REAL ESTATE AUGUST 2019

DISTRESSED LUXURY REAL ESTATE IN MUMBAI

Impact of regulatory changes and market dynamics on luxury residential real
estate in Mumbai market - Central Mumbai micro market in close focus
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Shubham Jain Anand Kulkarni

+91 124 4545 306 +91 22 6169 3326
shubhamj@icraindia.com anand.kulkarni@icraindia.com
 OVERVIEW
Residential real estate sector has been undergoing difficult times over the
last few years. Typical to the industry dynamics, the performance has been
divergent across segments and markets. The luxury residential real estate
segment has been the most impacted in the recent past, while the affordable
and mid housing segment has been faring better in comparison – the reason
being various regulatory developments.
Following the demonetisation from November 2016, affecting the cash
economy in the country. Historically, the real estate sector in general and the
luxury segment, in particular, has seen the involvement of a sizeable share of
the cash transactions. Demonetisation significantly impacted the
transactions in the luxury residential real estate segment and its effect is still
prevalent. The industry witnessed the implementation of the Real Estate
Regulation and Development Act (RERA) from May 2017. The provisions of
the act are focused towards improving consumer confidence through
accountability on developers, timeliness of delivery and transparent
processes; however, uncertainties during the transition period impacted the
demand for the residential real estate industry. Implementation of the
Goods and Service Tax (GST) from July 01, 2017 has also changed the
operating dynamics of the sector. The GST regime has been full of
uncertainties for developers as well as consumers alike due to lack of clarity
on certain taxation aspects in the initial period, followed by high GST rates in
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the interim and the reduction of rates starting from April 01, 2019.
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The luxury segment was highly impacted due to large ticket sizes and
resultant high quantum of tax component as per the earlier GST rates of
12%. Incessant delays in delivery as well as high taxes resulted in a change in
the industry trend from pre-booking under construction homes to
preference for ready-possession homes. This translated into the deferment
of a critical means of finance for the developers i.e. customer advances.
The NBFC crisis, which became prominent from the second half of the last
fiscal, has further exacerbated the liquidity of the sector. NBFC funding has
been the key source for the real estate developers, more so in the context of
the lack of enough customer advances. Unavailability of funding from NBFCs
as well as slowdown in incremental disbursements by some NBFCs on
sanctioned housing loans had a domino effect on the sector wherein the
construction activity was significantly delayed.
High cost of land and construction, weak demand, back-ended customer
advances, and limited avenues of external funding together have pushed the
luxury residential real estate segment into distress.
Mumbai is one of the largest markets for the luxury residential real estate in
the country. Vibrant economic activity and high purchasing power have been
the pull factors while scarcity of land and consequent high land cost has been
the push factor for development of the luxury market in the city.
 Mumbai Luxury Residential Real Estate – Significant concentration on central Mumbai due to well-developed commercial areas

Exhibit 1: Key Business Districts in Mumbai City
Historically, the southern area of Mumbai was the key business district,
primarily driven by good sub-urban railway connectivity. The city has
witnessed linear development along the arterial sub-urban railway lines
and roads due to lack of land resources for peripheral growth. Gradually,
business district has shifted from the southern to the central areas.
Resultantly, the southern and central areas have become the prime
residential real estate markets. Even though, the business activity has been
shifting further to the suburbans, a major share of the luxury residential
real estate is concentrated in the southern and central micro markets.

In line with strong growth commercial activity in central Mumbai areas like
Worli, Lower Parel, Prabhadevi etc., demand for luxury residential segment
had started to pick up in the past. Many developers, including the
organised ones, beefed up the supply in the micro market expecting a
further boost in demand. However, the aforementioned dampening
reasons significantly weakened the luxury residential demand.
Furthermore, inadequate road infrastructure constrained the demand
growth in the geography. Therefore, over the last two to three years,
central Mumbai has witnessed a significant high value inventory build-up.

