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]