News: Godrej Properties saw best ever sales in second half of FY19: Pirojsha Godrej-27-09-2019
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For the real estate sector, it is a matter of time before demand improves.
If you look at the sector as a whole, both the demand and the liquidity environment are cause for concern. But in each city, larger developers are seeing pretty good performance, says Pirojsha Godrej, Executive Chairman, Godrej Properties. Excerpts from an interview with Aabha Bakaya of ETNOW.
What is the demand scenario when it comes to real estate? How is it looking on both the residential as well as the commercial side?
The sector is going through a tough time. The commercial real estate sector has been going through a positive few years. That has been by and large doing okay. On the residential side, it has been a declining market since 2012. A lot of individual developers and the sector as a whole are struggling but what has benefited Godrej Properties and several other
whole are struggling but what has benefited Godrej Properties and several other developers is there has been a lot of consolidation in the sector. In each city, larger developers are seeing pretty good performance. For example, the second half of last financial year was by far the best ever period we had for our own sales. But there is no question that if you look at the sector as a whole, both the demand and the liquidity environment are cause for concern.
For you in particular as a business, how do things stand right now across your projects? I know that you have been delivering quarter on quarter, but how are you comparing it in terms of how it is versus what it was six months ago?
Honestly, we are not seeing much difference for our own projects from six months ago. We are quite happy with how launches are going. We are seeing this period as one that presents tremendous opportunity because the demand environment has been quite positive. We have actually raised some equity in anticipation of being able to invest at the right valuations in this market as other developers are looking to monetise their projects. I actually think the next 12 to 24 months presents a pretty unique opportunity for Godrej Properties to do our best at this difficult time and to capitalise on growing our own market share.
Is it the price point that you are managing to capture? Is it the overall product, what is it about your projects that is actually working in a market like this?
There is no one thing that is obvious but certainly getting the right product, making sure that we try to understand what we are doing in each individual project, what customers in that location really want etc. Making sure that we are appropriately managing the balance sheet, we are not stretching ourselves or putting any doubts in customers’ minds about our ability to financially withstand any pressure that might come as a result to market conditions. You are really doing our best to build on the Godrej brand and all that it stands for in terms of trust and good governance.
When you were talking about key markets, metros and non-metros, what are the differences in the demand scenario that you are observing?
Our focus for the last few years has been primarily on the top four markets in the country which are Mumbai, NCR, Bangalore and Pune. Within those, NCR has probably been the weakest, if you look at it from an industry perspective. A lot of developers there have struggled, a lot of apartments have gotten delivered even with 10 year delays. There has been a huge amount of issues but somewhat surprisingly for Godrej Properties, it has been our best performing market over the last few years. We actually sold more in NCR in last year than any of our other markets.
Mumbai market has not been as bad as NCR but it also had its share of pain points, particularly in some of the luxury products which fortunately we have not been too focussed on. The Bangalore and Pune markets have been generally steadier and better performing. You have not seen prices going up too much but demand has been relatively solid in those areas.
What really worked for you in NCR? Buyers are a little bit more apprehensive today about under construction projects.
There is no question. People are concerned about buying under-construction properties and for such properties, they do not look beyond the top three, four, five names in the industry because they don’t want to risk the uncertainty of delivery. Fortunately, given the corporate branding we enjoy, given the delivery track record we have within the real estate sector, I do not think we are seeing any challenge in under-construction properties as most of our sales happen when we launch a project which happens as soon as we receive all our regulatory approvals.
You have also taken the partnership model for many of your projects. Is that something you plan to stick to going forward? What does the cash flow situation look like over the next three years?
The partnership model that we have followed has held us in good stead. It has allowed the company to grow quite rapidly from probably not being amongst the top 10 developers by value of real estate sold to being amongst the top one or two. Doing that, while maintaining a prudent balance sheet and not overstretching ourselves to fund rapid growth because buying land can very quickly become a very capital intensive game. Our philosophy has been to the extent possible to use cash flows generated from the development to pay for that land through various partnership structures. That is something we continue to want to focus on.
