New Delhi: It’s a situation no realtor wants to be in. With demand for housing waning, especially in the profitable premium segment, and costs spiralling, real estate firms are finding that managing profit margins is a tough battle. Under pressure, top managers at such companies, then, are adopting various tactics to rein in costs. While one company is telling its construction workers to work extra time, others are using ready-made construction parts to save on expenses.
Unitech Ltd, India’s second largest realtor by market value, for instance, is importing tiles, sanitary ware and bathroom fittings from Chinese and European firms to reduce rejections. While the cost of such material is almost the same as those sourced locally, there is still a cost reduction because the quality of imported products is better, Sanjay Chandra, Unitech’s managing director, told reporters recently.
“When we import, we reject very few materials because the quality of the product is good,” Chandra said. “Wastages are less, so that way we save money.” Unitech is also working on standardizing sizes of doors, windows and similar materials across its projects so that these can be imported in bulk from countries such as China. The purchase and transport cost of such products can be minimized only if they are in the same shapes and sizes. Just by this one change, Unitech expects to save Rs400 crore this financial year.
The rise in the cost of building materials has seen construction cost increase by Rs200-250 a sq. ft, especially in overheated markets of New Delhi and its suburbs. And, rising inflation, at a 13-year high, has raised the cost of debt and interest rates for property developers have gone up on an average by 1-1.25%.
Several developers, including Parsvnath Developers Ltd and Omaxe Ltd, reported a decline in profits during the April-June quarter of the current financial year on account of an increase in finance and construction costs.
“While costs have gone up, prices have remained stagnant,” says Anshuman Magazine, managing director of real estate consultant CB Richard Ellis. “Developers will have to look at innovative ways to sustain margins by cutting costs.”
Unitech’s smaller rival, Parsvnath, is not yet importing materials but aims to reduce project completion times by having its workers put in longer hours.
“We have asked people to work in double shifts, say, a couple of hours more every day so that we can finish the projects ahead of schedule,” a Parsvnath spokesperson said.
Parsvnath, which currently has 77 million sq. ft of space and 56 projects under construction, also helps its in-house material purchase and construction capabilities to save on costs and time. Typically, developers outsource their construction work to third-party contractors.
Omaxe is focusing on tightening administrative costs, which increased to Rs10.81 crore in the June quarter from Rs7.63 crore in the year-ago quarter. The firm is working on reducing its travel expenses, says Sunil Malhotra, Omaxe’s chief financial officer. “We are using more of emails and video conferencing facilities to communicate rather than spending on travel,” Malhotra said. “We will see the results of this cost- cutting by the end of the year.”
Travel has been curtailed in the last two months. Omaxe’s travel budget, which was approximately Rs5 crore last year, has been kept at the same level despite more projects (38 versus 25) this year.
Noida’s Assotech Ltd is importing wood from Africa and South-East Asia for door frames which helps it in saving costs on these items by 7-10%. The company is using tower cranes to erect columns instead of using manual labour, which, too, will help cut costs, says Sanjeev Srivastva, managing director, Assotech.
Vatika Ltd is aiming to control costs as early as when the design of a project is being readied. Earlier, says Pankaj Pal, vice-president of sales and marketing at the New Delhi developer, architects would design the product and the company would determine the project price after deducting the construction cost and profit margins. “Now, we work backwards,” says Pal. “We first determine the price we can get from the market for the product, deduct our margin from it and then give a construction budget to the architects to work on.”