‘Controlled launch to sales ratio is key to strong fiscal management’

[ecis2016.org] Controlled launch-to-sales ratio and prudent fiscal management with a focus on delivery, are helping some of the new developers in India’s real estate market to score over their bigger and more established counterparts, says Nikhil Hawelia, managing director of the Hawelia Group

Many of the larger developers in India’s property market are today reeling under heavy debt burdens, over-leveraged balance-sheets and challenged execution capabilities. In an exclusive interview with Housing News, Nikhil Hawelia, managing director of the Hawelia Group, explains how success depends on understanding one’s capability to scale up.

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Q: Why are smaller developers gaining more ground in Delhi-NCR, as compared to the bigger and more established players?

A: In comparison to the larger players, mid-sized developers have better stability in their ventures, with their funds and resources concentrated on their limited projects. Larger real estate developers, especially in north India, are mainly focusing on multiplying the quantum of their work, just to show growth in scale. On the other hand, small and medium developers, are focusing on timely delivery and quality, resulting in higher customer satisfaction. A smaller management hierarchy, results in direct involvement of the higher management in key decisions, which improves work efficiency.

Q: What is the ideal launch-to-sales ratio, to keep fiscal management in control?

A: Instead of calling it an ‘ideal launch-to-sales ratio’, I would rather name it as a ‘controlled launch-to-sales ratio’. However, it cannot be generalised for all categories of projects, as the cost of land varies. This changes the break-even point, in the financial planning of the project. For example, in our affordable housing project in Greater Noida West, the controlled launch-to-sales ratio can be put up as 45%-50%, as per our planning and experience. Having said that, developers must not exceed their capacity, as it will affect one’s reputation and future projects.

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Q: How can developers scale-up, without affecting their execution capability?

A: Execution capability ratio, is the capability of the company to execute the given amount of work in a controlled manner, in all respects. Developers should clearly define the line between controlled and over-limit work. Working in a controlled atmosphere that maximises every business cycle, will help builders to scale-up their business and improve execution capabilities.

Growth is not bad but there is a thin line between hunger for growth and greed for growth.

Developers also need to adopt best practices, vis-à-vis fiscal management, timely execution, perception building, transparency, professionalism, consumer connect, etc. It is also imperative for the government authorities, to lay down unambiguous guidelines for development norms and ensure a transparent and timely approval process.

Q: What are the major fiscal risks that real estate companies face? When is a company fiscal risky?

A: Lack of financial discipline – over-leveraged balance sheets, high cost of land acquisition, too many launches of new projects and unforeseen challenges in the construction business, are the main fiscal risks that real estate companies face. This, in turn, forces the developers to expand on their funding sources, even at a high cost of finance.

Q: Can over leveraging be controlled?

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A: Commercial projects that involve leasing models, have better security than projects involving outright sales. Similarly, the frequency of sales in low-cost or affordable housing projects, is higher than in high-end projects. Differences also exist in the cost of land and the cost of execution of projects, as the cost of land varies drastically from region to region. This impacts the funding percentage that is required for the construction and execution of the project. Hence, it is not possible to define a generalised percentage of over leveraging that can be controlled.

Q: Does a developer’s personal involvement in a project, make any difference?

A: Involvement of the higher management at all verticals, is crucial to fulfill commitments and promises. Hence, developers should first, clearly define the quantum of work that will be undertaken for a particular business cycle, which is under their control. Major issues, like delays in possession, quality issues, etc., directly or indirectly occur because of uncontrollable growth.

Q: At a time when some of the larger players in the Delhi-NCR are losing their brand equity and market share, do you feel that new entrants have better chances?

A: While different developers may have their own customer base, expectations and market positioning, the common factors that affect them, are customers’ experience and word-of-mouth in the market. For example, our study in Delhi-NCR and other key Indian markets, indicate that consistently delivering one million sq ft every year, can make a developer trustworthy. However, large volumes of delivery with poor customer service, can kill a big brand. This principle is likely to gain significance in the Indian housing market, hereafter.

(The writer is CEO, Track2Realty)

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Source: https://ecis2016.org
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