‘Real estate transaction cost needs to be brought down’

Mumbai-based Lodha group, with estimated sales of ~85 billion in 2017-18, over 20 per cent higher than in the previous fiscal year, is one of the largest realty players in the country. At a time when the residential market is seeing its biggest demand slump, the company, promoted by lawyer-turned-businessman Mangal Prabahat Lodha, has become a consolidator. ABHISHEK LODHA, from the next generation of the family, now managing director of the unlisted company, spoke to Raghavendra Kamath and Abhineet Kumar on the firm’s growth plans and the stress in the sector. Edited excerpts:

What has helped you become a consolidator when the demand is at the lowest since 2010?

It is a misnomer that the real estate market is depressed. As a matter of fact, there is a flight to quality. We have seen substantial growth in market share — at 11 per cent in Mumbai now, compared with 9 per cent earlier. Actually, the time of fly-by-night operators is over.

Sales are up, but they are happening in an organised manner, with credible developers. RERA (the Real Estate (Regulation and Development) Act, 2016) has been implemented. That is helping consumers take informed decisions.

What is the kind of growth rate that you are expecting for the industry?

Growth in the Mumbai market should be about 5 per cent. So far this financial year, we have grown 20 per cent. There is growth across segments. In the past three to four years, there has been no investor demand in the market. Demand now is for homes of very high quality. That is because you are either buying for yourself or for your children. It is not speculative or for reselling. It depends on quality and credibility. So, if there are 1,000 developers in Mumbai, 75 per cent will say things are bad, 15 per cent

will say things are OK, and only 10 per cent will say they are growing.

Out of your total portfolio, what is the share of affordable housing today, and how much do you see it to be going forward?

Last financial year, our total India sales was to the tune of ~69 billion, of which 40-45 per cent accounted for by affordable housing sales. We sold nearly ~27 billion worth of such homes; that makes us the largest affordable housing player in the country.

How comfortable are you with your debt?

We are in a very comfortable position. This year, we will be getting ~85 billion in sales from customers. That would be one of the largest inflows for any real estate business in the country. Our debt (~170.9 billion at end of September) has to be seen in relation to our cash flow. We have said that we will maintain our debt level and look at lowering our cost of funds. We have been able to bring down our cost of funds by over 100 basis points in the first nine months of the financial year.

GlaxoSmithKline faced low demand for its land in Thane that got sold last year for ~5.55 billion.

Are land prices correcting?

Generally, for large land parcels involving investment of tens of millions of rupees, there are very few buyers with the competence to pay that money. We benefit from that. We recently bought land belonging to Patel Engineering at Jogeshwari for a good valuation, as there were few people who could complete that transaction in a timely manner. The total value for this was ~3.9 billion.

Ambit came with a report saying NCLT proceedings would bring bankrupt companies’ land to the market, increasing supply further. Would that bring down land prices?

It is possible that more land will come. But prices will depend on the market. It ultimately depends on home sales in the market. If sales are soft, land prices will go down. It will basically depend on the input -to-output gap. Mumbai has been the best-performing market in India. Sales have been decent. Here we have not seen any meaningful reduction so far. The Glaxo land had a lot of complexities, so that cannot be a benchmark. But there has been a softening in land prices. The bigger the land size, the fewer will be the takers for it. It will also depend on the location and size of the land. A softening is not consistent.

How can the market be revived?

The transaction cost is really high here. Under-construction real estate attracts a 12 per cent GST. Stamp duty (varies state to state) in Maharashtra is 5 per cent. The transaction cost of 17 per cent is unheard of. We are a low-income country, and the construction sector, including real estate, is a bigger employer than even agriculture. It is an industry known for creating wealth. High transaction costs make the market inefficient; they need to be brought down if the government wants to really drive real estate. We have to see how many people are employed by the sector in China and how much wealth is created by them. If we want to come anywhere close, we will have to bring down the transaction cost.