Pranay Vakil, chairman, Knight Frank India, highlights 10 home truths that the real-estate industry realised during the downturn that lasted around 18 months
1. Liquidity is vital: Developers realised this when sales volumes declined drastically due to the liquidity crunch. Developers who were selling, say, 40 flats a month could sell only around a tenth of that volume during the past 18 months. Liquidity was taken for granted by developers during the bull run. And when they could not repay their loans, they tried to sell off their land banks to raise cash.
2. Focus on the customer: The slowdown gave customers ample choice. Consequently, developers started looking seriously at the requirements of the buyer: What does he want? And what is the price he is willing to pay?
3. Investors are ‘fair-weather friends’: An investor is ‘with you’ in good times; when property prices go up, volumes go up. But during a downturn, when you need him the most, he becomes your ‘competitor’. Many developers were impacted by falling volumes because investors were selling their inventories at lower prices.
4. Sell ‘ready’ products during a slowdown: Developers who were the least affected by the slowdown were those who had ready products to offer. If your project was under construction or there was just a hole in the ground, it was difficult to find buyers. So, developers realised that they had to first complete the project before trying to sell it. Also, there were no takers for information technology parks during the slowdown.
5. Contracts can be broken: Developers witnessed customers back-tracking on legal contracts, especially in the commercial segment. Even big companies which had signed legal contracts and completed the registration procedure wanted to renegotiate or exit deals before the lock-in period ended. This had a cascading effect because many developers had raised money against the expected cash flows. As their loan burden increased, confidence in the industry was shaken.
6. Spiking prices is counter-productive: A few developers offered properties for as high as Rs1 lakh per sq ft. They discovered that a steep or sudden increase in prices can make customers postpone their buying until there is a correction. On the other hand, healthy growth can be sustained by a gradual increase in prices.
7. High-value transactions hyped by the media are not the ‘real’ market: When the media hypes a few high-value transactions, it creates an atmosphere wherein customers begin to feel that prices are too high. For instance, a retail property that is sold for Rs2 lakh per sq ft is an exceptional transaction and does not reflect the broader market. If such deals are hyped, it creates an artificial market and drives away prospective investors.
8. Innovate sales strategy: Developers tried to find innovative ways of driving sales as volumes dropped. A Bangalore-based developer created an escrow account to reassure customers that funds would not be diverted to other projects. Another developer promised to buy back the properties if prices declined over the next three years. Why didn’t the developers come up with this solution earlier? And why weren’t customers buying? Customers stopped buying because of two reasons. First, they expected prices to fall further; and second, they weren’t sure whether developers would complete ongoing projects.
9. Over-dependence on the information technology industry in the commercial sector can be suicidal: IT office space and malls comprise 80% of the commercial market and over-dependence on this customer segment will dry up volumes because the IT industry is one of the worst affected during a slowdown.
10. Do not try to penetrate a market where you lack expertise: Many developers tried to expand into tier-II and tier-III cities but failed to find buyers because they could not match the market knowledge and experience of the local developers.
– Pallabika Ganguly, [email protected]
Pramod Jain has a fairly colourful record of investments
Pramod Jain, a minority shareholder in Sanjay Dalmia-controlled cigarette-maker Golden Tobacco Ltd (GTL), made news with his hostile offer to acquire another 25% holding in the company at a hefty Rs101 a share. Who is Pramod Jain? A little digging reveals that he wasn't always hostile to Sanjay Dalmia and has a fairly colourful record of investments.
Mr Jain and his companies, Pranidhi Holdings and JP Financial Services, acquired a 6.47% stake in GTC when Mr Dalmia wasn’t able to redeem 890,000 shares pledged with the group. Mr Jain has since told the media that his open offer is aimed at ensuring that Mr Dalmia does not alienate GTC assets to meet his other obligations, including the large sums owed to India Bulls.
Mr Jain was also a director in GHCL, another Sanjay Dalmia company. Mr Dalmia had accused Mr Jain of trading in the GHCL shares without making appropriate disclosures. The latter resigned from the board in April.
In May 2006, Mr Jain was also involved in what turned out to be an extremely curious takeover bid for Cinerad Communications through his Delhi-based group company, Pranidhi Estates Pvt Limited. This company belonged to the noted film maker Zafar Hai and his wife Colleen Hai. Mr Jain's investment companies first acquired a big chunk of 25.80% of the shares from the Hai couple for Rs9.25 each and went on to make an open offer to the public to acquire another 20% at the same price.
Strangely, in less than a year, on 29 January 2007, Mr Jain resigned from Cinerad and his investment company sent a letter to the board asking that his investment vehicle, Pranidhi Estates, which made the open offer, should not be considered a part of the 'promoter group'. As of July 2009, however, the promoter group shareholding in Cinerad continued to be around 38.83%. This stake is held by India Emerging Capital Market Pvt Ltd which is listed in stock exchange records as a Promoter Group holding. Individual shareholders hold nearly another 40% of the equity while some corporate bodies hold 20%. Institutional investment is negligible.
Segment sees strong growth, but sales of electronic two-wheelers have stagnated
The domestic sale of mopeds for April-October 2009 grew nearly 27% on the back of availability of finance, lower interest rates and the festive season. TVS Motors, which is the only company to manufacture mopeds, sold 320,207 vehicles compared to last year’s 250,896, according to a report from the Society of Indian Automobile Manufacturers (SIAM).
“TVS Motors is heavily dependent on financing for the sale of (its) vehicles. In 2008-2009, the overall financing had reduced to 40% as compared to 66% in 2005-2006. Now with financing conditions improving, the sale of mopeds has increased,” said Sandeep Patil, an auto analyst from Kisan Ratilal Choksey Shares and Securities.
The sales of mopeds are dominant in semi-urban and rural areas especially in southern states like Andhra Pradesh, Tamil Nadu and Karnataka which account for 85% of the total market share.
Another factor which has boosted the sales of mopeds was the good monsoon in the southern peninsula which had been at 96% of the long-term average, according to the Meteorological Department. Agriculture output, which depends on the rainfall, provided an indirect boost to the sales of mopeds, the analyst added.
Again, the Bharat Stage IV (BS IV) implementation in April 2010 would mean lower levels of vehicular emissions—comprising hydrocarbons, nitrous gases, sulphur, carbon monoxide and particulate matter—which will ensure pre-sales in the months of February and March next year and increase the sales of mopeds to 538,000 units, an increase of 22% over 2008-2009.
These factors might not lead to significant rise in the domestic sales of mopeds in the long-term as there are signs of interest rates tightening, a view which is being maintained by a SIAM official.
However, if mopeds exhibited a stellar performance for the first seven months, Electronic Two- Wheelers (ETWs) put up a disappointing show. The domestic sales of ETWs for April-October 2009 dropped 83.8% to 3,001 units. Electrotherm (India) Ltd, the largest manufacturer of ETWs, did not respond to an email sent to it by Moneylife.
A factor which has affected ETW sales is the good performance put up by non-geared scooters (below 100cc), which are becoming increasingly popular among urban women and younger customers.
“The ETW market is still in the nascent stage, with its usage limited to urban areas only. There are other limitations also like infrastructure problems related to battery charging, total running capacity and maximum speed going to only 50-60 km per hour,” Mr Patil added.
The problem facing ETWs is that the market has not yet stabilised. Further, this segment is dominated by regional players and it is waiting for the entry of big brands like TVS and Hero Honda, the SIAM official said.
- Aaron Rodrigues [email protected]