Pradeep Jain, Chairman of Parsvnath Developers think that prices are actually hardening due to continuing robust demand and the govt. effort for price control by restricting the liquidity is apparently vague. Here are some excerpts of his conversation with Business Standard. The Q & A is actually interesting to read


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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  • Originally Posted by aditya
    Pradeep Jain, Chairman of Parsvnath Developers think that prices are actually hardening due to continuing robust demand and the govt. effort for price control by restricting the liquidity is apparently vague. Here are some excerpts of his conversation with Business Standard. The Q & A is actually interesting to read


    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.


    The residetial and commercial rates of the properties in Pune ,Mumbai market have seen sudden impact and rates are collapsing due excess production due to ITBI scheme benifits,introduction of slum TDR ,the rise interest rates on housing loans , with the rupee growing stronger by the day, non-resident Indians (NRIs) are postponing their plans to buy a property in the country. and due lots new unexperinced players entering in to the trade.we have noticed 8 to 16 % reduction in the prices.
    J.K.Patil and associates
    CommentQuote
  • Originally Posted by J.K.Patil and associates
    The residetial and commercial rates of the properties in Pune ,Mumbai market have seen sudden impact and rates are collapsing due excess production due to ITBI scheme benifits,introduction of slum TDR ,the rise interest rates on housing loans , with the rupee growing stronger by the day, non-resident Indians (NRIs) are postponing their plans to buy a property in the country. and due lots new unexperinced players entering in to the trade.we have noticed 8 to 16 % reduction in the prices.
    J.K.Patil and associates


    Dear Mr.Patil,
    I am curious to know where has the figure of 8-16% reduction in prices in Pune and Mumbai have come from. Are these published figures and if yes, which location of these 2 cities are exhibhiting such fall ?

    There has been no collapse of Rates as written by you.
    In the Mumbai market, there is an absolute shortage of quality residential and commercial properties, that are ready for possesion.
    There are far too many buyers than sellers in todays market.
    In fact, in south mumbai, realty deals in last 3 months have been on the decline not due to prices falling or buyer resistance to sky high prices.
    It is due to the fact that the sellers in those locations are not able to locate properties down north, where they intend to relocate and hence are not able to conclude deals of their own apartments. And this is out my personal experience being a realtor. For every apartment available in the market, there are 3 -4 genuine buyers, but short supply of ready properties at alternate locations act as a show stopper

    In a place like mumbai, with input costs like construction raw materials (steel, cement, sand etc), labour, TDR, Professional fees etc rising by the day, there is no possibilty of collapse of RATES. What is visible though is the temproary phenomenon of Buyer Resistance at a certain price which is not very elastic, as far as the buyer is concerned. But with reference to the market in general, there will be other buyers who would still find value at the current prices.

    As far as impact of rising interest is concerned, the only visible results are the defering of purchase of a second home by long term investors, who then intended to rent them out. Right now, they are fence sitting in the real sense. And a slight swing in the demand supply gap is a reason for some of these prospects to turn buyers. The first time home buyer has to buy a home at any cost, cos they face a bigger oppurtunity cost by not buying now. SO even at 15% Interest, they will buy. What would change for them is the locations and the configuration of the apartment.

    As far as NRI's postponing their decisons to buy in India, the truth is much farther from that. If you look at the ground realty, the indian realty market has been witnessing renewed interests from NRI's. They expect the Indian markets to keep performing better than the other developed economies cause there is still lots of land available for development. With legislation getting better and making property deals more transperent day by day, the confidence levels are rising. This in turn provides an impeteus to the NRI investing here. Add to that is the factor of coming back home. The emotional USP is always a big pull for indians to buy real estate here. WIth economic uncertanities rising by the day in almost all countries across the world, the wealthy indian sees more than common sense in parking his money in indian realty.

    With no offence to you Mr.Patil, i would request you to cross check your facts before you post. Such forums are information mines for people who look forward to these critical inputs to make or break decisions. SO be careful when you make statements like Market Collapse...
    What is though true is a subtle correction happening which was inevitable.
    But not all is lost.
    I see greater milestones for the Indian Realty market, not just in terms of prices, but better value offerings and a wide choice for the customer.
    CommentQuote
  • Is the realty bubble set to burst?

    This one is no doubt an Interesting discussion is going on. I would definitely like you all to read another article I just found related to the 'Property Prices scenario' in the region. Pls go through

    And what is the actual property rates' trend in the region? I still need to know. If anyone can guide me on whether the rates in this area are falling or increasing?

    By the time Mumbai’s second airport is up and running at Navi Mumbai, surging air travel may well overtake its capacity. But property prices in the sprawling area, planned as a mega city to decongest Mumbai, are already taxiing for take off. Like everywhere in India, property prices in the Navi Mumbai region are currently undergoing a correction from their peak levels since hardening of interest rates and prices are likely to fall further during the next six months due to lack of demand say real estate agents.

