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Corporate Aug 23, 2012

Investor-driven markets are good: Hiranandani

By Arlene Chang

In an exclusive interview with Firstpost, Niranjan Hiranandani, Chairman, Hiranandani Constructions, tells us why investors and rental markets are holding up the sector, and the company's plans to diversify into energy.

Below are edited excerpts of the interview. Watch the full interview in the accompanying video.

The past year and your outlook for this financial year...

I think the outlook looks extremely positive. The kind of demand underlying the economy is extremely strong. People want to buy a house. Of course, they want a house which is affordable and also provides the necessary infrastructure in terms of roads, access, power, water, education, etc. We find that to a large extent new project areas do not find the necessary wherewithal and that's where the real gap is going to be in the next one or two years. So we will have to work very hard along with state governments and local bodies to fill up the gap of increasing demand in the next one year. We have seen an upward trend and we do see a strong buying influence. In some instance there has been a slowdown in conversions that have taken place in the past three to four months. But recently the conversions have started happening. Banks have also reduced their interest rates by 50 basis points and that's having a positive effect on the customer.

Niranjan Hiranandani, Chairman, Hiranandani Constructions Pvt Ltd, tells us why investors and rental markets are holding up the sector

Investor-driven markets and how increased rentals compensate for the slowdown in sales...

Every market is partly investor-driven. When there are too many investors or short-term investors then it's a problem. But what we are seeing is most of the investor-driven sales are long term investors -most are looking at at least three to five years of investment, which is positive. So as far as real estate is concerned I think it's a very positive element and the investor market is very proactive, positive and not inflationary tendencies as it was in the yesteryears. I think investor-driven markets are good.

A lot of people want to buy property but are not able to buy it at the initial stages so they opt for rental properties. In the last one year real estate sales have slowed down but to some it has been more than compensated by rentals .A large number of people instead of doing the buy deals are doing the rental deals. So real estate is positive and rental markets are more positive.

Investors as competitors...

We don't see investors as competition. We don't have so many investors to cause competition, but yes, whenever there are investors and whenever they do want to exit the market there will be some kind of a parallel market which is going to run. But it hasn't really affected the markets to that extent. The problem only occurs when a large number of investors want to exit at the same time. That's dangerous for the investor and the developer because it hits the price line and causes confusion in the mind of the purchaser. But in most cases, the sales don't take place as the buyer is confused because when he sees a falling market, he expects that the prices will fall further. So an investor who really tries to cut prices beyond a point really doesn't get a sale so easily.

How have the real estate market changed in the past 8-10 years?

A very good thing that has happened is that younger people are buying in the market. They have got higher salaries. Banks and financial institutions are ready to lend these people money and the tendency to buy at a young age has actually happened. The general economic situation in the last five years, barring the last six months or so, has been so positive that there are also lots of other buyers in the marketplace. Overall the GDP has grown, the average income levels have grown, so we do find a higher purchasing power in the economy amongst the home buyers, which is very positive. There has been very strong growth in terms of sales. Younger people backed by financial institutions in the last 10 years is what has changed.

Supply of homes continues to see growth...

We have been growing about 15-20 percent per annum and we continue to grow at that level.

Builders across the country have not been able to bridge the gap of affordable housing. Why do you think that is so?

When we started Versova (in Andheri, Mumbai) we started at Rs 140/sq foot in 1981; when we started Powai in 1987 we started at Rs 500/sq foot; when we started Thane it was Rs 1200/sq foot. So we had started with affordable housing in all our projects in the suburbs. But over a period the land prices went up, the replacement cost of land has become prohibitive. It's difficult to get new land with permissions. So it's not like we have not gone into the segment, but over a period as infrastructure improves, the quality of housing improves, as replacement costs become more expensive, we have had to increase the prices.

Other factors that have contributed to rising property prices despite falling realty stocks.

There are two other factors (contributing to this). One is infrastructure is not married with development. The time gap between the delivery of infrastructure with the construction of the buildings don't match. Secondly, the government's commitment to infrastructure has been very laggard. They need to match up with that -- like you would need a metro, you need to create the cross harbor, you need to create coastal roads, they need to create water supply, they need to create so much infrastructure. Of course we will pay for it. But at the end of the day it is not possible for an individual developer to take up large infrastructure projects pan-cities, pan-country. So how do you construct more housing to make it affordable? How do you create the surplus in housing when you don't really have the wherewithal in infrastructure?

Upcoming projects and what are you most excited about.

The group is multi-faceted. Mumbai is our core area, like Powai and Thane. We are looking at Chennai, Bangalore, and Hyderabad. We are also looking at Nasik, Pune and Ahmedabad. We are looking at a future which looks better than the past.

Is the South India realty market going North?

Bangalore is pretty different and is very healthy. In fact in some respects it is leading Mumbai. And Chennai is also a very good market. I think each market is bound to be a little different. Of course if you compare every aspect of development or permission or infrastructure or the type of customer or the kinds of needs of the customer, they are very different. The stability and price range in the South Indian market is more stable as compared to volatility in the Mumbai market especially because of land prices.

Status of debt and order book for the coming year...

We have a low debt position and a good order book position. In fact we are not able to meet all the ends of our customers because we still have to get a large number of approvals. I think we have a positive trend in demand for our housing and we also have demand in terms of a commercial creation of assets.

Land banks or individual plots. What is the Hiranandani way?

We do buy land in terms of pockets which we aggregate and then turn into land banks or we do the reverse - in which case we pick up pockets and do the development. We are opportunistic in that sense of the term.

The hardest thing about being a real estate developer

The level of hardships keep changing but currently permissions are probably the most difficult- whether it's environmental or building provisions. I think that's an issue. Secondly I think the land cost is very high and is actually disturbing the final product prices. And the third is the mounting taxes which are now being added on. There's VAT, service tax, stamp duty, development charge - there are so many other costs which are adding up to the bottom line. This is causing an inflationary tendency which is much higher than what was 10 years ago.

How can the sector be brought to its glory days?

I don't think there's one thing to do. What you really need is to declare the housing revolution. You need to tackle FSI - increase it - and improve infrastructure. We need to create a development body which will actually build the infrastructure. We need to create policies which will bring about a large volume of houses in the shortest possible time. It is necessary to look at cross-subsidies in the economically weaker sections, finance availability, housing loans. I think what we need to do is a multitude of facts. You can't say the war will be won by one battle, on one ground. I think you need to win all the battles in order to win the war. There has to be cooperation of states and the federal structure in order to improve housing.

What is the roadmap ahead for the company?

We are focussed on housing and there's no doubt about it. Housing forms a major part of our portfolio - so residential housing, commercial housing, retail- we are looking at all these in a very serious way and continue to grow in the sector. The other part is, of course we are diversifying. My son Darshan, who has just completed the tallest residential tower in the world, is now looking at energy as one of his focus areas in terms of a power plant, a re gassification plant. So yes, as younger members of the family do join us, (they) are looking at diversifying, but real estate will continue to be the focus area for our company.

by Arlene Chang

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