BMC’s sweetener has triggered a ‘diabetes’ crisis for Mumbai real estate

Customer enquiries have dropped, and sales have fallen. Sentiment, however, has been crushed as the oversupply of homes meets the cascading impact of a battered stock market. The optically strong sales registration data met its opponent in ground-level reality for most builders. At the moment, the registration data feels akin to showing strong GDP growth data to an unemployed person.

What is the wrong with the real estate industry?

What’s gone wrong here? The foundation was laid in 2021 when the municipal corporation of Mumbai provided a sweetener to builders to rescue the then-ravaged real estate industry. The corporation charges builders for allowing them to construct areas/apartments on a given plot of land.

The fee paid by builders to the corporation is often the second biggest expense for them. In that year –there was a 50% discount on the offer. Builders jumped in joy and acquired projects to capitalise on the bonanza. The discount ended, but another sweetener emerged: builders were getting more construction area. Even this sweetener was gulped down with ferocity as builders scrambled to acquire land for developing new projects.

That sweetener is now triggering diabetes for many builders as there is severe competition among projects in most markets of Mumbai. There have been two fatal flaws in product development:

1) Excess supply of luxury apartments at high ticket prices

2) Same product with no differentiation. The first category is reminiscent of the Lower Parel market between 2012-2020. Volumes of Maruti Suzuki were expected at price points of Mercedes Benz. Despite the presence of heavyweight developers – it was a long struggle. Now, those memories are being relived at a grander scale across Mumbai as the hunger to do luxury projects by one and all is once again being challenged by the size of the demand pool.

The second category is the mid-level housing market, wherein intense competition ensures home buyers take long periods to evaluate their purchase. Decision-making time has increased from three months to 7-8 months. With little differentiation at the product level, the only difference is price and payment plans. Payment plans of 20:80 and 10:90 are common as builders look to attract buyers by seeking minor down payments with the majority to be paid at completion.

Discounts have begun, and prices are negotiable, although in most cases, it is offered “on the table.” It’s a tired, boring and unimaginative strategy destined to fail given the number of options for a home buyer. Eventually, prices will be cut publicly as select developers recognize the futility of the old approach.

What should homebuyers do?

The buyer strategy should be clear:

1) Evaluate every option carefully for a period of 3-4 months. During that period, the construction progress of the project will be monitored. The visibility of poor execution will eliminate at least 1/3 of the projects.

2) Home Price is important in decision-making, but it is risky to make that the sole determining factor. The most expensive mistake in home buying can be purchasing the cheapest home. A player’s reputation will be critical, as many builders have learnt to game the RERA system of justice. Compliance standards of builders are tested in a downturn, and reputation is the safeguard.

3) Real estate is not an investment. Theories and suggestions may float that a falling stock market will drive safety-seeking investors into real estate. It’s a dangerous strategy to deploy. Safe projects are priced at elevated prices anyway, while unsafe projects are as vulnerable as small-cap stocks.

Buy a home. Buy it for the right reasons, with the right research, and, importantly, with the right counterpart. Diabetes may not be contagious, but once the home is purchased, your financial health is linked to the builder.

Vishal Bhargava is a passionate real estate tracker with a habit of providing no-nonsense commentary. He is the founder of BHK Voice