Bengaluru: India’s real estate sector will always remember 2017-18 as a tumultuous year owing to a new regulatory regime and continuing slowdown, but for Bengaluru-based Sobha Ltd, it was a period of good revenues and robust cash flows. Sobha was also one of the five Bengaluru developers among the top 10 developers in the country with high levels of consumer confidence, according to a January survey by independent research firm Track2Realty.
In an interview, Sobha’s vice-chairman and managing director J.C. Sharma talks about what went wrong in the sector, finding solutions to problems and the need for budget housing. Edited excerpts:
How are real estate firms in India dealing with the prolonged bad spell the sector has witnessed?
On the residential side, things still appear to be difficult for most developers. To start with, RERA has made a lot of changes in the way the business takes place, the courts have become pro-customer and pro-active and customers are more aware. Developers are trying to work out ways to deal with these changes. But the message is loud and clear that this is a new era in real estate.
In the past, developers took up projects far beyond their capabilities and didn’t honour project delivery promises. We became part and parcel of the problem and then you need to go through the pain and recovery.
Developers have become more practical today. They are becoming more realistic in terms of the product, price and projects they are building. Because fundamentally, the problem was of oversupply and not walking the talk and that is now getting corrected.
How would you compare the current slowdown with the 2008 financial downturn?
In 2008, Sobha called for a press conference, if you recollect, after the first shock we got because of the global downturn. We tried to communicate that we were growing at almost 100% in 2007-08 and that a brake had been applied. Banks weren’t giving loans to customers and I had 60 odd cases where the customers had done the bookings and weren’t getting loans and they said we aren’t going ahead with the bookings. It was far more worse as most multi-national banks withdrew, public sector banks were cautious, our working capital limits were lowered. However, the Indian economy recovered very fast and within a year even real estate was back to normal.
This time around, it has continued for almost 4-5 years. If projects, that were started five years ago, have been delayed, how will one bear the interest costs, penalties, price versus increased construction cost? For most companies, it has been a challenging task.
But we need to also acknowledge why this happened. If a customer has been denied his home even after making 85-90% of the payment, then developers need to collectively accept that they have let them down. This is the reason why various stakeholders like investors and customers became sceptical.
The year 2017-18 was tough for all developers yet it turned out to be a good one for Sobha. How did that happen?
Despite the tough environment, this would be the best ever year for Sobha in our core market, Bengaluru, where we have the highest number of projects. My (project) cash flows this year will be the highest, profits are high.
The brand played a major role. When one buys a home now, customers doubt if the product and price are right or if the developer is trustworthy, if approvals have been acquired, because there is all-round scepticism.
Then, whatever is the residual, shrinking demand, it goes in favour of reputed developers and we took advantage of that.
We also lowered borrowing costs and have tried to bring the debt-equity ratio down. We had learnt earlier on that growth with high debt and high interest costs leads to problems and that, had we kept the debt under control then growth would have been better. So is it desirable to increase the debt and launch projects? Because one has to be careful that the extra effort you put into your projects should not go towards servicing debt.
For us, fortunately, we have shown free, superior cash flows and have sufficient inventory to generate cash flows but still we want to keep our debt-equity under control and also chase growth.
This looks contradictory but it just needs a disciplined mode of approaching the business and that’s what we did.
Among your peers, Sobha is easily differentiated for its quality of construction. But in uncertain times like these, how do you connect with potential customers?
From the beginning, (chairman emeritus) P.N.C. Menon felt that he has to bring international quality to the homes that are built at Indian prices. Not just backward integration in the factory which is a key differentiator, but it also had to be a differentiated business model with focus on delivery capacity, design capability, efficient sales and marketing teams because we never relied on third-party brokers.
As a prospective homebuyer, when you get in touch with Sobha, you will start experiencing that.
In the last year, we have invested heavily on sales promotion activity with the highest number of sales and marketing campaigns, schemes for existing customers and for our employees to give them the confidence. The CRM (customer relationship management) team went back to customers of all our completed projects, some of which are 10 or 12 years old, and took their feedback and communicated to the management and the latter took recourse.
How many developers would do that? In tough times, it is good to be close to the customer.
Do you believe in the government’s ambitious housing for all mission? How does Sobha fit into this?
We need to recognize and respect the ground reality. The fact that large-sized apartments are lying unsold when there is so much demand at the bottom of the pyramid should speak for itself. The government has tried to plug that gap and incentivise affordable housing for both developers and homebuyers, which is the way forward.
Apart from our Dream Acres affordable housing project in Bengaluru, there are two more projects planned in the city. We are looking at other cities like Pune, Hyderabad, Trivandrum, Ahmedabad and Mumbai where we can take this model.
Affordable housing also gives us an opportunity to address ambitious, first-time home buyers, anyone above 21 years.