Small looks good
Oct 10 2012
Witnessing huge demand for smaller sized apartments, instead of reducing prices, real estate developers are reduced the size of apartments to make it affordable for consumers
With demand for luxury properties on the decline, developers are diversifying their portfolio and focusing on the mid-market segment, thanks to the high demand. The primary objective, of course, is to maintain their margins. What is more, the cost of construction is also kept under check. So it’s a win-win situation for both developers and customers, the only difference being it is a volume business.
Leading developers, such as the Hiranandani Group, Nirmal Lifestyle, Hubtown, Puravankara Projects and Mantri Developers, among others, have hooked on to the new trend: small and smart houses in place of high-end luxury houses. Hiranandani, which is synonymous with high-end properties, has recently launched one-bedroom flats at Thane. But even a one-bedroom flat in Mumbai may cost around Rs 80 lakh or more.
Sunil Mantri, chairman of Mantri Developers, told FC Build that most developers are now focusing on compact houses since there is huge demand in the mid-segment category. “Rather than the size, price is more important to consumers because they are not able to pay high interest rates on loans. We are doing similar projects in Mumbai and Bangalore and soon plan to launch a new compact project in Balkeshwar (South Mumbai). Here, usually three-bedroom flats are around 2,000-2,500 sq ft, but we are planning to launch three-BHK of around 1,700 sq ft.”
Hariprakash Pandey, vice-president of BSE-listed HDIL, is one of the first to step into the mid-market with compact houses. “Since there is strong demand for smaller sized apartments, we have launched several such projects at the outskirts of Mumbai. We have projects in Vasai and Virar to cater to the mid-market segment.”
Pandey said it is always better to diversify one’s portfolio to mitigate risk. “People focusing on the middle segment of housing is also a good sign for the sector’s growth as maximum demand lies in this segment.” He added that smaller sized apartments are mostly bought by end-users in the age group of around 35 years who have nuclear families.
Echoing similar view, Anuj Puri, chairman and country head, Jones Lang LaSalle India, a leading property consultant, said, “With sales volumes stagnant and rising labour and commodity prices squeezing margins of developers, they are not bringing down prices. So developers are now focusing on small ticket projects.”
Puri said the challenges for real estate, now and in the near future, are the expensiveness of liquidity for real estate, the lack of availability of serviced urban land, continuing procedural delays in approvals and the slow pace of infrastructural growth. Also, increase in construction costs are not allowing prices to decline, he added.
Sandeep Reddy, co-founder of GrOffr.com, an online real estate portal, said, “There are no signs that the market will revive soon. People can’t afford two and three-bedroom houses that cost more than Rs 2 crore, apart from high maintenance cost. There is a huge demand for one-bedroom houses because of which more developers are trying to tap the opportunity to boost their sales.”
Research done by his portal, says Reddy, showed prices in Mumbai have risen by an average of four per cent in the past three to four months, compared with the 10 per cent rise during January-March. “The price rise is much slower that is pretty evident, but we believe it is still against buyer’s expectation who were expecting real estate prices to drop in Mumbai. We have crunched prices for more than 80 projects to arrive at this conclusion. We observe that 39 per cent of the projects did not see any price change, which means that most developers have kept their prices stagnant given the muted demand in the past three months,” Reddy added. Since there is no price correction happening, developers are constructing smaller size apartments to make it affordable for consumers.
Rajeev Talwar, group executive director, DLF, said, “Investment capacity of consumers depend on economy. With the slowdown in economy, consumers are sceptical of investing in bigger properties as marginal increase in interest rates on bank loans impacts them. Also, with high inflation, affordability of consumers are declining. So, earlier if consumers were paying around Rs 25,000-Rs 30,000 as EMI per month, now they don’t want to pay more than Rs 20,000 per month.”
Similarly, most developers are not able to bring down prices due to higher land and construction costs so they are constructing smaller size apartments. It is also easier to get funding for projects catering to the mid-segment because demand is higher, he adds.
According to a Cushman & Wakefield report released recently, developers facing high construction costs and discouraged from bank borrowing in India, were not able to reduce prices even though number of sales has reduced. Given the resulting liquidity constraints that enveloped the real estate sector, it was widely expected that after some time, developers would have to reduce their prices and buyers would then be tempted back into purchasing. However, most developers displayed strong holding capacity and wherever required, were able to raise funds through private equity options.
A similar trend is sweeping across the southern cities as well. Jackbastian K Nazareth, group chief executive officer, Puravankara Projects, said, “In south, there has always been a space constraint because of which, we have been focusing on the premium affordable segment. We are offering smaller sized two-bedroom and three-bedroom apartments that makes it more affordable for consumers.”
While the two-bedroom apartments range from 875-900 sq ft, the three-bedroom apartments are of around 1,100 sq ft. Seeing strong demand in this segment, more developers are stepping in to this category.
Pankaj Kapoor, chief executive officer of Liases Foras, a real estate brokerage firm, said, “In Mumbai, around 60 per cent buyers ask for one-bedroom houses, 30 per cent ask for two-bedroom houses and only 10 per cent go for three-bedroom house.”
In the city, real estate is very expensive, with one-BHK apartments in Rs 1-crore range. “Customers who were earlier aspiring to buy two-bedroom houses are settling for one-bedroom units due to significantly higher prices.”
Accordng to Kapoor, smaller size of apartments varies from city to city depending on the availability of space. In Delhi, one-bedroom house may be of around 600-700 sq ft, but in Mumbai, it is around 500 sq ft.
As per the Cushman & Wakefield report, urban India is likely to see an additional demand of about 11.8 million housing units in the next five years growing at a CAGR of 2.8 per cent during 2012-16. Of the total expected demand in the top eight cities, the mid-income group is estimated to witness highest demand of around 59 per cent at 1.3 million units, followed by higher income group and lower income group. The mid-ranged housing segment is expected to drive the maximum demand, says the report.