There has been much attention to the challenges facing real-estate developers on account of COVID-19. In contrast there has been little focus on the challenges facing another critical segment of the housing industry – landlords. The Maharashtra government provided a helping hand to developers by slashing stamp duty on August 26th, 2020. For apartment owners in Mumbai, however, things have only moved from bad to worse as rentals continue to slump further.
As the COVID-19 induced lockdown started easing in June there were indications that rents had been trimmed by 15% – 20%. Flexible and smart landlords agreed to re-negotiate rents downwards for a limited period with their existing tenants. The ones who remained stubborn and let go of their tenants have paid dearly with the consequences.
There is no location in Mumbai that has gained as much prominence as the eastern suburb of Chembur in the last 8 years. After excruciating delay, Prithviraj Chavan in 2013 finally managed to see through the completion of the Eastern Freeway. It provided easy and fast connectivity to key nodes with its ending at South Bombay. Then last year – we saw the unveiling of the BKC Connector that would provide the shortest gateway into the new commercial business district – Bandra Kurla Complex. Notwithstanding efforts by government agencies to mess it up, connectivity to other locations like Navi Mumbai and Thane is still smooth. The monorail between Chembur and Jacob Circle is not of much importance and has to be one of the worst planned infrastructure projects of all time – but for what little it is worth; it helps the locality. In short – with regards to connectivity Chembur is an animal of little comparison today in Mumbai.
It is wrong to peg Chembur as a monolith. In itself it is a location with wide divergences in prices and buyer profile. There are chaotic areas like P. Lokhande Marg that have projects priced at around INR 15k/square feet. And then there are quaint areas with good connectivity like Diamond Garden and Union Park that often quote at over INR 30k/sqft. At a personal level I opted to stay in Chembur between 2016-19 after abandoning my hunt in trafficked locations of Bandra and Khar. After a long search I finally decided on a street along Diamond Garden. It was a very calm and green location with little commercial activity except for the dozens of bank offices and ATM’s that are on the strip of land called Central Avenue Road.
There are three features to note about the Chembur real estate market
- It is primarily a redevelopment market with smaller buildings, bungalows or slums getting converted into projects
- Until the entry of Godrej with its RK Studios project, it is a market that had no large branded player. It is dominated by developers like Kukreja, Tridhaatu, SKG, Sabari etc. Hiranandani did a project there many years back and it is a pity for Chembur that he didn’t do more
- Given the paucity of large land parcels – there are few projects that have a meaningful number of amenities. It does have a wide range of clubs/gymkhanas for different segments – from the efficient Club Emerald to the bustling Chembur Gymkhana to the exclusive Bombay Presidency Golf Club
I did a few channel checks and visited Chembur recently. Here are my findings
- Prices have dropped between 10-15% at a median level. And distressed properties are available at a discount of over 20%.
- Primary deals are also seeing aggressive pricing. Until it stretched itself too thin, Tridhaatu Developers offered superior quality at a high premium to the market. Now given the environment – it is also aggressive in its pricing
- SRA projects are seeing attention. Ruparel executed one recently with the Orion. Spenta is executing a large SRA project Alta Vista – only time will tell if it can replicate its South Bombay record in the suburbs.
- Most redevelopment projects that are being firmed up between societies and developers will almost certainly get renegotiated. If not renegotiated – my best wishes to the developers. For owners of buildings looking to get redeveloped – I will repeat my principle in selecting developers “RARELY is the highest bid – the best bid.”
- During its launch Godrej RK Studios had priced itself at a comfortable 20% premium. With prices of neighbouring projects falling and RKS holding on, the premium has now widened to Oberoisque levels of 30%-35%. I mean no offense to Godrej, but there is no developer except Oberoi and Hiranandani who can garner demand at that level of premium consistently. (And even Oberoi will be tested in two of his under-construction projects)
View on the market
- It is now an overwhelming consensus call that real estate prices in Mumbai are unlikely to rise. Even most developers have stopped spinning that story. I don’t disagree. But here is my view. With the fate and pace of the Mumbai Metro completion now uncertain – Chembur will retain its appeal due to its connectivity to key locations. Hence whenever the downcycle and COVID-19 does stabilize – markets like Chembur will recover earlier than most others. It will be a gainer for the worst reason in decadent cities – terrible infrastructure and poor connectivity for the other localities.
