ET Now Talking to ET Now, Pirojsha Godrej, Executive Chairman, Godrej Properties, points out that though underlying markets have been quite tough but for the companies with the right brands and right practices, who are able to bring to market products the customers want in correct locations, demand continues to be robust.
Edited excerpts:
Ever since I started tracking your company very closely, I am a big admirer of the way you are conducting your business and how you have always kept up to your promise.
Now the tough part. The underlying demand for Indian real estate is rather not impressive yet you have managed to build and deliver on time, your new product launches have done rather well and if I understand the market dynamics you have not bought the prices down in order to jack up the sales. Why is that?
Yes, the underlying markets have been quite tough but we felt and it has been demonstrated in the market that for the companies with the right brands, who have the right practices, who are able to bring to market products the customers want in the correct locations, demand has continued to be quite robust. We have seen sales for example in the first half of the financial year. There are higher than full previous financial year by 40%. As long as we have the right products, we remain confident that even in tough markets we will be able to sell. We are seeing other good developers also witnessing good responses to their projects.
It is very clear now that the market is differentiating quite strongly amongst developers and developers who are seen as credible and likely to delivery their projects on time with the right level of quality, who are able to conceptualise innovative products, will continue to see big opportunities in the market.
We are speaking to you after one year since demonetisation. Explain the significance of the iconic event and how has a sector recovered from the cash ban move and has there been a meaningful change in demand recovery?
No, as you rightly pointed out, demonetisation now is just over a year old. We have obviously seen other major reforms in that period including the real estate regulatory which I think is the bigger reform as far as the real estate sector is concerned as well as the goods and services tax being introduced.
In this sector, there is never usually a dull movement and certainly this year has kept things interesting. Our sense is that all of these steps have actually lent further impetus to the process of consolidation that was already underway in the sector.
The relative advantage of the more established players who in any case were not accepting any payments in cash, who in any case were compliant with many parts or almost all parts of the real estate regulatory acts requirements and who have an easier time complying with GST. Those kinds of developers are at a bigger advantage in the market and typically real estate has been a very fragmented sector.
Even a developer like us who has led amongst the listed players by booking value over the last couple of years still have a total market share of around 1% of the overall markets. That speaks to the kind of fragmented market we operate in. The kind of opportunity that there is through the process of consolidation that has been underway for sometime but has gathered pace since demonetisation and RERA.
Demonetisation certainly was a major event. I would say the sector has more or less fully recovered from that and the lingering shocks are actually more from RERA and GST. But all of these again lead to a lot of consolidation in the sector.
Could you give me a sense as to how much million per square feet you could deliver in next two to three years?
Our highest ever annual deliveries have been in the 6 million sq ft range. While we have seen scaling up on the sale side, we will have to see a commensurate scale up in deliveries. We will be in that 5 to 10 million sq ft a year range for the next few years and hopefully, once our sales scale to the next level, we will see deliveries scale up as well. We actually think that while counterintuitively, people tend to assume that it is harder to deliver real estate once the scale increases, we actually think it becomes significantly easier because as a company you are forced to bill the processes, the capabilities and the team strength. You need to really have more predictable delivery and we have been certainly putting in a lot of work towards that.
Are you getting a sense that post GST and RERA, a lot of unorganised builders who were making a small building, a small villa, a combination of two or three houses, a small piece of land who were developing small parcels of real estate, could feel the crunch and a lot of business could migrate towards good builders like Godrej, the Oberois and the DLFs?
That process is underway already and it is gathering pace. The relative advantages of the more organised players have strengthened quite considerably over time. Firstly, from a customer standpoint, customers now are more certain and willing to work with only a certain set of developers because they face so many challenges in terms delivery, governance issues and other problems that even if they can get a lower cost home they may not be willing to take that kind of risk.
Similarly, on the funding side, the cost of capital for smaller developers tends to be double or triple the cost of capital for the more organised players. These are some pretty significant disadvantages. Typically, real estate has been a sector with pretty low barriers to entry in India which is why you have as many developers in the country as you do.
My understanding is that CREDAI has more than 10000 members which speaks to clearly a very large number of real estate developers in the country. My sense is a lot of those will move out of the sector, will partner with the larger developers to develop their existing projects.
Certainly, there is further room for this consolidation process to unfold over the next decade.
