Sobha Developers Ltd’s managing director JC Sharma discusses the impact of service tax on the realty sector and his company’s roadmap with Moneylife’s Pallabika Ganguly
Pallabika Ganguly (ML): The Union Budget has brought the construction industry under the ambit of service tax. What would be the impact of the service tax charges on the real-estate industry?
JC Sharma (JS): The prices of properties are likely to go up by more than 3%. The service tax on the under-construction properties and on leased land development will impact the actual users. This is a bit of a dampener for the realty industry.
Every year, after the Budget, there is a price hike in some sectors. People make noises about the same for some time after the change and then accept it as daily routine. The same situation is here also, for a few weeks, there will be tentativeness in the market but it will again turn normal.
Real growth in the economy is the biggest booster. The reduction in direct taxes will give more money in the hands of people. This Budget is a positive one.
ML: How do you see the realty market performance over the past 12 months as we near the end of FY10?
JS: The realty market has seen both side of the coin—boom and bust. In the last couple of quarters, we have clearly seen the confidence coming back both from the customers and developers. We foresee that despite the service tax and increase in input costs due to the excise issue which will impact the industry later, the realty segment will move smoothly.
ML: Sobha Developers is planning to enter into joint development agreements with landowners to expand land banks. What are the merits of such agreements?
JS: Going forward, we are looking at such deals. Execution of a project is our strength so the best way to enhance this skill is to tie up with landowners. As a model, instead of putting my money, I leverage on my strength. My focus is to increase the volumes. Few of my existing projects are constructed on such models and we are looking for such joint venture developments in the next quarter.
ML: Your company was talking about entering a segment called ‘value homes’. What is the progress on this front?
JS: We have plans to enter that segment in a year’s time. I am trying to develop the ‘value home’ segment on the lines of China, Thailand and Mexico. I am still working on the model and have not finalised anything that would work in India.
ML: How much is your total area under construction at present and what are your plans in sales and inventories?
JS: Currently we are developing around nine million square feet (sq ft). We will be developing another eight million sq ft over the next financial year. Out of nine million, we are planning to hand over residential projects of about four to five million sq ft over the next 12-15 months.
Out of the total nine million, I have little more than three million to be sold. We had planned to sell one-and-a-half million square feet in FY10. We have already achieved the target and we are almost at a stage of crossing two million square feet of sales rather than the earlier target. For the next financial year, we have plans to sell three million square feet.
ML: During the third quarter to end-December, Sobha Developers posted a 444% higher net profit to Rs40.80 crore on revenues of Rs310.20 crore. How did you achieve it?
JS: From the last quarter, the realty market started showing signs of revival. A combination of quality products and marketing strategies helped us to achieve the target. The growth can be attributed to revival in economic growth, improved job scenario especially in the IT, auto and textile sectors, coupled with competitive interest rates offered by various banks.
ML: In which segment, high value, mid value or low cost, do you see the demand coming from?
JS: All kinds of apartments have good demand, whether mid value, high value or low cost housing. I recently came across data, which showed that the middle class is growing at a compounded annual growth rate (CAGR) of 14% and upper middle class at a CAGR of 21%.
ML: What is the growth you are looking at in Q4FY10?
JS: We do not make forward-looking statements but we are expecting a good growth. Around 10% more growth than the last quarter. I expect sales to take place at the same speed as they are currently going through. There could be some hiccups, but I think they will be absorbed by the market.