    “ Prospective house buyers should wait for six months. The airport will completely change the face of this entire locality and property rates are likely to appreciate by more than 25 per cent once construction of the airport gains momentum,” said Manohar Shroff of Shivam Real Estate, a leading Navi Mumbai real estate consultant and developer.

    Real estate consultants say prices in the region are likely to drop by 15 to 20 per cent in the coming months and house buyers/investors should come in at a time before prices shoot up due to the implementation of the airport project.

    “Land prices in the region are already at a peak. Several builders have already purchased huge tracts of land with an objective to build townships and scarcity of land would further jack up land prices going forward,” said Manju Yagnik, Vice Chairperson, Nagar Group of Builders.

    “There would be residential and commercial property development spanning 20 kms near the airport. Real estate prices in Navi Mumbai can match that of Mumbai city,” she claimed.

    According to builders, apart from residential construction activity, commercial construction will also boom. “Several hotels, Malls, multiplexes and retail chains would occupy bulk of the land. Big retail chains like WalMart have already blocked space. Any business that is associated with the airport would come up here and property prices may go up by 100 per cent in three years,” said a developer asking not to be named.

    Hectic construction activity is all set to take place in the regions of Kharghar, New Panvel and Kamothe, which are very close to the proposed airport. Currently these areas are undergoing a period a recession. “ We are hardly getting any inquiries. In a month, two deals are taking place as compared to a deal every week three months ago. But we expect better days ahead,” said Shroff.


    Source: hindustan times
    CommentQuote
  • If there actually a PRICE FALL?

    And what is the actual property rates' trend in the region? I still need to know. If anyone can guide me on whether the rates in this area are falling or increasing?


    My question is also same as raised by vaddy. Everyday there is some article published stating the 'fall' in property prices of many cities. Is our realy market actually experiencing or going to experience some fall in property rates??
    CommentQuote
  • Would you like to repeat this comment in hindsight?

    Dear Ram,

    My name is Ram too. That was a sharp note to Mr. Patil.

    Now that it is Oct 2008 and Realty is in general retreat all over the world, would you like to make that last comment again?

    .... "Such forums are information mines for people who look forward to these critical inputs to make or break decisions. SO be careful when you make statements like Market Collapse...
    What is though true is a subtle correction happening which was inevitable.
    But not all is lost."

    Myybe Mr. Patil may have the last laugh after all!!!

    No offense! :)

    cheers,



    Originally Posted by Pinnacle
    Dear Mr.Patil,
    I am curious to know where has the figure of 8-16% reduction in prices in Pune and Mumbai have come from. Are these published figures and if yes, which location of these 2 cities are exhibhiting such fall ?

    There has been no collapse of Rates as written by you.
    In the Mumbai market, there is an absolute shortage of quality residential and commercial properties, that are ready for possesion.
    There are far too many buyers than sellers in todays market.
    In fact, in south mumbai, realty deals in last 3 months have been on the decline not due to prices falling or buyer resistance to sky high prices.
    It is due to the fact that the sellers in those locations are not able to locate properties down north, where they intend to relocate and hence are not able to conclude deals of their own apartments. And this is out my personal experience being a realtor. For every apartment available in the market, there are 3 -4 genuine buyers, but short supply of ready properties at alternate locations act as a show stopper

    In a place like mumbai, with input costs like construction raw materials (steel, cement, sand etc), labour, TDR, Professional fees etc rising by the day, there is no possibilty of collapse of RATES. What is visible though is the temproary phenomenon of Buyer Resistance at a certain price which is not very elastic, as far as the buyer is concerned. But with reference to the market in general, there will be other buyers who would still find value at the current prices.

    As far as impact of rising interest is concerned, the only visible results are the defering of purchase of a second home by long term investors, who then intended to rent them out. Right now, they are fence sitting in the real sense. And a slight swing in the demand supply gap is a reason for some of these prospects to turn buyers. The first time home buyer has to buy a home at any cost, cos they face a bigger oppurtunity cost by not buying now. SO even at 15% Interest, they will buy. What would change for them is the locations and the configuration of the apartment.

    As far as NRI's postponing their decisons to buy in India, the truth is much farther from that. If you look at the ground realty, the indian realty market has been witnessing renewed interests from NRI's. They expect the Indian markets to keep performing better than the other developed economies cause there is still lots of land available for development. With legislation getting better and making property deals more transperent day by day, the confidence levels are rising. This in turn provides an impeteus to the NRI investing here. Add to that is the factor of coming back home. The emotional USP is always a big pull for indians to buy real estate here. WIth economic uncertanities rising by the day in almost all countries across the world, the wealthy indian sees more than common sense in parking his money in indian realty.

