People are looking to buy homes, buy larger spaces and it has an implication for us from a product development perspective. But from a demand perspective, it has led to a very positive revival for the residential sector, said Mohit Malhotra, MD & CEO, Godrej Properties. Edited excerpts:
What has been your outlook on the fact that there has been no extension of the stamp duty? Do you think that volumes will likely sustain, will the revival be impacted quite significantly on account of this roll back?
We are present across four cities and stamp duty cut has been only in Mumbai and Maharashtra. We are seeing demand revival across the four geographies, across the key cities. It is not just because of the stamp duty cuts which happened in Maharashtra. Real estate is at all-time high in terms of affordability, interest rates are all-time lows. So, people are seeing this as a right time to buy homes and people are understanding the value of homes in this COVID times.
On your specific question on stamp duty, yes there will be a temporary phenomenon in Maharashtra where the volumes could go down for a month or two. But from a long-term perspective the demand is very much in place and we do not see it as a long-term issue. Demand revival is pretty strong and across geographies.
When you say demand is picking up, are you talking about volume growth or value growth?
I am talking about volume growth.
When you say volume growth is picking up, in which category is it specifically picking up? Is it at the entry level, mid-luxury or luxury demand?
Largely the demand has been pretty stable and strong in the mid-income segment, which is the bread and butter for us. If you look at from a price point perspective, anything outside Mumbai between a price point of 35 lakhs to a crore is what we classify as a mid-income and that has seen very strong demand over the last few quarters. That has been very stable and we remain very bullish in that segment.
The luxury demand in Mumbai picked up very significantly thanks to the stamp duty cuts but whether that demand will continue to remain buoyant or not is something which is difficult to guess right now because stamp duty cut did play a very significant role in the luxury markets.
If I look at raw material, they have gone through the roof. One side demand is coming back, but for your balance sheet are you getting pricing power back?
You are right, the prices of steel, cement have started to go up. Steel has significantly gone up. We will need to pass on some of these costs to the consumers. Now, from a percentage of top-line perspective, the cost is not very significant. Even if there is a 20% rise in the price of steel and cement, it translates between 1% or 2% of the top line. So, passing some of the small numbers is something which we would need to do as a developer community because margins are already very thin.
The real pricing power of taking price hikes significantly is couple of months away. Just to put it in perspective, it has been almost eight years of downward cycle in our industry. Most geographies have had price cuts or actually prices remained flattish. So if you adjust for inflation, the prices are really low. However, couple of months of volume growth and then the pricing power will be back for us in the market.
Help us understand what is currently your launch pipeline and your response to recent launches, especially in Delhi NCR.
We did close to 11 launches in second half of the year and we had very successful launches across the cities. We had launches in Bangalore, where we launched a plotted development which was a sellout. We had a plotted launch in both NCR and in Pune, which was again a very big sell out. Multiple successful launches in Pune and Mumbai.
Now specifically coming to NCR, we actually had a launch in the central Noida market and that project was a record sale where we sold close to 500 crores in a very short period of time. We have seen very strong demand in that particular project and also across cities. The launches have really done really well over the last few months and we expect this trend to continue.
Going forward would you be acquiring more land parcels? Is there a strategy which is put in place one year into the pandemic?
We had a shift in strategy almost four years back, where we took a call to invest more capital in the real estate market as a part of our counter-cyclical investment strategy. If you see, we have done only three rounds of fundraising over the last four years and have deployed significant amount of capital in the market. We just did another round of QIP in the last quarter and have the cash available in the balance sheet today to pick up more projects. We think there will be a mix of joint ventures and outright purchases which we will be using this capital to invest in.
What will happen to evergreen sectors like start-ups and IT? Are you witnessing any change in demand patterns in cities like Bangalore, Chennai, or even Gurgaon?
We are largely a residential player. What you just described is a pretty strong headwind for commercial development across the country. Again, the jury is out to know what is the impact of work from home for the commercial market.
But definitely for the residential market, the COVID-induced work from home is a very positive development. People have understood the importance of homes. We have spent close to a year at home. I have never spent so much time at home. People are looking to buy homes, buy larger spaces and it has implication for us from a product development perspective. But from a demand perspective, it has led to a very positive demand revival for the residential sector.
When will the investor comeback in equity markets? Do you see the trend changing now that affordability is back? As builders you will say bullish things, but let us hear the reality.
The investors have walked out of the real estate market for almost five years now. It is very typical of any downward cycle. At the peak, 80% of the sales started to happen to investors. Since almost a year back, almost 90% to 95% of the sales was happening to end-user only. This shift typically happens in any cycle. There is nothing new here.
But for last one year during COVID we have actually seen some bit of investor demand trickling in. If I look at our overall portfolio, almost 20% to 25% of sales today are investors. So they have started to come back in the market. Lot of people today have a view that the prices have bottomed out and the probability of prices going down from here, vis-à-vis cycle turning and giving positive return, the probability is in favour of the cycle turning. We are seeing investors slowly and gradually coming back in the sector.
In next 12 months, what kind of million square feet project are you likely to launch and are also likely to give OCs for?
I would avoid any forward guidance at this point of time. We are rapidly growing as organisation. If you see our past trend, we have been growing at a pretty rapid pace. This year we are pretty bullish and optimistic, so no reason why growth should slow down. But I would be avoiding any future guidance.
How do you see things evening out as on the demand front the news is good, while on the input side the news is bad? Typically, when you launch a project, you lock the pricing and they do not change. What happens to the existing projects which were launched six months to one-and-a-half years ago? Will that start affecting your profitability in the medium term?
As I said, even if you take a very extreme view on commodity prices like steel and cement, the impact on margin is around 1%. That is something for the previous launches we will absorb. Again, at the time of launches we sell between 70% to 80%. So, balance inventory is something where we will look at passing on some of these inflations to the consumer. Overall there might be an impact at close to a 1% level for the past sales which are locked. For the future launches, we will see how much of this can be passed on to the consumers depending on how the pricing is shaping up in the market.