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'Why expect property prices to decline?'

June 01, 2007 09:54 IST

The 1978 Yash Chopra film Trishul was all about Vijay (Amitabh Bachchan) coming to a big city and struggling to become a construction baron. The plot was melodramatic and full of twists and turns.

Real life for construction magnate Pradeep Jain, 42, has been equally interesting. Starting off as a property broker with a 45-square foot office on the ground floor of Arunachal Bhawan on New Delhi's Barakhamba Road, Jain has today moved into the big league, although he has his office in the same building.

With 152 million square feet under development, the earthy Jain is an angry man today. His ire is particularly reserved for the recent interest rate hikes, which he believes are squeezing supply and hurting buyers as prices are actually hardening due to continuing robust demand. Excerpts from a free-wheeling conversation with Siddharth Zarabi and Nayantara Rai:

After all the controls put in place by the government, what is happening to the real estate sector?

The government in its wisdom has decided to increase the interest rates for home loans. Domestic borrowing for developers has also become very expensive. External commercial borrowings have been banned.

All these measures to suck out liquidity will work. But, at the same time, it will put a constraint on the supply side. Once that happens, obviously property prices will increase. It is basic economics.

You are saying prices will go up. Everyone is talking about a cooling down of property prices.

Show me one property whose price has actually fallen. Everyday, the media discusses a cooldown - some quote a 15 per cent decline in prices, others 25 per cent. I went to buy a Mercedes Benz recently.

The salesman who knew me was telling me about increasing interest rates and how that must have impacted my sales. I asked him how many models of Mercedes he had sold in the last quarter and how that compared to the previous nine months.

He admitted the number of cars sold in the quarter outnumbered his sales for the previous nine months - and this at a time when car financing has also become expensive.

I explained to him that if I have lived without a Mercedes till now, I can afford to carry on with my life without this luxury. But buying a house is a totally different ballgame - it is a necessity. Think about it, how long will you want to live in a rented house?

And even if the real estate market had gotten so overheated, it was obviously because people were ready to buy properties at those prices. We did not force anyone to buy. But now the government is trying to curtail inflation and property prices by coming up with all these steps. Tell me, have the prices of onions and potatoes come down? If they have not, why are you expecting property prices to decline?

Like I told you, the liquidity crunch will impact the developers' ability to execute projects. Input costs have also been steadily rising.

Could you elaborate on the increasing input costs?

Real estate development supports around 240 ancillary industries. If the product cost of these industries as well as interest rates keep rising, obviously my margins will be impacted.

Along with that, salaries have gone up manifold. Manpower costs have gone up roughly 300 per cent over the last two years. We have to keep pace and pay higher salaries. Any employee, who knows his value today, cannot be shortchanged. If I know I can get up to Rs 50,000 a month, I would rather stay home than work for someone at Rs 40,000.

There is also a basic shortage of contractors in the country. Their order books are full, several times over. Contracting profits have gone up from 7 per cent to 20 per cent. That also adds to developers' costs.

Two Delhi-based companies have forged joint ventures with foreign contracting companies. Is that the solution?

I have seen all the hype around these joint ventures. The question is: does it make any business sense? I don't think so. Firstly, you have to pamper these foreign partners. Just to meet them, you have to pay for a business class ticket and put them up in fancy hotels. Even if you consider that to be trivial, such a business arrangement eats into your profitability. They may have the technological know-how, but certainly not the local infrastructure to reduce costs.

In Dubai the construction cost is 400-500 dirhams per square foot, which works out to Rs 6,000-7,000. In Singapore, the average cost of construction is S$ 400-500 per square foot, or around Rs 18,000.

Compared to that, the cost of construction in India is Rs 1,500-2,000 per square foot. And the average sale is less than Rs 6,000 per square feet. How will a foreign partner make construction more viable?

What about private equity and foreign direct investment?

Please note, large developers do not favour private equity. Debt at today's interest rates is still cheaper than private equity. For private equity, you not only have to give up an equity stake in your project or at the holding entity level, but also share up to 25 per cent IRR (Internal Rate of Return). Why would I want to give 25 per cent of my yield to another party?

Is that the only option left for developers that do not have deep pockets?

The days of fly-by-night operators are over. With the real estate boom, everybody wanted to become a developer. Even your paanwaalas were fancying themselves as brokers and builders.

There will be a weeding out process. Large developers will buy out the land and projects of small players. These small builders know that today they will not get funding. Banks will not lend to them. And private equity will not touch them.

What steps are you taking to ensure cost-cutting?

We at Parsvnath never buy land from the secondary market. We acquire land directly from the farmers. For 20 years, before I became a developer, I was a broker. I used to buy land for some of the biggest realty firms in existence today.

That is where my original expertise lies. I know how to acquire land cheaply and legally. Given our foresight, Parsvnath purchased land two years ago in Chennai and Sohna Road (Gurgaon) for rates, which are rock bottom by any standards.

What about special economic zones?

We are small SEZ developers. We have planned 16 zones and have got formal approvals for four and in-principle approval for eight. Our largest SEZ is a 2,500 acre multi-product one at Chennai.

If the government were to remove some concessions, we will still benefit. We can always convert the entire area of our proposed SEZs into a real estate development project. And obviously, if the government gives more concessions, we will carry on benefiting. There is an upside for us either way.

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