IPO-style property sales: Will it work in India’s real estate market?


In India’s real estate market, several developers have resorted to inviting Expression of Interest from prospective buyers, to sell their projects. We look at whether this method is merely a marketing gimmick, or if it can offer something useful to home buyers

In the real estate market, where prices have stagnated over the past few years, developers are experimenting with various new sales and marketing strategies. Inviting Expression of Interest (EOI) to sell apartments in an IPO-like manner, is one such strategy which could be termed as market disruption. This strategy has been applied rather selectively in Indian real estate but has met with success. Only the branded developers have experimented with this method though as not everyone can afford to go public and invite EOIs because if the project is under-subscribed, it exposes the developer in the open market. Moreover, selling a housing project through the innovative method of quasi book building, also requires that developers have confidence about the success of their project, as the price discovery process is driven by fundamental ‘demand-supply’ metrics.

 

Successful IPO-style home sales in Indian realty

  • In 2013, Tata Housing sold its Gateway Capital project, in Gurugram, in an IPO style, which was over-subscribed by 20 times.
  • In the same year, the Lodha Group sold its project Blue Moon in central Mumbai, where more than 1,300 applications were received in a 10-day process, from prospective buyers and it was over-subscribed by two times.
  • In 2015, the Lodha Group again received 2,500 applications from home buyers during its nine-day IPO, for a residential project in Thane. The ‘issue’ was pre-launched in India and in New York, London, Dubai, Singapore and Hong Kong.
  • Provident Park Square of Puravankara was recently oversubscribed by 1.6 times, with the developer receiving 1,300 EOIs for 750 units, as a part of their unique quasi book building-based price discovery process.

The advocates of this model argue that through this process, the power of decision making is given to the buyers, as they are driving the most important aspect of a product – its pricing. This strengthens the buyers’ trust in the developer and also boosts the developers’ confidence about the product.

See also: Guide to buying a property under auction

 

What is quasi book building?

The traditional home buying process, always depended on negotiation between buyers and the seller. The quasi book building method eliminates this time-consuming exercise and introduces a transparent, yet competitive manner of price discovery and selling of real estate. In this method, all the information about the product is offered to prospective buyers in the pre-booking stage, along with a ‘price band’ for each type of unit in the project. After this, the developer invites EOIs from prospective buyers. This helps him to analyse the demand for the project and arrive at a data-driven approach to the eventual pricing decision. All customers during the pre-booking process are allotted units of their choice, based on a first-come-first-serve methodology. While early buyers are at the top of the queue and hence, get access to a wider choice of units, all buyers during this process are offered a uniform base price.

Ashish R Puravankara, managing director of Puravankara Limited, points out that introducing a home buyer to the property through a quasi book building method, directly involves the buyer in the pricing decision of the property, thereby, introducing a transparent and engaging home buying process. “From a developer’s point of view, it helps him to understand potential customer interests and expectations, which in turn, help in quality service delivery. At the end of the entire process, both, the developer and the home buyer, are mutually benefitted. The quasi book building method is an effective and efficient way of engaging with our stakeholders,” says Puravankara.

 

Advantages for home buyers in IPO-style property sales

  • A buyer enters the project at a reasonably lower price point.
  • Even if someone places a bid that is higher than the final price, the person will have to pay only the final price and not his bid price.
  • Flats are allotted on a first-come-first-serve basis and hence, the buyer has a higher probability of getting his/her choice of floor and/or view without any PLC (preferential location charges).
  • If the IPO is successful, the buyer is assured that the project will be delivered, as builders cannot divert the money under the RERA.
  • Buyers can opt out with minimum loss, in case the IPO is not successful.

Good demand for a project, also tends to boost buyers’ confidence towards it. Quality, affordability and timely delivery, are the most important factors that property buyers look for and if a developer fulfils these conditions, then, the product is more likely to catch the attention of prospective buyers and thereby, get more EOIs.

Rakesh Gupta, director of Squarewood Projects, however, points out that a book building process that is done through EOIs, gives the impression that it is done prior to obtaining sanctions. “If this is the case, one needs to check how such arrangements will work under the Real Estate (Regulation and Development) Act (RERA). If it is done after sanctions are obtained, I do not see much essence for builders, other than this being another marketing tool, by creating an element of suspense for the prospective buyers. This looks similar to the lottery type of system, which we do frequently in Kolkata. They attach some kind of uniqueness, in terms of scarcity for products, which are sold through lottery. From a builder’s perspective, this is always good, since they have bulk bookings from day one, in the form of EOIs,” Gupta explains.

 

Cost and benefit analysis of selling properties by inviting Expression of Interest

In terms of the brand and marketing strategy, introducing the Expression of Interest (EOI) is an ideal platform, to deepen the customers’ engagement towards a brand and also generate consumer interest in the project offerings. Additionally, it also gives an insight of the buyer sentiments, which can be useful for designing the next offering. However, such initiatives require huge upfront marketing costs. Also, if the money raised through EOIs is very less, there is a high chance of cancellation. More importantly, if the housing units on offer are not over-subscribed, it could send a negative message about the project and affect its future marketability.

(The writer is CEO, Track2Realty)

 

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