Can Mumbai’s Real Estate Be Ruled By Outsiders?

The Bangalore-based developer, Puravankara Limited, launched its first project in Mumbai a few weeks ago. Prestige Estates, another Bangalore focused developer, will be launching a project in the next few weeks in the commercial capital. The Kolkata-based Siddha Group is already doing two projects in the city. Salarpuria Sattva has an equity partnership in a recently launched project. There is talk of DLF, the Gurgaon giant, making a return to Mumbai with a slum rehabilitation project in the medium-term.

These are all moves of a wider trend wherein developers from the rest of the country are looking to penetrate the high-profile Mumbai real estate market. There are broadly two major arguments in favour of embarking on this strategy.

1) Everyone in the business grasps the fact that most customers in Mumbai are offered terribly low-quality offerings – at a price that offers very low bang for the buck.

2) Given the regulations and distress that has been there in the Mumbai real estate market, several local developers are exiting the business or just focusing on completing their existing projects. Hence there is an opportunity for newer players to come and make their mark.

One response to this strategy is to dismiss it as being another attempt to penetrate a new market – that will fail. There is history to back this assessment as real estate remains a very local business. Let alone a player coming from a different state into Mumbai, even within the state of Maharashtra – we have seen developers from Pune struggle in Mumbai. At a larger level there is the oft-repeated example of DLF entering the Mumbai market and then taking a step back. Ditto with the Unitech-Omkar joint venture.

Enter Experienced Brands

The other extreme response is that the superior developers from outside the city will easily conquer the market. Their ability to plan and execute better will provide an edge. Besides, several of the players have healthy balance sheets that provide a distinct advantage given the tight liquidity environment that most players are subject to.

At a personal level I am delighted to see experienced hands make an entry into Mumbai. The city has for far too long been given shoddy quality with negligible responsibility towards delivery. Hence superior performers from other cities are welcome.

Yet my personal view is that outlook may fall somewhere in between. While Mumbai is a quality starved market, penetration of the market needs a different mindset and approach compared to most other markets. Although it is true that several roles are now outsourced to agencies that have experience in the local market, yet there are many things which remain unstructured.

For starters, there is the element of getting approvals and handling the local environment. While no major city in India has a simple and transparent process there is little doubt that the complexity and cost in undertaking a project in the commercial capital is remarkably high. To offset that, most developers have opted for a local Mumbai partner. Prestige has DB Realty in a majority of its planned projects. Sallarpuria Sattva is testing the waters with an equity partnership with Mumbai based Wadhwa Group. For construction in one of the largest land parcels in South Mumbai, Adani Realty is in a joint venture with the Marathon Group. None of these moves however guarantee a smooth path.

A Look At The Challenges

The second challenge that is unique to Mumbai is with regards to land availability. The pricing will be subject to demand and supply. But beyond the pricing, the skill will lay in optimizing the plot size. Small plot sizes that yield dense projects with small homes are a challenge that most developers from other locations are not accustomed to. Given this constraint, it is my hope that these developers do not get tempted into doing large slum rehabilitation projects that has almost always broken the morale of many a developer.

The third challenge is towards profitability of the projects in Mumbai. Notwithstanding the common perception of most citizens, developers in Mumbai today operate at slim margins. The cost-structure is inflated and leaves very little potential for pricing to be at levels which will garner quick and robust demand. Yet robust demand is what developers from other cities must aim for to build and cultivate their brand in the Mumbai market. And that means keeping pricing aggressive and being patient towards profitability goals.

The beginning has been mixed. My sales office visit to Puravankara’s project was a vibrant and movie-set like experience. The pricing is expensive but the micro-market is in hot demand and I would imagine that the compact 2BHK’s offering may see itself through. I will however be wary of extrapolating initial demand at that price into a larger base of units.

Eventually in this trend the big gainer is likely to be the home buyer in Mumbai. Mumbai is a large market that can accommodate a variety of players, but the involvement of reputed and successful players from outside will raise the overall standard of the offering and experience. For a market in desperate need of credibility and quality – this entry of experienced and credible players must be welcomed.

(Source: Moneycontrol)