It has been a healthy quarter for you, in fact not just you the entire real estate space has been abuzz with all the sales data that we have been getting our hands on. Help us understand how the quarter went by?
That clearly was the key difference between April and May versus June. June was a very strong month, I would say, as strong as what we saw in January, February, March which was a really strong quarter when COVID was clearly not on our kind of vision panels. April and May was hit quite a lot. Other than construction activity, almost all sales, other things were affected because clearly all of our minds were with how to deal with COVID and how to get our nation out of that difficult situation we were in. But, the rebound from June onwards has been very strong, much stronger than it was after the first wave and it goes back to the fact that the organised sector, where the corporates or medium sized enterprises which are the key buyers of housing, whether the people working in those companies, whether the people who have indirect employment with those companies or the owners of those companies, all of us have taken an emotional and health hit but the financial hit on the organised sector has been quite muted and therefore the resilience of home buying has continued to remain strong.
We do think given the overall picture on supply and demand that housing is at the start of a multi-year bull run and we should not really be comparing the numbers that you are seeing right now with what we saw in 17, 18, 19 but go back to 12, 13 and 14 where the buoyancy was a lot stronger and supply and demand was lot more balanced and we think that kind of buoyancy will come back to the sector over the next 12 months.
What gives you this kind of optimism that residential properties now at the cusp of a multi-year bull run, is it purely because all of us are working from home and we need larger spaces or is it more coming in from the affordability push, your interest rate is going low, stamp duty cuts?
So three important factors. First and foremost is affordability. Affordability in our country at about 3.3X to 3.5X is the best– it has ever been supported by very attractive home loan rates and mortgaged loans continue to be the best performing asset class for most lenders and therefore lenders continue to focus on increasing their presence in mortgaged home loan financing so that is very good. Home prices have not really moved up between 2014 and 2020, while incomes have grown prices have not grown, which had supported affordability.
Point number two, of course, is the increase in the demand for housing through a combination of us working from home and realising that our homes are not necessarily fit for purpose. We do not really have the space-whether the work space or the outdoor space that we really need and even going forward even if COVID becomes a milder impact on our lives, we still are going to do a little bit more from our homes, working five days a week from the office is not likely to be the normal and therefore, people do want bigger, better homes.
The third and the most important change over the last 12 months has been the consolidation in the real estate housing industry. After the IL&FS crisis of late 2018, all the NBFC lending to the sector has moderated, become a lot more disciplined and therefore all the excess supply, the tier II, tier III developers who were providing excess supply and I would say in some sense spoiling the market has gone out. You have really a shortage of ready supply. You have a shortage of high quality supply and when people see that, they realise that prices are already starting to move up and that leads to an increase in demand. Real estate is one of the few sectors where a moderate price increase actually leads to an increase in demand and with all those three things great affordability, increase demand for the use of the home and a moderation on supply driven by the consolidation in the industry gives us confidence that this industry will start contributing in a much more meaningful way to national economic growth just like it has done in other countries for example the US, UK, China and so on.
What does this surge in demand mean for a developer? Is this unsold inventory which is getting sold or this is an indication that a fresh development cycle also has started at your end?
It is a mix. I think the preference in most markets is to buy ready inventory wherever it is available. There is a second layer which is only the top two or three developers in every city, where when they start new projects the sales are happening. Luckily for us, we are by far the largest developer in the Mumbai region and our brand credibility and delivered track record means that when we launched new projects, the response is quite strong. We overall have a launch pipeline of about 4.5 million square feet, 45 lakh square feet for this fiscal year and we do believe that will compliment the sale of our ready and close to completion inventory. But, what is important for us is that we have about 7.5 thousand crore of ready inventory and in addition to that, we have another 10 to 12 thousand crores of inventory which is fairly advanced. So, we can provide to the market at very different price points right from affordable housing to premium housing. This ready or close to ready inventory is the need of the hour for the consumer because they want to upgrade quickly.
Two things have happened – one is that the stamp duty benefit which was there till 31st of March in Maharashtra has gone away and second is that commodity prices were gone higher. So what does it mean for your pricing and also for the readymade inventory?
As I had maintained earlier in the year, the stamp duty cut in Maharashtra was an icing on the cake and it triggered demand but it was not the reason for the sales happening. And as we have seen with the numbers in June and also what we are seeing on the ground after June, the sales continue to have momentum now and so therefore, the stamp duty cut, except the stamp duty increase now or going back to normal has been accepted by the market. Obviously the cut was very helpful and we are thankful to the government for that.
In terms of commodity price increase, there certainly is some pressure. The overall construction cost in a city like Mumbai has probably moved up on a like to like basis compared to two years ago by about 10% and that implies a margin impact of about 4%. We do think that will get passed on because salary growth in the country has been 6-7%, so if prices rise by about 5%, you can still maintain or even modestly increase margins but at the same time– affordability continues to get better and that is the important point. I think the Indian housing market has to become a lot larger than it is today and for that affordability has to keep getting better and that will happen with two things. One, home loan mortgage rates will kind of further reduce in my view and second, we are going to see home price growth less than salary growth and therefore affordability improves.
We saw a similar set of circumstances let us say in 2004 and 2005 where real estate market was coming off a 10-year flat patch, interest rates were highly affordable and that led to a multiyear boom, do you think we could see parallels of a big wave in demand and pricing, pricing is the underlying point here, like we saw let us say 10-12 years ago?
