N Murali, managing director, Shriram Properties, part of the Southern conglomerate, Shriram Group, appears unperturbed by demonetisation. Real estate is where a lot of black money is parked and its impact on this sector is being analysed every day. “The organised real estate sector welcomes demonetisation. It will improve our industry’s image on transparency and credibility in the minds of public and the government.” “There has been a series of transformational reforms apart from demonetisation such as Real Estate Regulator Act (RERA) ,GST, Benami Transactions (Prohibition) Amendment Act,IFRS, introduced all in a row and in quick succession. These have created lot of ripples, expectations and predictions about India’s real estate business. We have to respond in in a way to bring back the home buyers confidence to the markets”
Shriram Properties was promoted by the group in 1997 and Murali got the opportunity to run the business when he was only 28. Chairman R Tyagarajan who has a history of encouraging youngsters felt he was the right man for the job. “We moved to Bangalore from Chennai when the business had a lot of starting troubles. No capital was available. Our focus was to find customers, servicing them and giving them a clear title. “We had to compete against big developers who were not concerned about customer service. They were into double and triple transactions and there was a lot of speculation going on.
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Murali says that it was hand to mouth existence in the early days and he had to develop new schemes to structure the finances. Within three years, the company found its niche and started growing rapidly. “We passed on a lot of benefits to the customers from whatever we collected.” By 2005, the company was firmly established in Bangalore and it acquired the huge Standard Motors property in Chennai.
Shriram Properties, has always focused on mid-market and affordable housing segments. It has developed more than 11 million sq ft across 26 projects, 77 % of which is in mid-market and affordable housing areas. There are on-going projects of 21 million sq ft in five different geographies. The company has an additional land bank of 602 acres for future projects. It is the market leader in the South and has entered Kolkata and testing waters in Mumbai. “We have developed an asset light business model with partnerships. We have a healthy mix of own projects and joint development projects with both revenue sharing and space sharing models. The company has won the Assocham best developer award for the southern region for three consecutive years.”
It got a major breakthrough when FDI started flowing in 2006. “A lot of PEs have lost their investments in India in real estate. We are among the very few who have given consistent returns to the investors”. Walton street capital was the first to invest in Shriram Properties followed by Starwood capital, then TPG and Tata Capital. There has been a good value appreciation of over 2.5 times from the first investment. Shriram Properties’ investors who have exited at the project level have made substantial returns. The company has partnered with 11 investors with 17 investments totalling about $440 million. “We want to be the most trusted player with transparency and good governance in real estate, but also become a market leader and to be the most valued company.”
Murali says this is the right time to find solutions for the housing shortage in the country. Shriram Properties would like to play a role in solving this major problem. “More than 90% of housing shortage in India (approximately 20 million units) relates to the economically weaker section and lower income group housing. Upper segment which forms miniscule percentage will remain unaffected with the magnitude of the challenge. They are not worried and affected by price variations and the demand and supply situation”.
With demonetisation, it is anticipated that land price will come down . Industry sources indicate that southern states may witness 20% fall in land prices while in Mumbai and NCR it may be a fall of 30% and 50%, respectively. According to Murali, in an affordable housing project with unit price at R3,000 per square feet plus stamp duty and registration fees (which vary from state to state) and taking them as approximately 8 % to 10% of the unit price, the total cost comes to around R3,250 per square feet to R3,300 per square feet. “Fall in land prices by 20 to 30% will have only a negligible impact of say 2 % to 3 % on the overall price. It will be a fall of less than R100 per square feet not altering the situation significantly. “
Several measures have to be taken if one has to see the benefits of demonetisation to make affordable housing a reality. “We have to reduce the approval cost. If we are able to contain it to R50 cumulatively with the anticipated fall in land price it will be less expensive for the home buyer. This is possible with transparent digital online approval which will take minimum time putting an end to unethical practices. The state governments are obliged to provide infrastructure such as roads, water, and sewerage. Cash strapped states can examine some mechanism with private developers for initial outlay of funds.
Murali says that approximately 25-30% of the unit price is taken up by taxes and fees. “Going by our example it is nearly R750-R900 per square feet, some times it is R1000 with higher registration fees. There is scope for a single tax for purchase of housing unit which will reduce the overall price for the homebuyer by another R250 per square feet. This is after leaving the margin for the government to bear the obligatory infrastructure,water and sewerage costs.
He hopes these changes will happen soon. Murali says the mid-market segment will boom in the next 20 to 40 years. “Real estate sector will surely witness a healthy growth for organised, reputed, credible players in the days ahead.”
sushila.ravindranath@expressindia.com