Exhibit 2: Key Commercial Establishments in Central Mumbai

Establishment Location Area (million sq ft)
One Indiabulls Centre Elphinstone 1.7
Indiabulls Finance Centre Elphinstone 1.7
Peninsula Corporate Park Lower Parel 1.3
Peninsula Business Park Lower Parel 1.2
Marathon Futurex Lower Parel 1.2
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Source: ICRA research

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Source: Google Maps, ICRA research

 Mumbai Luxury Residential Real Estate – 39% of the area under development is in central Mumbai; 75% by tier-I developers
Exhibit 3: Share of Total Units Under Construction in Mumbai City

Total apartments in various ongoing projects in Mumbai City1

23% currently are 45,764 spread across 572 projects, out of which the
central Mumbai2 micro market has 33% share with 15,190 units
67% 33% across 137 projects. Since the market has a higher share of luxury
houses, the area under development3 in central Mumbai is ~39% of
10% the total area under development in the city.

Many well-known developers have interest in residential real estate

Mumbai (Excluding Central)
Other Developers in Central Mumbai
Source: MahaRERA, ICRA research
Exhibit 4: Share of Total Area Under Construction in Mumbai City
61%
in central Mumbai due to previously anticipated high demand and
Tier I Developers in Central Mumbai expected healthy profitability in the luxury segment. Apartments
under development from tier-I developers in the central Mumbai
market are ~70% of the total apartments in the micro market, while
the area under development from the tier-I developers stands at a
higher level of ~75%. The tier-I developers have nearly 10,260
apartments across 47 projects.
29%
The significant presence of tier-I developers in the micro market,
large areas of apartments on offer, premium configurations and
39% high-end amenities underline the luxury nature of the market in
central Mumbai.
10%

Mumbai (Excluding Central) Tier I Developers in Central Mumbai

Other Developers in Central Mumbai

Source: MahaRERA, ICRA research

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1 Includes all the projects listed in MahaRERA with ‘District’ as Mumbai City. Does not include Mumbai suburban or other peripheral regions in Mumbai Metropolitan Region
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2 Includes all the projects listed in MahaRERA with ‘Pin Code’ as 400011, 400012, 400013, 400014, 400025
3 Total area considers ‘Total FSI’ field in MahaRERA for the projects under consideration
 Mumbai Luxury Residential Real Estate – Average apartment size in central Mumbai 19% higher

Exhibit 5: Share of Total Units by Apartment Size in Mumbai City (in sq ft)
89 projects
Evidently, the average area per unit4 in central Mumbai is 19% higher
7%
at ~1,600 sq ft as against that of ~1,340 sq ft for the Mumbai city.
Excluding the central Mumbai micro market, the average area per
unit for the rest of the Mumbai city is even lower at ~1,215 sq ft.
43%
275 projects
208 projects As presented in Exhibit 5, ~43% of the total units in Mumbai city have
50% an average apartment size of less than 1,000 sq ft, while the same
stands at only ~20% in central Mumbai. Further, share of units having
average area more than 1,500 sq ft in central Mumbai is 39% as
against that of 29% for the Mumbai city.
2500+ 1000-2500 <1000
Notably, the average unit area of the units from tier-I developers is
Source: MahaRERA, ICRA research
further higher by ~6% as compared to the micro market average and
Exhibit 6: Share of Total Units by Apartment Size in Central Mumbai (in sq ft) it stands at ~1,700 sq ft, which underpins the premium nature of the
24 projects central Mumbai micro market.
34 projects 11%
20%

69% 79 projects

2500+ 1000-2500 <1000

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Source: MahaRERA, ICRA research

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4 Calculated as Total FSI divided by total number of units under development

 Mumbai Luxury Residential Real Estate – Several tier-I developers have high ticket apartments in central Mumbai

Exhibit 7: Key Luxury Projects in Central Mumbai

Project Developer Location Price Range (In Rs. crore)
The Park Lodha Group Worli 3.9-9.1
Crescent Bay L&T Realty Parel 3.6-10.1
World Towers Lodha Group Worli 7.3-20.7
Omkar 1973 Omkar Realtors Worli 8.0-30.5
Indiabulls Blu Indiabulls Worli 4.3-80.0
25 South Wadhwa Group Prabhadevi 8.8-16.7
Crown Rustomjee Prabhadevi 5.7-11.9
Avana Kalpataru Parel 9.2-19.3
Piramal Mahalaxmi Piramal Realty Mahalaxmi 2.9-10.5
Indiabulls Sky Indiabulls Lower Parel 11.0-15.0
Minerva Lokhandwala / Shapoorji Pallonji Mahalaxmi 8.5-11.7
Vivarea K Raheja Group Mahalaxmi 10.5-22.6
Nirvana Runwal Realty Parel 3.2-5.5
Source: www.99acres.com, ICRA research
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 Mumbai Luxury Residential Real Estate – 55% of Mumbai’s value of unsold inventory lies in central Mumbai with high share of tier-I developers