At the same time, for the right projects at the right valuations, if we do see distress in the market because of the overall liquidity, I am quite happy to use that as an opportunity to acquire land at the right price.
Is that going to change the balance on the books over the next year, a year and a half? Are you planning to go aggressive on that?
We definitely would like to see a greater investment over the next couple of years. We actually did a QIP where we raised a couple of thousand crores in the first quarter of this financial year. Temporarily the impact of that was to reduce debt on the balance sheet but really we have no interest in having debt at as low levels as we currently do because we really want to use this as an opportunity to strengthen the portfolio.
In a long cycle industry like real estate, we typically think a counter-cyclical investment strategy makes a lot of sense. When everybody else is struggling a little bit, when valuations are at the right level, that is when we should be as aggressive as we can in terms of expanding the portfolio and then hopefully launching and building these projects as the market improves. We think there is an opportunity to deploy about Rs 5,000 crore into new projects over the next couple of years. That is a very important focus area for the company in the near term.
Do you feel that there is going to be a shift in sentiment with regards to people now willing to perhaps go out there and spend, seeing that shift in liquidity spending now going forward?
There is probably no one silver bullet, but I do think the corporate tax cut announcement was a significant one. It will help boost sentiment in the economy as a whole, will certainly help boost sentiment within corporates that are thinking through their investment plans. But is it an immediate solution that tomorrow we will see an increased consumer demand? Probably not. But has it set in motion a cycle of events that will likely end up with that result? Probably yes. The way it plays out is that you will see greater corporate investment which will result in greater job creation and confidence which in turn will be what spurs consumer demand.
For the real estate sector, it is a matter of time before demand improves. First of all, you have six or seven years of cyclically weak period. Over that period, you have seen affordability of real estate improve dramatically. The interest rates over that time have come down by anywhere between 300 and 400 bps; property prices have been probably flat and in some markets like NCR, have actually come down a lot. If you assume 8-10% growth per year, peoples’ income have grown by 50-60%. So affordability is completely different today as compared to 2012 and that is a big fundamental underlying driver that should over time lead to much better demand.
The overall economic growth in the country needs to pick up a bit. Overall confidence in the direction of the economy needs to pick up a bit and the real estate sector. Once that happens, we are bound to see an improvement.
How long do you think that is going to take?
The million dollar question to which unfortunately I do not think my answer is probably worth even a rupee. The timing of this is honestly quite difficult to predict. I have been quite consistently wrong about the timing of it but again the underlying factors are in place. The affordability of real estate is quite good, India’s economy again is going through a bit of a tough patch but I do not expect that that will last more than the next 12 to 18 months. That is probably the timeframe where I would see this kind of turnaround happening.
Do you see that economic activity completely negating the effects of the slowdown that continues to impact industry? Are you seeing an overall improvement coming in say next year?
Certainly that is our bet. We would not be putting in Rs 5,000 crore of new capital to work if we were not very optimistic about the prospects of the sector. I think it is a sector that is very cyclical both here in India and globally and the reason for that is it takes quite a while for supply to adjust to prevalent demand conditions.
If you have committed a project and started construction on it and suddenly demand deteriorates, you do not have much ability to pull that supply. Similarly, if tomorrow we expect there to be an improved demand, we do not have ability to create that supply in that shorter timeframe. You have to acquire the land, go through all the regulatory approval processes, design the project, launch the project so that takes its own time which again is the whole reason that the sector is so cyclical. Anecdotally, every skyscraper in the world has apparently been delivered in a recession because such projects almost always are conceived in good times but the time it actually takes to deliver inevitably seed the market conditions have turned.
Our bet is there is nothing different about this cycle. We are going through a tough period but this too will pass and there is a lot of talk of oversupply at the moment. If you talk to any developer or analyst, there so much supply, our view is that it is quite visible that two, three years from now, we are going to be in an opposite period because you can probably count on one hand the number of developers that are actually investing in new projects at the current moment.
Once the older projects that represent the current stock of supply gets absorbed, two or three years from now, there would not have been enough new projects planned in this period which will lead to the next up cycle.
