For the past half a decade the residential sector has witnessed price reductions and couple with changes in income tax laws the role of investors in RRE has been coming down. This has led to a situation wherein only the people who want to reside are purchasing the apartments.
Another big shift has been the move towards smaller apartment sizes and therefore ticket sizes. Some of the successful launches during the past 12 months pre covid were builders who offered a sub ₹1 crore apartments as also apartment sizes of 2bhk or less.
With the advent of covid and the uncertainties about continued employment continued salary upgrades I predict a situation where every individual would seek to conserve cash. I see a trend wherein the movement would be for affordable consumption rather than display consumption.
Would people want to saddle themselves with a large debt for acquiring an apartment. I am not so sure.
The reality today is as follows
Builders are sitting on large unsold inventory
Several projects are partially completed due to lack of sales as well as lack of funds to complete the projects
And most importantly most of the ongoing projects are funded almost completely by debt with hardly any equity
Finally no lender is willing to extend further loans to these existing projects.
Is there a way out. Possible. Needs a mindset change.
Instead of selling apartments the builders can lease the apartments. Get into long term leases. With an option to buy at the end of a certain period at a pre determined value.
The asset continues on the book of the builder. The builder can do a funding based on lease rentals.
Of course it doesn’t have to be 100% lease model. Like in the commercial RE there could be a mix of sale and lease.
But, and this is critical – the builders have to inject equity into the business to display commitment. Essentially move from a debt equity ratio of 99:1 to may be 60:40 or 70:30.
But this would certainly lead to an uptick in lease of apartments with a buy back option. And improvement in operating cash flows.
Can this work. Sure it would. It just needs one builder with the foresight and vision. Once the trend starts it would grow in momentum.