I am of the view that as Mr Uday Kotak mentioned in his remarks last week that India is at the start of a medium term investment cycle just like it was in 2003 and that will lead to wealth creation, it will lead to job creation and all of those for housing demand. In terms of the difference between 2004-05 versus today, I think the difference is that in 2004-05 the focus was on premium housing and today at least for a player like us the focus is on affordable and mid-income housing. We are aiming to have two-thirds of our sales or more come from affordable and mid income housing over the next couple of years and therefore I think the demand is a lot more sustainable and resilient. That goes back to your point on pricing, I think the pricing in 2004-05 ran ahead of itself and as the industry leader, as the largest residential developer in the country, it is our commitment and focus that affordability continues to remain strong and therefore we will try to make sure that pricing growth is there but it is modest, it is below wage growth so that affordability continues to improve and more and more Indians can buy a high quality home.
You have given an optimistic guidance and view on the digital infrastructure space. What are your ambitions on this front and what sort of potential do you see here?
So, we started on digital infrastructure about two and a half years ago in partnership with ESR on a 90-acre park. ESR is one of Asia’s largest logistics players listed on the Hong Kong Stock Exchange. Since then, we have grown that quite a bit on our own, and now almost 275 acres has been monetised or under development. We have seen a lot of Grade-A international players take up space from us, people like FlyJac which is a subsidiary of Hitachi, so many other international companies from US, France and so on.
Our focus on the digital infrastructure started with Palava where we have earmarked quite a large tract of land which is probably the best quality land in the country close to the Navi Mumbai Airport, not far from JNPT, which is India’s largest port and a completely clear title, great infrastructure and so on. As the demand in Palava has grown, we have seen interest from international players, sovereign funds and other such players who want to partner with us to expand this platform into other locations. So, we are working on that platform now and probably over the next three to four months, we will come to a conclusion on that platform and as it progresses we will be able to rollout our learning into other locations too in a capital light manner but capitalising on the fact that the company will have an annuity income string to complement its residential business.
What is the debt reduction plan and timeline looking like?
We continue to remain committed to the timelines, getting our debt below 10000 crores by the end of this fiscal and moving to a position of being very-very low leverage towards net debt zero company by FY24 and using the strength of our balance sheet at that point in time to really have sustainable long term growth. Over the last three months we have reduced debt by over 3600 crores, our overall cost of borrowing has fallen by 70 bps and we continue to remain on track, not only to come below 10000 crores of debt by FY22 end but also to substantially reduce our cost of borrowing, which will give great strength to our balance sheet.
We had a two notch rating upgrade from India Ratings a couple of months ago and we continue to pursue further upgrade in ratings. So overall, given the improvement in the business on the ground the fact that our digital infrastructure platform is allowing us to monetise the large landholdings that we have the reduction in our debt, the reduction in our cost of debt all of those make us believe that we will be well on track to achieve the goals that we have laid out on being a very-very prudently managed balance sheet.
For the next two or three years if one has to look at the top line contribution which will come from pure lease rentals whether it is in the digital infrastructure or long term lease and pure sale of inventory, how will that mix change?
See, we are a housing company and our business will continue to be driven by housing, I would suspect about 80 to 85% of our sales even three years out will come from housing, digital infrastructure is a unique opportunity, given the land that we have and the knowledge and expertise we have developed in that space over the last two-three years. The quantum of shortage of Greenfield supply in that sector and we will build out on that, but that will be a separate entity in which MDL also has a holding, Macrotech developers has a holding, and other capital partners have a holding but within Macrotech– focus will be housing more on affordable and mid income housing as we have mentioned earlier at least two-thirds to 70% of our sales coming from that segment and overall, we do believe the opportunity in housing is long term, it is sustainable, our focus on affordable and mid income housing makes it relatively low risk and that is going to be the thrust of the company’s growth journey over the next few years.
We are going through a unique phenomenon right now and it is reverse migration or work at home where companies are encouraging employees to start working from home. How does that impact mid housing market, let us say in a city like Mumbai?
I think there are number of things happening in result of COVID and its impact on the work place. I would say the primary impact is work from home because of the fact that people there is a productivity benefit by working from home, at least one or two or three days a week if not all five days of the week and that leads to an increase in demand for housing because people want some additional space at home, they are going to spend more time at home, they need the home to be a better quality therefore they want to buy only from a tier one developer, they need it better maintained. Again our pedigree in maintenance and running the operations after handover is very attractive to buyers.
In terms of reverse migrations back to smaller towns, that is a trend which has been seen, but that has got to do more with the starting category of housing buyers, these people typically tend to be renters and therefore the impact of home buying is not so strong. Our general belief is that work from home will settle at lesser days in the office but it would not settle at never come to the office and therefore we believe that work from home is a significant net positive for housing demand in urban areas like Mumbai.
People do not come to Mumbai and live only for work, they come here because of the quality of the education for their children, healthcare, a safe living environment, and retail and entertainment options and a great work culture and I think all of those reasons people will continue to want to live in Mumbai because ultimately, you want to be in the market place when you want to get a new job, when you want to get a promotion, you want to be in front of your manager. We are seeing that people who are in Mumbai want to continue living in Mumbai but spending more time working from home.
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