Understanding and responding
to real estate cycles
| Coming to grips with the ups and downs of the cycles can prove
valuable to developers, writes Ramesh Nair |
Photo: T. Vijayalakshmi
Ups and downs: Successful development strategies will help in the long term.
—
A key question which all of us are facing today is, “Where
are we in the current real estate cycle?” The boom phase that started in 2003
is slowing down but has not ended.
Over the last four years, the residential real estate market in Chennai has
experienced a period of excess demand making it a seller’s market. Demand for
housing has increased, vacancy rates fell and capital values have increased,
disrupting the balance of supply and demand. But, over the last quarter the
residential market in Chennai has seen signs of stagnation. The key reason
behind this slowdown has been higher prices and interest rates impacting
affordability, and to a lesser extent, excess supply in a few micro markets,
rather than slow down of the economy. Developers, who were selling their entire
projects in a few days, are now taking months to sell their unsold stock.
When compared to cities such as Delhi, Mumbai, Pune and Bangalore the
completed stock of new apartments in Chennai is low. In the short term a number
of developers will offer a variety of free offers (such as free car parks) and
flexible financing options (such as interest waiver during construction period)
so that they do not have to bring down the prices.
Land owners need to realise that there were a number of instances of land
owners in Chennai refusing to sell their prime lands in 1995-1996, and then
ultimately selling them for a similar or lower price in 2004-2005. If there is a
lull in the residential real estate sector, then it will definitely bring down
land values. From 1997 to 2003, the sale of bare land dropped rapidly and prices
fell. Since land prices are slow to move downward when compared to building
prices, they can contribute to the slowing down of the real estate boom.
Developers should focus on acquiring land banks which they can plan, execute and
market in only the short to medium term. It is common knowledge that in the
cyclical world of real estate, the biggest profits are made when one buys
discounted real estate when nobody wants it, and then sells highly priced real
estate when everybody wants it.
Developers need to build strong management teams. The key to successful real
estate development is no longer “location, location, location,” but
“management, management, management”.
There is need to manage risk and ensure that the developers are never placed
under undue pressure from the volatility of the economy or specific industries
and they need to think through issues on a long-term basis.
The developers should focus on having the highest-quality asset base. This
means the quality and specifications of the building, the specific location, the
depth of the infrastructure and accessibility. In the future, there will be two
critical dimensions of success in the development business. The first is finding
the good deals. Finding those projects, buyers and locations that are going to
be economically attractive. The second critical dimension of the business is
executing those deals well. This is possible only with a sound strategy.
Meanwhile, this is the time for developers to put major emphasis on the
execution of their under-construction projects.
Unlike in the more developed markets such as the US, where research on real
estate cycles began as early as the 1930’s, research and analysis of real
estate cycles in India hardly exists.
This is because of data unavailability and lack of real estate research. .
Also in India the data is missing to construct a performance history of the real
estate markets. Developers should not make the mistake of projecting current
trends indefinitely into the future. They should view market boom with caution
and search for opportunities in down turns. Developers should resist excess
optimism at the top of cycles.
Developers need to realise that market change is normal and focus on
understanding why the market conditions are changing. Developers need to
understand the difference in demand from end users and investors. Successful
developer strategies that achieve above-market returns over the long run are
dependent on understanding the macro and micro market cycles, good market timing
and a degree of contrarianism.
The author is a Local Director with Jones Lang LaSalle
Meghraj, one of the largest real estate advisory firms in India and can be
reached at ramesh.nair@jllm.co.in or
+91-98844-11100.
Courtesy:
Property Plus, The Hindu
