Mumbai: The sprawling used-car lot of Popular Car World Pvt. Ltd at Andheri, a Mumbai suburb, has disappeared. In its place stand sentinel-like billboards of Housing Development and Infrastructure Ltd (HDIL), guarding the entrance to the vacant plot that once stocked 350 cars.
Maximizing value: HDIL billboards at what was earlier a used-car lot at Andheri in Mumbai.
India’s unending appetite for real estate, and the scarcity of land that can be developed in the country’s commercial capital are encouraging city’s large used-car dealers, who have surplus space, to either lease or sell it out.
Leading used-car sellers such as Fazulbhoy Motors Pvt. Ltd and Sai Service Station Ltd have leased out surplus land and property.
“We have rented out about 2,000 sq. ft of our showroom in Prabhadevi (an upmarket Mumbai neighbourhood) to Kotak Mahindra Bank,” said Aarif Fazulbhoy, director of Fazulbhoy Motors. According to Fazulbhoy, the average rent in Prabhadevi is about Rs300 per sq. ft for a month (which means a 2,000 sq. ft area could fetch Rs6 lakh a month), although he did not say how much rent his firm earns.
High street rents in Mumbai have shot up by 22-42% in the December quarter from a year ago, depending on the location, according to data from real estate advisory Cushman and Wakefield. In the past two years, rents in some premium locations have doubled on the back of an increase in demand.
Dealers are quick to add that while they are leasing out some of the surplus land and property for good returns from rents, they are not doing so at the cost of their business. Peter David, sales manager at Sai Service, which is also an authorized dealer for Maruti Suzuki India Ltd and Bajaj Auto Ltd, said the company has “not lost out on our used-car operations” in Mumbai’s Lower Parel region after it leased out a showroom there.
“For used-car dealers, it may be beneficial to move to alternative locations and maximize their real estate value by bringing in branded retail format(s),” said Rajneesh Mahajan, director, retail services at Cushman and Wakefield. “Automobile dealers with a large area have a greater opportunity,” to lease out space, he added.
For sure, better earnings from rents might tempt some to exit the business altogether, especially when more intense competition and rising costs such as staff salaries are hurting margins. Yet, not every one in the used-car business is convinced that this would be the right step.
“You still need to have your own business if real estate prices fall,” said Karan Nagpal, director, Velocity Cars Pvt Ltd, which sells used cars from only one outlet. “Getting out of the business and renting out your premises would not be a very good idea.”
On the flip side though, steeper rents also mean higher costs for those dealers who don’t own premises. Indeed, there is some indication that these dealers are moving from high-cost areas in Mumbai to suburbs such as Andheri, Kalyan, Kharghar or Mira Road, where rents are lower.
The situation is even more dire for smaller dealers. These dealers, who typically move 5-10 cars a month, are getting into the “mood to exit the business” Fazulbhoy said.
Three smaller dealers admitted things were getting tough.
“High rent is pushing us out of business,” said the proprietor of a used-car dealer in Mumbai who did not want to be identified as it would affect his already weak business. “Over the last one year, many dealers who sell less than five cars a month have shut shop because of high rents,” said another worried dealer, who, too, did not want to be named for the same reason.
What’s worse is prices of used cars have come down following the excise duty cuts on small cars in this year’s Budget. The market itself is also showing signs of a slowdown, according to dealers. Add to this the increasing competition from vehicle makers, who have entered the used-car space, and the picture for the smaller players looks grim.
Vehicle makers such as Maruti Suzuki India Ltd, Honda Siel Cars India Ltd, Hyundai Motor India Ltd, Ford India Pvt. Ltd and Mahindra and Mahindra Ltd have all entered the business. This is because selling used cars can result in a profit margin of as high as 10%, compared with as low as 2% for most new cars.
While there is no accurate data available on used-car sales in India, previous estimates from Maruti’s TrueValue and Honda Siel’s Auto Terrace used-car divisions say that the market for used cars in 2007 was 10% more than that of new cars sold during the year.