Tuesday, October 12, 2010

Real estate prices hit the fast track in New Delhi, Mumbai

Is real estate becoming an asset bubble?

DNA invited some leading real-estate players to help readers understand the trends in the industry in Mumbai.

Prakash Shah: Mid-town means areas like Lower Parel. I don't see a price correction happening in distant suburbs like Thane where the price is about Rs8,000. That is affordable middle-class housing. That’s a place where land availability is still possible. Enquires and business are going on. There is reasonable demand and supply. Not at the same levels as in 2008, buta reasonable demand-supply position is there. And Rs7,000-8,000 is an affordable rate in Mumbai. Maybe in other cities I understand Rs3,000-4,000 is an affordable rate, but Mumbai has a peculiar way of thinking. Compare the prices of Central suburbs, which are around Rs8,000 a sq ft, with those of Western suburbs like Borivli-Kandivli where prices are around Rs10,000-11,000 sq ft. These differences will remain.

Anand Narayanan: In Delhi, you can just keep expanding. Manesar or Gurgaon. The Delhi model is to give the first investor all flats, who then sells them to a second investor and then to the third. In Mumbai, because land is scarce, the builder (except for the small part he has sold to original investors) normally wants to sell to the real user. It also ensures that the market does not get too speculative, and prices don’t fall. The flats may sell very slowly, but the builder can afford to wait because he does not have a million square feet to sell, with the knowledge that he can develop another million square feet tomorrow. That is why, in Mumbai, when I go and buy a product in Hiranandani or any of the good developers. there is a lock-in period. If I put in money today I may not be able to sell for a period of time which is a reasonable period of time. It could be as high as one year to three years. Then there is a high exit cost.There is a transfer charge which is designed to stop investors from flipping it and which can go as high as 15% of your sale value. These exit costs could be in the region of Rs50-100 per sq ft.

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when we talk of the possibility of a bubble, we’re actually only talking of property in Mumbai and Delhi right now.

The real estate market in Delhi led the correction, and Mumbai fell in line next. Both bounced back after the introduction of stimulus packages and the government’s actions in restructuring debt. During the revival phase, a large amount of capital sitting on the fences immediately saw an opportunity. This was first seen in the equity markets, and then later in the real estate and gold commodity markets - all three classes bounced back convincingly.

There is, therefore, a concern that these two markets have demonstrated higher-than- expected enthusiasm, especially in the central parts in the case of Mumbai, and Gurgaon and Noida for Delhi. A lot of investors have plugged in considerable amounts of capital in these regions, and the values, on an average, have now gone 30% higher than the last peak. Some of the residential developments in central Mumbai in 2008 had peaked at `30,000/sq ft. Today, they stand at 38,000/sq ft.

The kind of volumes that we have witnessed in the first half of 2010 has come down dramatically but the liquidity situation in the market has not dropped, and neither has the appetite for investment. In fact, the same enthusiasm, which had been previously contracted by the central parts of Mumbai, is now spreading towards the other parts of the city.