The inventory scare is highly exaggerated: J.C. Sharma of Sobha Limited
Goutam Das August 23, 2018
J.C. Sharma, the Vice Chairman and Managing Director of Sobha Limited, is candid on the state of the Indian residential real estate market. For the "face of the industry" to change, he has a list of asks from regulators and the government. He speaks to Business Today's Goutam Das on the challenges, as well as on the way forward.
BT: Do you see a revival?
Sharma: There are mixed reports. Some markets are doing well; some are not. That is the factual situation. Within markets, some of the players are doing well while some are not. The Bangalore market has been doing relatively better than most of the other markets. It is the best performing market. In residential, developers are caught with inventory. People believed that India's GDP would grow 7-8 per cent and salary income in double digits. So the salaried class would keep buying homes wherever they are working. That story got derailed. However, the slowdown, which started from 2013-14, is easing. The price points, more or less, have been established. Prima facie, there is hardly any scope for prices to come down. If the prices do come down from where they are right now, the developer would make a loss. Calendar year 2017 was better than 2016. 2018 will be a better year. However, a clear recovery, where developers get pricing power, is still a bit away. Whether it is two-three quarters away or two-three years away is anybody's guess.
BT: The residential sector is still stuck with a huge inventory and it is depleting at a very slow pace...
Sharma: On the inventory scare, it is highly exaggerated. When a plan is approved and a project is launched, it gets into the inventory data, and it remains till the project is completed and handed over and fully sold out. Now, in projects where the real estate problem continues, that inventory is still being shown. Whether it is Jaypee, Amrapali etc. Whether those projects would be completed this year or next year - the government, the banks, the courts - they are trying to help customers - but it takes its own time. That inventory has no meaning. When people start needing a home and looking for a home, they will start coming back. Things would look better.
BT: We are seeing market consolidation with many developers exiting. Is that because of RERA?
Sharma: Yes, that is true but RERA is the smaller part. The bigger part is financial capabilities. When you have more than 60 per cent of the loan from NBFCs, where the average return expected is not less than 15 per cent in a market where prices haven't risen in the last four-five years vis a vis the cost of construction increase, how do you service it? The highest inflation is in labour wages over the last five years. Raw material prices have gone up six-eight per cent.
BT: What do you see as some of the emerging business models in this scenario? Some developers have been advocating a 'build first and then sell' model...Sharma: In India all models will work. In the case of someone selling an apartment post completion, his cost would be known upfront. There is also no headache of dealing with customer complaints during the construction period. If you have the financial muscle, you can do this. However, very few developers have that kind of financial resource capability. On the other hand, if you start with just land as your investment, or a joint venture, then you are using the customer's money, which is significant. The RBI should not consider land as speculative investment. They should not say banks can't fund money for buying land. Second, today, customers can get a loan at 8.5 per cent but a developer gets it at 15 per cent. The risk of the customer and the bank is on the developer. If he doesn't complete, what do you do with the 8.5 per cent? The risk weight-age needs to change. Three, the construction process takes an inordinately long time and doesn't benefit any stakeholder - by simply delaying the approval process, no one stands to gain. Once approved, the construction progress can be monitored with the same vigour as what goes into giving the approvals. If that happens, the face of the industry will change.