A lot of developers have spoken about acquiring land at low prices. Do you think that is the way forward which would also in a way make the business more viable? You would be able to see that as an attracted tailwind which may help you cut prices in a material manner without really impacting your margins?
Developers will always be happy with land prices that are lower and selling prices that are higher but these things are quite cyclical and will move hand in hand. Certainly while we are going through a down cycle of the type we currently are in, you will see some better opportunities on the land acquisition side -- be it through outright purchases or joint ventures which is our preferred model.
The thing to keep in mind though is that real estate is a very cyclical sector. It always has been a cyclical sector globally and I see no reason that pattern will in anyway be disrupted in India. When we are at the low of the cycle like we currently are, you will see those opportunities but as the market starts improving I think you will see more demand on the land side which in turn will take up prices again.
Our sense is actually that there is likely to be a pretty strong rebound in n property market performance over the next couple of years. If you look at affordability today, it is the best it has been in about 10 or 15 years, interest rates over the last three or four years have reduced by 300 bps, peoples incomes have been growing quite steadily, property prices are flat in most markets. In some markets like NCR we have actually seen big property price reductions. All of that has had a very positive impact on affordability and that is a great predictor ultimately of a demand revival and we expect once demand picks up, the strength of the recovery will probably surprise many on the positive side.
If demand comes back and if prices pick up, then what happens to your net realisation and what happens to the demand scenario? You have managed to grow in a tough environment. When real demand comes back, when the investors come back what happens then?
Well certainly, the first step will be volumes recovering. We have had now five years of pretty sluggish sector de-growth for the most part. The first thing we will see once demand picks up is volumes coming back. A lot of the current supply is getting absorbed and once that happens, then you will start seeing some upward pressure on pricing as well.
It is a typical real estate cycle. When things are bad, supply gets constrained, people get quite concerned, there is a further consolidation but then once demand picks up you will see the existing supply go away, you will see then upward pressure on pricing and then of course that will create fresh supply which will lead to the next cycle.
Our own sense is that over the next couple of years, the first step we will see is a strong demand recovery and hopefully that will reflect in stronger volumes and then prices. But each leg of the cycle is very important from a developer’s perspective and it is important to emphasise the right strategic priorities.
Frankly we think the current moment of weakness in the sector presents us with as much if not more opportunity than when markets turn because as you pointed out once markets improve we should get better pricing power, that should reflect in higher earnings and margins. But I think from a business development perspective, there are a huge number of opportunities for us to partner with land owners and other developers to enter new developments and that is where we actually think a lot of value gets captured when we enter into these partnerships.
The markets tend to react more to news of launches and positive sales and the like but we feel the most important value creation trigger in the cycle really is when we lock in these new deals. Opportunity to do that is about as strong as it has ever been with current markets being what they are.
The only thing is you do not know what will turn the cycle on the demand side and I mean one look at the skyline in Mumbai from the sea link and there seems to be quite a bit of supply coming in. I wanted to ask you about the affordable housing format which is also something that you are going to be focussing on quite a bit going forward. You have made endeavours in that direction. How much can affordable housing contribute to your revenues going forward, what is the game plan on that?
It is a great question and what is noteworthy is the kind of emphasis the government is putting on affordable housing and I think one strategic shift that the government has made over the last year with its approach to affordable housing is quite important to note.
Earlier the government was extremely focussed on ensuring that there was no possibility of any development that was not solely catering to affordable housing getting any benefits.
What has happened over the last year is that the government has realised that while promoting affordable housing is very important, the general real estate sector doing well is also exceptionally important for the performance of the economy.
The real estate sector is obviously a big one itself but it is a very important ingredient for many ancillary industries like steel, cement, paints and so on. It is also the largest job creation engine in the country behind agriculture through construction jobs. All of these benefits in addition to the importance of actually creating affordable housing stock have been fully recognised.
The government has liberalised some of the norms relating to affordable housing easing the size constraints, easing the timelines within which projects have to be completed. Now, there is a very compelling set of incentives available to developers and customers who are interested in this space. I would say it caters to both true affordable housing as well as mid income housing and our bigger focus has been and will continue to be on the mid income housing space. But certainly we see tremendous opportunity through some of the schemes the government has rolled out including the interest benefit schemes to customers, income tax benefits to developers. A very significant part of our existing portfolio can cater to these requirement and we will certainly be looking to add new projects aggressively that will focus on this space.