As a force of habit, I keep a check on most micro-markets of Mumbai by talking to various stakeholders at regular intervals. Due to that there is limited scope to get misled as there is always easy verification that can be done. Hence, I have been aware that the rental market in Mumbai has seen a meaningful correction post-COVID. Yet, there is nothing better than actually visiting properties. So, when my friend Uday Tharar asked me if I would be open to accompanying him on his search for properties in Bandra – I was more than happy.
Uday is an economist working with a Large Fund in Mumbai. He is also a Bandra loyalist having stayed in the area for the last 6 years. Now his search was for apartments in areas like Bandstand and Mount Mary Road. Both the locations are premium areas but most of the buildings in that area are very mediocre. Even my former boss at ET NOW and the now influential Bloomberg columnist – Andy Mukherjee, could get a spacious apartment and a fine sea view but the building in itself was remarkably modest.
The lazy argument is that because the buildings are old – one has to be sympathetic in a judgement. That contention cuts no ice according to me – when landlords attract charge such steep rentals from tenants it should be their responsibility to do a better job in upkeep and maintenance. The only reason most landlords don’t do it – is because it doesn’t matter. Tenants keep coming. The charm of Bandra overpowers all inefficiency.
After visiting the properties with Uday, nothing much has changed on the quality of buildings in recent years. One good addition I noticed is the Raheja Bay at Mount Mary. The rental market is however under pressure in Bandra. Below are some of the findings
- Rentals are down by 15-20%: The fall is greater in the high-ticket size but at a median level the rentals have dropped 15%. Landlords who have been smug and let previous tenants go by not renegotiating downwards are paying a heavy price. Forecast of a rental market is complex– but in all likelihood things will worsen until at least December.
- Landlords waking up to reality: Normally it takes an apartment being empty for a month and no visibility of a new tenant – for landlords to start getting anxious. There is high anxiety building up among landlords. Owners are beefing the quality of offerings (new AC’s, TV etc) within the apartment to attract tenants.
- Brokers: Things have been so weak that even brokers have thrown in the towel. No big talk. Acceptance of the fact that the situation is damp with a bleak outlook. There is scope for a tenant to even get away with a brokerage-free deal.
COVID-19 has had many negative consequences for India. One silver lining probably it may have done is – get landlords in Bandra to value their tenants appropriately. It has been overdue.
Why Mumbai real estate is in a crisis?
- Average cost of a new apartment: INR 1.5 crore to INR 2 crore
- Downpayment of 30% by the home buyer
- Home loan of atleast INR 1 crore
- EMI of approximately INR 75k
How many households can afford paying an EMI of INR 75k?
- ~ 15,000 households pay rent between INR 50,000/month – INR 100,000 month
- ~ 20,000 households pay rent in excess of INR 50,000/month. These households can stretch themselves and instead purchase an apartment
- ~ 60% of rental agreements involve a rent of less than INR 25,000/month
- Leakages exist in rental data: Many do rental agreements for multiple years, few don’t even do agreements, some pay a component in cash etc
- Assuming these leakages, yet number that can afford a home will not exceed 50,000 households
- First-home buyer demand impacting replacement and upgrade demand
- Trend moving towards ready and resale apartment
- Unsold primary inventory of over 100,000 units
Is it a surprise that Mumbai real estate is in a structural crisis?
NUMBER OF HOUSEHOLDS PAYING RENT ACCORDING TO DIFFERENT SLABS
||25k – 50k
||50k – 100k
Source: CRE Matrix
Mumbai’s rental registration mechanism has seen a silent revolution in the last five years. From an only manual mechanism in registration of rental agreements in 2014, today almost 90% of all transactions are done through eRegistration. The ease in registration has had a meaningful impact in compliance as well. Rental registrations in Mumbai have surged 84% since 2015. Data from the Department of Registration and Stamps shows in FY15 a total of 1.35 lakh registrations were done. In FY20, the registrations had increased to 2.49 lakh.
||Total rental registrations
Source: IGR Maharashtra, BHK Voice