Sucheta Dalal :Mixed signals from the real estate market
Sucheta Dalal

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Mixed signals from the real estate market  

May 15, 2006

If you are guided merely by the vast volumes of data spewed out by foreign real estate brokers, builders or realty venture funds then the bull market in this sector seems set to last for the next few years. They have a way of arranging all the good news into a fantastic investment scenario where nothing could possibly go wrong. 


Here is the case, made out by Celedon Investment Research. It says, tax concessions to consumers and developers including rationalisation of stamp duty and the repeal of Urban Land Ceiling Act in 9 states, along with computerisation of land records have set the stage for urban renewal.


Urbanisation in India is far below international standards at only 28 % as compared to 32 % in China, 41 % in Indonesia and anywhere between 75 to 80 % in developed nations.


Increase in salaries and lower taxes have apparently ensured that the cost of houses, which used to be a multiple of 20 times the annual income of buyers is now down to 4.5 times (it does not say what portion of potential buyers fit into this classification).


The next 15 months will see a $3 billion investment in Indian real estate through joint ventures with international funds and developers. This will see a spate of buyouts and joint ventures in the industry. Caledon’s research points out that Dubai based Emaar alone is planning a US $ 4 billion investment in India through its joint venture with MGF Ltd to develop smaller cities.  It says, the urban housing sector will require a $25 billion investment in the next five years. In April, the California Public Employees' Retirement System (CalPERS) caused a flutter by investing  $100 million into an Indian realty fund.


If you step back from these rosy demand projections and look at the property market from the buyers perspective, things look a lot different.  For starters, the entire real estate industry has much to gain by joining the same chorus of about India’s booming property market.


Most companies connected with the real-estate and construction business and even those who are not, are all hoping to raise vast amounts of public money though Initial Public Offerings (DLF of Delhi is projected to catapult to an astounding market capitalisation immediate on listing) in this bull market. Then there are realty venture funds (inside information on Jai Corp’s plans saw the stock hitting the upper circuit for days before it finally announced its plans) and foreign investors who have effortlessly raised millions of dollars from foreign and Indian investors.


Pune is one of India’s hottest property markets today growing at over 25 %. Here is what the head of an IT company discovered when he avoided the large brokerage firms that are driving up property prices. Determined to get the best price, this IT honcho posed as a small business man with plenty of cash in hand and the legitimacy of a couple of gold cards who wanted to seal a quick deal. To his shock, he discovered that almost every builder was ready to drop prices for a quick sale, but what was stunning to him was that they were willing the rate by half.  More interestingly, commercial property in Pune is selling at a marginally lower rate for IT companies.

A Mumbai builder from Wadala says that the combination of higher interest rates and soaring prices had certainly halted fresh sales, especially for middle class borrowers seeking funding. Suddenly, many dream houses have flown out of reach and his last 7 flats remain unsold.


A real estate advisor tells me that several clients are scaling down their expectation. Those in their 20s who wanted nothing less than a two-bedroom flat with a 20 year repayment are now willing to settle for one bedroom.  Others are scaling down from row houses and three-bedroom spreads to more moderate apartments. Attractive tax concessions on home loans alone have ensured that the business keeps chugging along without a visible slow down because people would much rather pay EMIs than taxes. However, with interest rates having shot up from 7.5 % to over 10 % in just over 15 months investors are seriously worried.


The rush to buy second homes has apparently taken a serious hit. An anecdotal report says that some IT executives in Pune had invested in as many as 15 under construction flats each, hoping to book a huge profit on completion. Their big property play was financed by housing finance companies. Banks are worried about such funding, especially since bad loans, especially at public sector banks are mounting steadily and are in the region of a high 5 %. The Reserve Bank of India is even more worried about banks doubling their exposure to the real estate market in the last year. It has quickly imposed curbs on their investment in realty venture funds. We learn that the banking regulator is refusing to clear any new investments by banks in realty venture funds although SEBI has permitted 20 realty funds to operate in India.


Interestingly, several sections of the realty industry blame foreign brokerage firms for driving up prices. They say that with Foreign direct investment (FDI) in Indian real estate estimated to be in the region of  $16 billion over the next five years, these firms hope to profit from channeling these funds or offering consultancy services.


That is why several concerned persons are demanding an independent regulator for the realty market to oversee its development by setting standards, ensuring transparency in pricing and documentation and playing a powerful supervisory role. The creation of such a regulator will also hasten the process of computerizing land and property records and standardizing property related charges and procedures across the country. A bigger benefit would be a dramatic reduction in bribes collected by government officials involved in every aspect of property deals. This is all the more important if with the advent of realty mutual funds and venture financing.




-- Sucheta Dalal