Edited excerpts:
Ever since I started tracking your company very closely, I am a big admirer of the way you are conducting your business and how you have always kept up to your promise.
Great view with you and thanks very much for those kind remarks.
Now the tough part. The underlying demand for Indian real estate is rather not impressive yet you have managed to build and deliver on time, your new product launches have done rather well and if I understand the market dynamics you have not bought the prices down in order to jack up the sales. Why is that?
Yes, the underlying markets have been quite tough but we felt and it has been demonstrated in the market that for the companies with the right brands, who have the right practices, who are able to bring to market products the customers want in the correct locations, demand has continued to be quite robust. We have seen sales for example in the first half of the financial year. There are higher than full previous financial year by 40%. As long as we have the right products, we remain confident that even in tough markets we will be able to sell. We are seeing other good developers also witnessing good responses to their projects.
It is very clear now that the market is differentiating quite strongly amongst developers and developers who are seen as credible and likely to delivery their projects on time with the right level of quality, who are able to conceptualise innovative products, will continue to see big opportunities in the market.
We are speaking to you after one year since demonetisation. Explain the significance of the iconic event and how has a sector recovered from the cash ban move and has there been a meaningful change in demand recovery?
No, as you rightly pointed out, demonetisation now is just over a year old. We have obviously seen other major reforms in that period including the real estate regulatory which I think is the bigger reform as far as the real estate sector is concerned as well as the goods and services tax being introduced.
In this sector, there is never usually a dull movement and certainly this year has kept things interesting. Our sense is that all of these steps have actually lent further impetus to the process of consolidation that was already underway in the sector.
The relative advantage of the more established players who in any case were not accepting any payments in cash, who in any case were compliant with many parts or almost all parts of the real estate regulatory acts requirements and who have an easier time complying with GST. Those kinds of developers are at a bigger advantage in the market and typically real estate has been a very fragmented sector.
Even a developer like us who has led amongst the listed players by booking value over the last couple of years still have a total market share of around 1% of the overall markets. That speaks to the kind of fragmented market we operate in. The kind of opportunity that there is through the process of consolidation that has been underway for sometime but has gathered pace since demonetisation and RERA.
Demonetisation certainly was a major event. I would say the sector has more or less fully recovered from that and the lingering shocks are actually more from RERA and GST. But all of these again lead to a lot of consolidation in the sector.
Could you give me a sense as to how much million per square feet you could deliver in next two to three years?
Our highest ever annual deliveries have been in the 6 million sq ft range. While we have seen scaling up on the sale side, we will have to see a commensurate scale up in deliveries. We will be in that 5 to 10 million sq ft a year range for the next few years and hopefully, once our sales scale to the next level, we will see deliveries scale up as well. We actually think that while counterintuitively, people tend to assume that it is harder to deliver real estate once the scale increases, we actually think it becomes significantly easier because as a company you are forced to bill the processes, the capabilities and the team strength. You need to really have more predictable delivery and we have been certainly putting in a lot of work towards that.
Are you getting a sense that post GST and RERA, a lot of unorganised builders who were making a small building, a small villa, a combination of two or three houses, a small piece of land who were developing small parcels of real estate, could feel the crunch and a lot of business could migrate towards good builders like Godrej, the Oberois and the DLFs?
That process is underway already and it is gathering pace. The relative advantages of the more organised players have strengthened quite considerably over time. Firstly, from a customer standpoint, customers now are more certain and willing to work with only a certain set of developers because they face so many challenges in terms delivery, governance issues and other problems that even if they can get a lower cost home they may not be willing to take that kind of risk.
Similarly, on the funding side, the cost of capital for smaller developers tends to be double or triple the cost of capital for the more organised players. These are some pretty significant disadvantages. Typically, real estate has been a sector with pretty low barriers to entry in India which is why you have as many developers in the country as you do.
My understanding is that CREDAI has more than 10000 members which speaks to clearly a very large number of real estate developers in the country. My sense is a lot of those will move out of the sector, will partner with the larger developers to develop their existing projects.
Certainly, there is further room for this consolidation process to unfold over the next decade.
A lot of developers have spoken about acquiring land at low prices. Do you think that is the way forward which would also in a way make the business more viable? You would be able to see that as an attracted tailwind which may help you cut prices in a material manner without really impacting your margins?
