Mumbai
has a high residential inventory of 67,000 units, equal to sales of 34
months. While the underlying demand is strong, it is
not being converted into transactions due to the high property prices.
From a developer’s point of view, low absorption is a source of worry;
however, due to high costs of land acquisition, raw material, labour,
finance and new costs such as fungible FSI,
lowering prices beyond a point seems difficult, says Ramesh
Nair, COO – Business, Jones Lang LaSalle India.
It
is important to understand exactly where the problem actually lies – in
high property price or high ticket size? While property
prices are largely location-driven, ticket size is a combination of
size of the apartment and property price. As per the developer
community, there is not much possibility of reducing the prices attached
to locations.
The
answer seems to lie in developing projects with smaller apartments. But
what made developers focus on larger configurations in
the first place? The answer can be found in the past.
Demand Type Drives Supply Type
There
are two types of buyers – those who believe locational advantage is
more important than larger sized apartments, and those who
believe the opposite. The former opted to compromise on size and
continued to live in the same locations. The latter, with the objective
of living in larger apartments at relatively lower ticket sizes, moved
to the suburbs and extended suburbs.
However,
this second class of buyers - while achieving the primary objective –
also compromised on their standard of living. Not the
least of the backlash was long and uncomfortable daily commutes between
home and work place.
Understanding
buyer requirements, developers started focusing on apartment
configurations of 2 BHK and above. Larger configurations
help developers to provide better amenities within and outside the
apartment, and consequently to charge corresponding premiums. Such
properties also require a lower number of buyers compared to smaller
apartments.
The Formula Crumbles
This
strategy worked well till 2008, as the absorption more or less equalled
launches. However, between 2003 and 2008, property prices
increased substantially and ticket sizes for the same configurations
went beyond the common man’s reach. Post 2008, property prices rose by
another 36%.
Due
to this, a buyer who could buy a 2 BHK in Mumbai within a budget of INR
80 lakh in 2008 needed to shell out another INR 10 lakh
to buy just a 1.5 BHK. Similarly, the cost of a 1.5 BHK in 2008 equals
that of a 1 BHK today.
Another
problem was that smaller-configuration apartments were available
largely in the suburbs and extended suburbs. This affected
senior citizens who had spent their entire life in the Island City.
Meanwhile, existing structures became increasingly more dangerous to
live in, even as families grew in size.
Lack
of sufficient options with smaller configuration forced these
individuals and families into suburban and extended suburban locations
during a phase of life in which life is ideally supposed to be easier
rather than harder.
Fast Forward To Today
Today,
developers are faced with a reduced demand for larger apartments, and
the option of reducing property prices is limited. The
only strategy open to them is to focus more on smaller apartments and
offer reduced prices to the extent possible.
While
nothing can be done about non-selling larger configurations but reduce
prices or sit indefinitely on unsold inventory, the fact
is that new developments must be configured for smaller sized units,
and therefore greater affordability, if the Mumbai residential market is
to see a significant revival.