Exhibit 8: Share of Unsold Inventory by Apartment Size in Mumbai City The unsold inventory in Mumbai city stands high at ~54% of the total
25000 80%
units while that for central Mumbai, in particular, stands at around ~52%
70% of the units. The share of unsold inventory for the tier I developers also
20000
60% stands at ~52%. The share of unsold inventory for larger units (more than
15000 50% 1,500 sq ft) is marginally higher at ~58% for Mumbai as well as the micro
40% market. The unsold inventory in Mumbai city might be higher due to long
10000 30%
execution delays in some of the projects. Around 11% of the area in
20%
5000 Mumbai city does not have revised date, indicating long delays, as
10%
0 0% compared to 9% in central Mumbai. Also, the average date of completion
2500+ 1000-2500 <1000 for Mumbai city is around 1,020 days, while that for central Mumbai is
Total Apartments % Unsold around 920 days.

Source: MahaRERA, ICRA research The unsold inventory in central Mumbai constitutes ~32% of the total
unsold inventory in Mumbai City. However, ICRA estimates that the share
Exhibit 9: Share of Unsold Inventory by Apartment Size in Central Mumbai
of value of unsold inventory in central Mumbai is much higher, at ~55%
12000 70%
of the total value of unsold inventory in Mumbai city. Total value of
10000 60%
unsold inventory in central Mumbai is estimated to be Rs. 45,000 crore
50%
8000 while that for the Mumbai city stands at Rs. 83,000 crore. Unsold
40%
6000 inventory in projects being developed by the tier I developers is
30%
4000 estimated to be Rs. 33,000 crore. Considering the high value of inventory
20%
2000 in the micro market, the underperformance of the geography has
10%
severely impacted the real estate sector in Mumbai.
0 0%
2500+ 1000-2500 <1000
The Central Mumbai micro market has also been grappling with delays in
Total Apartments % Unsold the projects under construction. Approximately 18% of the units are
Source: MahaRERA, ICRA research proposed to be delivered in FY2020 and FY2021. A significantly high 71%
of the units have proposed deliveries in or after FY2022. This is possibly
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an indication of the contingency buffer being built in by the developers

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for unforeseen delays in execution.

 Mumbai Luxury Residential Real Estate – Long delays affect project execution

The average delay in proposed delivery (based on available data of revised MahaRERA timelines) stands at 394 days in the central Mumbai micro market.
The actual delays are expected to be even higher.

Realising the slowdown in the market, the developers have resorted to various measures to improve the sales velocity. High ticket size has been one of
the key constraints in the luxury residential segment and the developers are resorting to reconfiguration of apartments with lower carpet area which in
turn reduces the ticket size. The same should be reflected in the decline in average flat areas going forward.

Loss of trust on developers due to long delays in deliveries has also been a key reason for contraction in pre-booking and resultant decline in customer
advances. To improve customer confidence, the developers are entering into joint developments, joint ventures or development management
agreements with better brands with strong execution capabilities and track record. The same is expected to result in a consolidation of market share
towards the organised developers.

Other measures like deferred payment schemes, incentive schemes are also being taken to improve sales velocity.
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 OUTLOOK
ICRA expects the weakness in the luxury residential real estate in Mumbai to continue
in the near term. The developers will continue to face liquidity pressure due to
challenging financing environment and weak demand. Few developers with strong
balance sheet, track record and group backing are expected to consolidate their
position and market share during the testing times.

Various measures, like reconfiguration of apartments to reduce ticket size, association

with stronger developers, might help the stressed developers to liquidate the
inventory gradually. However, maintaining supply discipline remains critical to
strengthen the bargaining power of developers.

Improvement in financing environment and resultant timely execution of the projects

remain a very critical aspect of regaining consumer trust, is likely to be a
comparatively longer process. In the near term, the trends of deferred buying and
back-ended payments from customers in the luxury segment are likely to prevail.
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