Developers will always be happy with land prices that are lower and selling prices that are higher but these things are quite cyclical and will move hand in hand. Certainly while we are going through a down cycle of the type we currently are in, you will see some better opportunities on the land acquisition side -- be it through outright purchases or joint ventures which is our preferred model.
The thing to keep in mind though is that real estate is a very cyclical sector. It always has been a cyclical sector globally and I see no reason that pattern will in anyway be disrupted in India. When we are at the low of the cycle like we currently are, you will see those opportunities but as the market starts improving I think you will see more demand on the land side which in turn will take up prices again.
Our sense is actually that there is likely to be a pretty strong rebound in n property market performance over the next couple of years. If you look at affordability today, it is the best it has been in about 10 or 15 years, interest rates over the last three or four years have reduced by 300 bps, peoples incomes have been growing quite steadily, property prices are flat in most markets. In some markets like NCR we have actually seen big property price reductions. All of that has had a very positive impact on affordability and that is a great predictor ultimately of a demand revival and we expect once demand picks up, the strength of the recovery will probably surprise many on the positive side.
If demand comes back and if prices pick up, then what happens to your net realisation and what happens to the demand scenario? You have managed to grow in a tough environment. When real demand comes back, when the investors come back what happens then?
Well certainly, the first step will be volumes recovering. We have had now five years of pretty sluggish sector de-growth for the most part. The first thing we will see once demand picks up is volumes coming back. A lot of the current supply is getting absorbed and once that happens, then you will start seeing some upward pressure on pricing as well.
It is a typical real estate cycle. When things are bad, supply gets constrained, people get quite concerned, there is a further consolidation but then once demand picks up you will see the existing supply go away, you will see then upward pressure on pricing and then of course that will create fresh supply which will lead to the next cycle.
Our own sense is that over the next couple of years, the first step we will see is a strong demand recovery and hopefully that will reflect in stronger volumes and then prices. But each leg of the cycle is very important from a developer’s perspective and it is important to emphasise the right strategic priorities.
Frankly we think the current moment of weakness in the sector presents us with as much if not more opportunity than when markets turn because as you pointed out once markets improve we should get better pricing power, that should reflect in higher earnings and margins. But I think from a business development perspective, there are a huge number of opportunities for us to partner with land owners and other developers to enter new developments and that is where we actually think a lot of value gets captured when we enter into these partnerships.
The markets tend to react more to news of launches and positive sales and the like but we feel the most important value creation trigger in the cycle really is when we lock in these new deals. Opportunity to do that is about as strong as it has ever been with current markets being what they are.
The only thing is you do not know what will turn the cycle on the demand side and I mean one look at the skyline in Mumbai from the sea link and there seems to be quite a bit of supply coming in. I wanted to ask you about the affordable housing format which is also something that you are going to be focussing on quite a bit going forward. You have made endeavours in that direction. How much can affordable housing contribute to your revenues going forward, what is the game plan on that?
It is a great question and what is noteworthy is the kind of emphasis the government is putting on affordable housing and I think one strategic shift that the government has made over the last year with its approach to affordable housing is quite important to note.
Earlier the government was extremely focussed on ensuring that there was no possibility of any development that was not solely catering to affordable housing getting any benefits.
What has happened over the last year is that the government has realised that while promoting affordable housing is very important, the general real estate sector doing well is also exceptionally important for the performance of the economy.
The real estate sector is obviously a big one itself but it is a very important ingredient for many ancillary industries like steel, cement, paints and so on. It is also the largest job creation engine in the country behind agriculture through construction jobs. All of these benefits in addition to the importance of actually creating affordable housing stock have been fully recognised.
The government has liberalised some of the norms relating to affordable housing easing the size constraints, easing the timelines within which projects have to be completed. Now, there is a very compelling set of incentives available to developers and customers who are interested in this space. I would say it caters to both true affordable housing as well as mid income housing and our bigger focus has been and will continue to be on the mid income housing space. But certainly we see tremendous opportunity through some of the schemes the government has rolled out including the interest benefit schemes to customers, income tax benefits to developers. A very significant part of our existing portfolio can cater to these requirement and we will certainly be looking to add new projects aggressively that will focus on this space.
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(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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