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Business News/ Money / Real estate firms returning to high-price, high-volume model
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Real estate firms returning to high-price, high-volume model

Real estate firms returning to high-price, high-volume model

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Bangalore: In February, DLF Ltd launched 150 high-end apartments in the third phase of Capital Greens, a residential project in West Delhi, at Rs10,000 per sq. ft. About 70% was sold within weeks. Just six months earlier, DLF had sold apartments in the first phase of the same project at Rs4,500 per sq. ft.

Also See Project Pipeline (PDF)

India’s largest real estate developer is set to launch at least 20 million sq. ft of space in 2010-11, spending around Rs2,000 crore in construction. Its product mix for the year is 26% high-end residential projects, 38% commercial or office space, and the rest, mid-income or value housing.

DLF and other large realty firms are returning to the high-price, high-volume model of their best years, now that their debts are lower and cash flows improving.

DLF, Unitech Ltd and Housing Development and Infrastructure Ltd (HDIL), the country’s top three realty firms by market value, have set an aggressive pipeline of projects, but analysts warn that over-pricing of properties could dampen sales again.

In 2009-10, DLF sold 12 million sq. ft of space, of which 65-70% was residential real estate mainly targeted at middle-income buyers. Another 20-25% of the mix was for commercial projects and the rest for hospitality and retail developments.

Realty was among the sectors worst hit by the economic downturn. Developers were saddled with huge debt and property prices declined steeply. Developers quickly turned their focus from high-end to less pricey projects.

“The past is clearly behind them. Most firms sold a lot of stock, even through pre-sales, in the past four-six months. But now they need to focus on execution and delivery," said Ramnath S., director (research), IDFC-SSKI Securities Ltd. “Once delivery of projects picks up in the next six-eight months, it will put back confidence in buyers."

Revival signs

Some of that confidence is already returning because of good pre-sales in recent projects, which has boosted cash flows.

DLF executive director Rajeev Talwar said the sales outlook for the firm is good and there are revival signs in the commercial sector as well.

Even firms such as Unitech, which had sacrificed margins for sales during the downturn, are trying to regain their high-margin status by increasing prices. Around 15-17% of the developer’s proposed portfolio is in the high-end residential segment in cities such as Mumbai and the National Capital Region (NCR) centred on New Delhi.

Brokerage Prabhudas Lilladher Pvt. Ltd said in a 27 April report that Unitech still has around Rs2,200 crore of debt to repay in fiscal 2011, but that’s not a worry as high-value sales and warrant conversion would help meet its operational cash flow and debt retirement.

Unitech didn’t respond to Mint’s queries as it is in a silent period ahead of its quarterly results.

HDIL, which has repaid around Rs1,250 crore of debt and expects a healthy cash flow of Rs3,200 crore over the next two years, aims to launch about 6 million sq. ft of space every year, IDFC-SSKI said in an April report.

Lingering worries

Property prices are also rising. Mumbai leads the pack with the rates going up by 30-40% in the past six months, followed by NCR and cities such as Bangalore, where prices have gone up by 15-20%. NCR, in fact, saw 35 million sq. ft sold in the past year, along with a sharp recovery in high-end residences, Bank of America Merrill Lynch Research said in a 15 April report.

The initial euphoria from high residential sales in the second and third quarters of fiscal 2010 dropped in January and February. The developers blame that on a post-festive season lull, but property consultants say the drop in sales early in 2010 was because of the sharp rice in prices, particularly in Mumbai and Gurgaon.

In fact, Goldman Sachs Research, in a 16 April analysis, indicated a slowdown again for the sector. According to it, Gurgaon saw monthly home sales fall to around 1,600 units in January-February from around 2,400 units in the fourth quarter of 2009. In Mumbai, monthly home sales fell to 4,100 units in the January-March quarter from around 5,700 units in the preceding three months.

“Volume game is what everyone needs today and so, even if we get to sell our stock a little cheaper, we should try and get it out," said Sarang Wadhawan, managing director, HDIL.

“If developers take the positive market symptoms wrongly and take risk in expensive land exposure, they would struggle later," said Sanjay Dutt, chief executive (business), Jones Lang LaSalle Meghraj, a property advisory.

Another property analyst, who didn’t want to be named, said execution is a key worry because in much of the project pipeline, developers have begun pre-sales, but completion would take a while.

Photo by Rajkumar/Mint

madhurima.n@livemint.com

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Published: 10 May 2010, 12:52 AM IST
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