    With no offence to you Mr.Patil, i would request you to cross check your facts before you post. Such forums are information mines for people who look forward to these critical inputs to make or break decisions. SO be careful when you make statements like Market Collapse...
    What is though true is a subtle correction happening which was inevitable.
    But not all is lost.
    I see greater milestones for the Indian Realty market, not just in terms of prices, but better value offerings and a wide choice for the customer.
    CommentQuote
  • Hi Guys,

    The real estate property value would come down at least 20% to 30% down.
    You can ask me why? Since, any market or business is purely depending on consumer’s demand and supply. It is simple thump rule apply for the any business you may consider. Just, you consider the situation now, main consumer of luxury items mainly from the people who are working in IT firms. Now, it companies are looking down ward trend as their outsourced work majorly getting from US. As it seen visible and strong recession happening in US, it will have direct impact on our IT firms those who have business with US. As US is in recession we re not receiving as much big project as it is suppose to be. Now, almost top IT concerns start downsizing their employees. So, the people who unfired are unwilling to invest in real estate. Since, they are unsure about their job. So, you can say huge slump at consumer side. So, practically there is no demand. Obviously, real estate price will come down.

    India has not announced recession in India as it is not having any negative growth. But, there is still high possibility India would enter in to recession in 2009, January. Already, big giants like DLF, unitech are not doing good business. No consumer, No business are the consequences of recession this would lead huge job cuts. The people thinking the worst already hit India. But, it is merely started. So, worst day are yet to come.
    CommentQuote
  • Pradeep Jain does not expect the prices will fall down

    Pradep Jain says the cost of construction in India is Rs. 1500 to Rs. 2000/sq.ft. This is too high a figure. If it is so, how come builders at Bangalore offer the flats at about Rs. 1700/sq. ft. even at the outskirts of Bangalore? There is one well known builder at Indore offering duplex houses at Rs. 1700/sq. ft. with kitchen cabinet etc. How long our real estate guys will hold on to the very high prices and take the public for a long ride?
    CommentQuote
  • Not for very long ...

    Originally Posted by ks2071746
    Pradep Jain says the cost of construction in India is Rs. 1500 to Rs. 2000/sq.ft. This is too high a figure. If it is so, how come builders at Bangalore offer the flats at about Rs. 1700/sq. ft. even at the outskirts of Bangalore? There is one well known builder at Indore offering duplex houses at Rs. 1700/sq. ft. with kitchen cabinet etc. How long our real estate guys will hold on to the very high prices and take the public for a long ride?



    ks, you missed the hidden meaning in that statement.

    While you pay Rs 1500 - 2000 for your personal flat, he will build his personal flat with that money!!! :D

    This will not last long. Ashok Leyland has just announced 60% fall in volumes in November. This is after announcing 50% fall in October. Auto companies have announced from 20% to 40% drop in sales in the Diwali month!!!!!

    And what they are not telling you is the big jump in delinquency rates in Auto Loans. While in 2001 recession it peaked at around 30%, it has already crossed that figure by now and we are not even in recession :o!

    Rest assured. Property price is the next in line. The only thing that is keeping it high is people's reluctance to give it up because most of us are wedded to our property. But when financial pressure gets to breaking point, it will be the wedding that will break.

    cheers

    A car is he second most
    CommentQuote
  • Real estate downtrend

    Originally Posted by wiseman
    ks, you missed the hidden meaning in that statement.

    While you pay Rs 1500 - 2000 for your personal flat, he will build his personal flat with that money!!! :D

    This will not last long. Ashok Leyland has just announced 60% fall in volumes in November. This is after announcing 50% fall in October. Auto companies have announced from 20% to 40% drop in sales in the Diwali month!!!!!

    And what they are not telling you is the big jump in delinquency rates in Auto Loans. While in 2001 recession it peaked at around 30%, it has already crossed that figure by now and we are not even in recession :o!

    Rest assured. Property price is the next in line. The only thing that is keeping it high is people's reluctance to give it up because most of us are wedded to our property. But when financial pressure gets to breaking point, it will be the wedding that will break.

    cheers

    A car is the second most


    Dear wiseman, Chennai real estate guys are the most tough nuts to crack.One of my friends told me that they have some association type of body and they are sticking on to the prices and not reducing the rates. They are used to high and unimaginable profits and I do not know how long will they hold on to the high prices. Most of the fellows do not budge and hardly give Rs. 25 to Rs. 50 per sq. ft type of peanut reductions. The recent rain havoc has shown the public the areas which are prone for water logging, some areas became water logged now, though in the last 25 years, there were no water logging. In those so called -safe- areas, the fellows have increased the rent as also the sq. ft. rates. Now another strength to these profiteers- RE chaps is that the interest rates may fall and now they will hold on to the prices for some more time.
    I await your expert views on the ratio of carpet area vs saleable area. This varies from 65% to 72 %.

    ks2071746
    CommentQuote