As sales dip, realtors go after people with deep pockets

Last Updated: Wed, Jul 13, 2011 19:10 hrs

Real estate companies in South India are increasing the focus on premium launches to offset any fall in the operating margins as sales volumes drop due to the hardening interest rate regime.

As customers in premium, luxury and super luxury segment are not sensitive to rate hike, companies try to compensate the drop in sales volume of mid-segment houses through this kind of launches.

“Clients who buy this kind of houses are not interest rate sensitive. So, it provides us a cushion against any possible drop in sales in mid-market segment,” L S Vaidyanathan, executive director of Nitesh Estates said. He also said the company was planning to launch two to three projects in the premium segment in the next two quarters.

RBI has raised key policy rates 10 times in the last 15 months to contain rising inflation rates, which stood at 9.06 per cent in May.

As a result, cost of borrowing has increased for home buyers due to a rise in home loan rates. Subsequently, sales volume of realtors have dropped in the recent time as home buyers defer their decision to own homes in a high interest rate environment.

This phenomenon is prominent in the mid-market segment where homes typically range from Rs 25 lakh to around Rs 55 lakh.

Further, operating margin of real estate firms is under pressure as they have less leeway to pass on the rise in input prices to end-consumers in the wake up falling demand. “We are not doing any drastic price correction to spurt volume. Rather, our focus is on premium segment to protect margin level,” Vaidyanathan said.

Referring to this matter, S Baaskaran, chief financial officer, Sobha Developers, said the company’s primary focus on premium products had ensured that rate hike has minimal impact on the balance sheet. “Sobha has a focus on higher middle-income group products to premium from the very beginning. We will have little impact due to the interest rate hike,” he said. The company, whose home price is above Rs 50 lakh, is planning to come up with six new launches in the premium and luxury segments. “Operating margin levels are protected despite a difficult interest rate regime. We don’t see any impact on profitability in this kind of environment,” he added.

This trend is also followed by Brigade Enterprises, Puravankara Projects among others in recent times.

Talking about a greater focus on premium and super-premium products, an analyst with a real estate consultancy firm said this would continue for the next six months till demand picked up in middle income group segment.

“Given the inflation number, home loan rates will not fall in next two quarters. So, real estate companies will come up with more premium products to protect bottom line,” he said.

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