group will use an IPO-like automated algorithm system to sell/allot apartments to buyers at its latest 17.5 acre premium project at Lower Parel during the pre launch phase ( between 18 and 27 January).

According to the details available on the website, the company will start distributing applications along with the prospectus at the project launch. Customers will have to attach a cheque along with the form and mention their configuration preferences. The prices will not be disclosed at the launch; instead, only a price band will be made available. The cheques will be accepted until a particular date, post which the bookings will be closed. The company will release the final price and allot flats to customers based on their preferences.

The project aims to sell at least 600 flats during the IPO process, the results of which will be out on 29 January. Some 20 percent of the total cost needs to be paid upfront and the lock-in for the flat is till the date of possession, which is a minimum of four years as the apartments are planned to be ready by 2017.

An email query seeking details of a basic 2BHK flat got this reply: "The 2BHK built up area is 1,368 sq ft and carpet area is 8,54 sq ft. Best part is the rate. It is 23,391 psf. Floor rise is 90 per floor...First come, first serve basis."

However if measured by carpet area, it roughly costs around Rs 38,000 a square foot.

A 3BHK flat measuring 1,674 sq ft with a carpet size of 1,045 sq ft will cost around Rs 3.92 crore (excluding registration and other charges), while a 3BHK luxury flat with a carpet size of 1,242-1,274 per sq ft will cost around Rs 4.87 crore, according to the company's brochure.

These prices are very aggressive since they are similar to those currently offered in distant western suburbs like Andheri and Vile Parle.

Om Ahuja, chief executive, residential services, Jones Lang LaSalle India, a global property consultant said, "There is a serious demand for the right product at the right price, which is in the right location."

The catch here, however, is that buyers will not be allowed to actually visit the site during the pre-launch phase. Ten percent of the total amount needs to be paid within 21 days from final allocation after deducting the token amount of Rs 9 lakh, while another 10 percent needs to be paid within 45 days post allotment.

However, the biggest concern for buyers and investors is timely completion of the project since there is no exit option till the date of possession. Industry experts say Lodha projects have sometimes faced delays in construction.

Another concern is selling off inventory. In the recent past, Lodha appears to be the only real estate major that has bought vast tracts of land in Mumbai, be it the textile mill in Parel, the New Cuffe Parade plot in Wadala or the recent American consulate property. Investors are clearly concerned as Lodha has a lot of inventory to sell in a rapidly slowing market where transactions are falling.

Lodha's Blue Moon Offers 2, 3 , 4 bedroom air - conditioned residences starting from Rs 3.6 Cr

Lodha had recently bought a plot from DLF Ltd, the country's largest developer, for Rs 2,727 crore in one of the largest realty deals. Lodha has codenamed the project as 'Blue Moon', which will have around 2,000 apartments. The IPO strategy relates to this development on this land.

"The IPO strategy in a high-end market could be a game changer for developers as it applies the capital market strategy in real estate in a premium location and that too at the right price," said JLL's Ahuja.

This is because in an already sluggish market, buyers are only buying when prices are reasonable.

He added that at these prices, Lodha is expecting an unusual demand for its Blue Moon project as it will provide the perfect opportunity for end-users living in the suburbs to shell out a little more and move to South Mumbai.

When the L&T-Omkar joint venture launched its redevelopment project in Bhoiwada in the Parel area of central Mumbai, it got 400 confirmed bookings and 150 others waiting within four to five days of the launch.

However, industry experts warn that buyers must ascertain the actual carpet area being offered along with loading charges and be extremely cautious about what they are getting into since they are not allowed pre-launch visits.

In the L&T Omkar project, apartments were offered at Rs 16,000 a sq ft, but buyers ultimately paid around Rs 20,000-22,000 a sq ft, given floor rises and other charges, an industry expert pointed out. This negated the lower initial ticket price.

"The loading charges in this instance exceeded 50 percent," the expert pointed out.

In Mumbai, several terms like built-up, super built-up, salable, and carpet area are used to define the floor space being made available to the buyer. The difference between the carpet area (the actual area between walls in a flat) and the area sold (salable area) is called the loading factor, explains Amit Goenka, National Director, Capital Transactions, Knight Frank India.

He further explains that carpet area does not include the area of terraces, flower beds, balconies and car parks, which are granted free from FSI computation to each building. "Loading factor = (Salable area - Carpet area)/Saleable area. This factor should generally not exceed 30 percent."

Loading charges are the number one trap in flat buying.

For instance, Builder A says his flat is 1,000 sq ft and is quoting Rs 2,500 per sq ft then the flat cost is Rs 25,00,000. This includes 20 percent loading.

Since Builder A has 20 percent loading, the actual carpet area is 1,000-200= 800 square feet. So instead of paying 800 x 2,500 = Rs 20,00,000, you are paying 1,000 x 2,500 = 25,00,000. You are paying 20 percent more in this case.

Often developers commit that loading won't exceed a specified limit. One should verify this against what the developer states and charges you for, he added.

Also there are various other costs connected to purchases likefloor rise, car park, amenities, preferred location, infrastructure charge, and maintenance and club house, which can grossly increase the total cost of ownership in the end. Hence the advertised cost may not be the real cost.

Secondly, the builder's condition that the flat cannot be sold till possession, which is likely to take place in 2017, will keep trade investors at bay, but it will not do away with retail investors who can sell the flat after holding it for five years when the prices appreciate considerably.

Lodha is already confident that when the launch offer takes place , prices will be at least 20 percent higher than the pre-launch prices offered now. "The price is going to be increased by around 20 percent after this pre-launch This is an opportunity for you to own a flat in SOBO (South Bombay) at a suburban price," Lodha Group said in a presentation.

"Since the prices will be increased periodically as their inventory sells off, the project will be one of the biggest real estate opportunities for investors as well as end-users," Lodha said on its website.

Updated Date: Dec 20, 2014 15:07 PM

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