Face to Face with- Mr J.C. Sharma, MD, Sobha Developers

Source: The Hindu Business Line.


Customers should invest 30-40 per cent of their own money into the cost of the home. This way, the impact on EMIs during interest rate increases will not be significant. — MR J.C. SHARMA, MD., SOBHA DEVELOPERS

After an IPO that received stupendous response from both institutional and retail investors, Sobha Developers has identified high-growth cities and lined up projects. Mr J. C. Sharma, Managing Director, Sobha Developers, says one need not be unduly worried about the price correction happening in some pockets. He views this more as a consolidation phase for developers. He also emphasises the need for home buyers to balance between borrowed and own funds when purchasing a house.

Excerpts from the interview:

There has been price correction in some real-estate pockets. What went wrong with the `boom' story?

I do not agree that things have gone wrong. Home loan growth rates are still above 40 per cent. Further, the home loan to GDP ratio in India is still the lowest amongst all the countries. What happened was that banking funds, which are available to every single industry, were being lent to real-estate at a faster pace than what the RBI desired. This was a kind of fuel to the so-called boom, as people were investing more in land by availing such funds. So the RBI started cautioning banks on the money being used by real-estate developers merely for `land buying/selling' transactions. At the same time, there were inflationary pressures in the Indian economy. Bank lending was growing at 30 per cent over the last four years. They (the RBI) thought that this is an industry where there may not be the right pull in giving or getting funds at this point in time. So restrictions were imposed. At the retail level, home loan rates started going up. At the institutional level, it is not only real-estate but every single corporate has been asked to pay a higher cost to avail of funds. We feel that when an economy has been growing at 8.5 per cent, it is only a desirable step to see to it that if there are some aberrations at the micro level, they are corrected.

So what was the aberration in the realty segment?

Wherever you find that there is a demand waiting to happen or is already happening, people would like to take advantage. When this happens, aberrations take place. Some people would have purchased an apartment or an office space with the presumption that there will be a 20 per cent increase. When this 20, or even 10, per cent increase does not take place and they hear that prices are about to crash and corrections are likely to take place, then they may like to sell it. For them it may be a business where they have made money in the past. They are basically traders and not investors. If such people lose, it will give room for the right kind of customers to step in and buy those apartments or commercial space at the right price. It is our opinion that there is nothing to worry about. When employment growth at its highest ever this year, when exports are growing in double digits, when increments in salaries are growing in double digits, how can an industry that is a proxy play to every one of the above not be benefited? Neither have we reduced rates for any of our projects nor do we intend to do. In fact, we are launching new projects in our earlier locations, at higher rates.

Would the correction mean that it is consolidation time for Grade B and C players and they will soon be out of action?

That is the right way of looking at the present scenario. Yes, it is consolidation time. The real-estate industry is fragmented and disorganised. I am told by the Commercial Tax Office of Bangalore that there are 400 developers in Bangalore alone. So if you have so many people coming, you can look at in two ways. There is money to be made in this business, so the new players are flocking. From the industry and customer perspective, one has to be careful since some of them may not have the deliverables — the right processes, right kind of land and execution ability. If such people are weeded out through this consolidation process, it is good for the industry.

Will the North-South divide (in terms of premium paid for land in the North) remain?

The gap will narrow as we move forward. Certain locations have inherent advantages. Such as Mumbai being the financial capital, Delhi the political capital and catering to the whole of the northern market. Pune - because you cannot put up large-scale operations in Mumbai but the Mumbai-Pune highway connects it to a less congested city, there is demand. We cannot wish away the advantages that these cities enjoy. But with the thrust on infrastructure in Chennai, Bangalore or Hyderabad, we feel that the growth that has already taken place in these cities will ensure that once the infrastructure bottlenecks are not talked about as much, there will be less price disparity.

Will the South continue to be your area of focus?

We would like to call Sobha a pan-India company with primary focus on areas that are growing fast. We happen to be in the South fortunately and the South is growing faster than any other part, so the focus will remain on southern cities. Among the southern cities, we have identified Chennai, Coimbatore and Hosur in Tamil Nadu. In Karnataka, we will focus on Banglaore, Mysore and Mangalore. In Kerala, it will be Thrissur and Kochi. Likewise, we have identified eight projects in the South from which we wish to grow. We have already launched projects and a few are coming up this financial year. Apart from this, we feel we must have a presence in NCR (National Capital region) because it is the fastest growing and the largest area in the whole of the North.

Is there a case of excess supply coming up in the real-estate market?

The growth has just begun. If, for a short period of time, developers have some stocks available, no harm done. Manufacturing businesses have one or two months of finished stocks or work-in-progress. Today we are in an industry (real-estate) where there are hardly finished stocks with prominent players. If you wish to buy a Sobha apartment today, I do not have anything on hand to offer. Now, thanks to an increase in supply, maybe some apartments that are to be completed six months from now will be available. In projects, if five out of 100 projects do not get sold, the heavens will not fall. Let there be some stocks available to the customers, always.

But would such a situation lead to panic selling by developers, leading to sharp price corrections?

Many consumer durables have discount sales, nobody questions as to why there is a discount. A finished apartment always get a ready buyer. So out of the 100 apartments in a project, 95 are sold at the developer's price. If the developer needs working capital against a finished project, one can always borrow money. You can securitise or put it on rental basis. These are other options now available but require a newer mindset.

The funding options available to developers appear to be narrowing. What are the options available, in your opinion?

SEBI or RBI norms will ensure that money remains productive and not invested in land which the real-estate company is not capable of developing. Had the norms come three or four years later, the damage to the industry may have been much more. We feel that real estate is a sunrise industry. If a company does not have the right kind of deliverables and cannot be rated appropriately, it does not deserve to either come to the public domain and if it does, it has to come with the right valuations. Some of the companies in India, in my opinion, are being managed professionally, have the right credentials and have every right to access the capital markets by adhering to the compliances required. On the debt part, in our industry, a debt-equity ratio of not over 2:1 is desirable. They should be able to raise money (debt) against the projects on hand. And we feel banks are not refusing money against projects and that is the right way of looking at it. Coming to private equity, PE players will be the biggest beneficiaries of the restrictions as they will be able to invest in the right players who are not ready for public issue, nor comfortable with debt. The company that accepts PE funds will also be sufficiently capitalised, thus improving the debt-equity structure. Of course, the company may have to cede some rights but they will become more professional.

What should home buyers do to lessen the impact of interest rate hikes?

If I am eligible for 100 per cent loans - a customer should not be induced by institutions. We believe that in the interest of the customer, one should have his own savings to pay the developer and take minimum funds from institutions. A customer should invest 30-40 per cent of his own money into the cost of home. This way, the impact on EMI during interest rate hikes will not be significant. A customer should not be induced by institutions into believing that he is eligible for 100 per cent loan.

Have you seen speculative transactions among Sobha's buyers?

In our sales strategy, if you are a speculator, you pay a price to us at least. For example, if booking is done in the name of X and tomorrow he/she wants to sell it to Y, X or Y has to pay Rs 100 per sq.ft as transfer fee. If you go for cancellation, you have to pay 25 per cent as cancellation charges. The process ensures that the speculator pays a price. This is akin to the stock market. You cannot avoid day-traders. They provide liquidity but may not make as much money as long-term investors.