Why Mumbai’s real estate industry should focus less on price, more on quality

No segment has abused its position as a wealth multiplier as widely as the real estate sector. Delayed projects, shoddy execution, deception and even fraud are common. And yet, it worked, as rising home prices kept many customers satisfied with the trade-off.

Then, prices reached a level at which most end-buyers couldn’t afford them, while investors didn’t see any meaningful appreciation to bet on property. Given the lacklustre market since 2016, and with COVID-19 now dealing a knockout punch, I was hoping to see fledgling steps towards a new narrative emerging from the industry.

Pricing, pricing, pricing

Three broad narratives exist currently.

At one extreme, there is a narrative of weak profitability levels not permitting the real estate industry to be very flexible on prices. There is some merit in this claim. Profitability levels are not as high as most believe, although it is hard to fathom the rationale of not slicing off a big chunk of that margin when it is clear that at prevailing prices demand simply does not exist for most players.

At the centre, there is the narrative of real estate being a good investment bet given low interest rates, volatile equity markets, falling home prices etc. There is less merit in this claim; it’s unfair to point at mid-cap and small-cap stocks getting butchered to cite real estate’s superiority over equity. With the exception of a handful of developers, every under-construction property purchase is as risky as investing in a small-cap or mid-cap stock.

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The other extreme is lame scaremongering over the dismal economic environment that will exist if prices are slashed, because of which prospective buyers should not hope for a price cut. This is easily the weakest argument ever pitched in real estate pricing and I won’t even dignify it with an assessment.

However, in none of the narratives is anything besides the price ever highlighted. There is a reason for this. The real estate industry has never marketed housing as only a product. The product was always a compromise in lieu of almost-assured price appreciation. And appreciation did happen. Then from 2015-16, the music stopped, forcing buyers to look for value. But the old tune of the industry was tough to stop dancing to and the strategy continued.

Also Read: Mumbai property market gets it mojo back after coronavirus lockdown

I don’t blame the industry for that strategy. Given the casual approach that most developers have on product development and quality, emphasis on these aspects at the time of sale was never going to work. Industry specialists from overseas often gasp in shock at the easy wear and tear, and rapid deterioration of construction in India.

Wanted: Credible third-party quality inspectors

One of the challenges in moving towards a quality-driven market is that there is an absence of credible third-party quality inspectors and certification of projects. There are agencies that do it for valuation, environment etc. But none for quality. This allows developers to reduce initial costs by compromising on quality and leaving buyers with recurring maintenance costs to fix the quality gap. That has led to a situation wherein brands have become a proxy for quality. I have two reservations with that: 1) Branded developers, too, have inconsistency in their quality (there are exceptions such as Hiranandani Developers and Oberoi Realty). 2) Brands are extracting a disproportionate premium.

Regulatory support has come in to set quality standards, but an immediate deterrent that is emerging is social media. Earlier, one could keep the lid on a bad project, but today that is no longer possible as social media has given betrayed buyers a platform to expose it. My interactions indicate that the industry still continues to underestimate the relevance of social media -- improving a website or increasing social media spends is no substitute for sophistication in strategy.

What happens next?

Broadly there are two options for developers in the current environment, when demand has collapsed and prices are dropping: 1) Plan, innovate and become efficient -- especially at the pre-construction stage, where current practices are still very poor 2) Use the price-fall trajectory and get back to the lazy ‘investment’ returns theory + emotive ‘home-owning’ opportunity.

If it is the latter, it will be a big missed opportunity. Location and price will remain important but quality has to start becoming a bigger part of the equation in a real estate project. As Nimish Gupta, MD of advocacy group RICS, bluntly puts it: “Pain may be inevitable, but suffering is optional. Developers who continue to ignore the importance of professional real estate practices, pre-construction processes and honest execution will remain in a coterie that continues to whine at the government or external factors, but do nothing to help themselves.”

Gupta is right. No government bailout is coming. Demand has collapsed. The only way to rebound then is to look inward, introspect and upgrade. For many -- it is too late. For some, it isn’t.

Price cuts are a necessary but insufficient condition for revival and developers need to go beyond pricing. The tide has gone out and most of the industry has been swimming naked. They mustn’t go deeper into the ocean to hide that reality. They will drown.

(When not busy with his newstoon platform Snapnews, Vishal Bhargava is a real estate enthusiast who views and reviews new projects. Views expressed here are personal)