Replies to comments on Mumbai real estate

I didn't expect so many comments on my earlier post. And since most of these are detailed comments, it makes better sense if I post my replies here.

Prakash: Thanks for the comment, I agree with most of the points you mentioned.

Realty Rider: My post isn't about Mumbai's potential. And none of the projects you mentioned have been 'successfuly completed'. From what I hear retail (mall) space is being converted to commercial, not the other way around. Thanks for the comment.

Lekhni: Thanks for such a detailed comment. Here are my views on each of the points you raised.

1. The level of buying from speculators/investors in Mumbai's real estate market has crashed, and this isn't a new phenomena. A decline of interest from these speculators/investors, has been happening for the last six to nine months. That's the reason why transactions have taken a hit.

I agree with you when you say that an external shock might drive investors (who have been waiting it out) to sell - in fact, I even mentioned it point #5. Now whether that shock is in the form of a US recession or something else is a different matter. I mean, a shock in the form of a US recession will hit many more sectors (not just in Mumbai but in other countries, most notably US itself!) so real estate is bound to be a casualty.

Interestingly enough, since I wrote this post, we've already got a new shock - inflation at 11.05% (thanks to the oil surge - again a global phenomena) and the prospect of a sharp rise in interest rates. Now that should logically impact Mumbai's real estate prices. Let's wait it out and see if it does.

2. I already mentioned this in point #3. And builders haven't 'started throwing in stuff', they've been doing it for almost a year. But like I mentioned, headline rates have not fallen as yet. Sure, your effective cost reduced with these so-called freebies but the impact on your overall cost of purchase isn't huge and prices still remain too high.

3. I never made the point on stock markets financing the real estate bubble. And I can't agree with you that Mumbai's real estate boom has been financed by easy lending. That might be true to a some extent for HNIs and large investors, but not for the majority.

In fact far from it, banks started going slow on mortgages about a year back. This happened after the RBI pointedly took note of the speculation in the real estate sector (Gurgaon and Bangalore being good examples) and then increased risk-weightage on mortgages which made life tougher for banks - some of which had indeed gone over-aggressive on home loans. (If you know anyone in ICICI Bank ask them why they drastically cut/transferred their staff from their mortgages division).

The RBI woke up to the asset bubble in real estate much earlier as compared to the Fed which waited for a crisis to put them in action. Try getting a home loan now in Mumbai 'with little or no documentation' - you might be surprised how difficult it is here from the US - even today ;)

I understand the call you're taking and like I said I'd only be too happy to be proved wrong. In fact from the way things are going (after 11% inflation and a rising interest rate scenario), there might actually be a sense of panic among builders which might drive down prices. And if this does happen, it will not be because of speculation, greed and dodgy lending practices by banks. It will be because inflation drove up interest rates, which in turn stifled India's overall GDP growth - thanks, in no small measure to the oil shock, i.e. an event that affects almost every country in the world and not just the city of Mumbai.

I think both of us are in agreement that Mumbai realty prices will fall. It's just a question of how much and how soon.

Anon - not sure if that has anything to do with my post, but thanks for the comment.

Manoj - Some factual errors in what you said - prices never crashed 50% in the early 90s. They fell 50% from the mid-90s when the RBI raised interest rates (my guess is probably around 1994-95, sometime after 12th Sept 1994 when the stock markets touched an all-time high of 4,643) all the way to about 2002-03 (which annualised is an 8% decline - not exactly a 'crash'). So, as you correctly pointed out real estate typically crashes in slow motion and lasts longer. Will it happen this time? Let's see. For Mumbai prices to go into a similar downward spiral this time for the next 5 years, a lot would have to go wrong - and if that does happen, I think there'll be much more to worry about than just the real estate market. Thanks for the comment and I wish I could make such a handsome return on my investment!

Mumbai real estate: slowdown yes, panic no

"Many top city builders in dire straits" reads todays TOI front page. Ironically, page 3 carries a full page ad from DB Realty for the tallest building in the suburbs (Rs9,200/psf delivery in 2010). I don’t think Mumbai’s real estate price are crashing anytime soon. Here's why:

1. No Supply in town... Remember everyone saying that opening up of the Mill Lands and the repeal of ULCRA will 'unleash' land? It's not happened. And no one expects it to. There are many mills that have yet to be converted to real estate project. No one knows the status there. As for the lands already converted (Piramal's Ashok Gardens, Marathon, Bombay Dyeing, Lodha Bellissimo, etc. Sheth's Beaumonde), the builders (and owners) are laughing all the way to the banks. Rates in all these projects are upwards of Rs30,000/psf and no, they aren't coming down. If anything, more premium apartments are coming up at even higher rates.

2....And too much in the suburbs: Redevelopment has changed the landscape of western suburbs from Bandra to Santacruz. Even now, construction activity is in full swing as societies yield in to builders. You'd expect this kind of supply to push down prices, right? No chance. Smaller flats (500sqft+) aren’t available because older societies (which have these flats) are hanging on for lucrative redevelopment proposals.

Meanwhile newly constructed/redeveloped buildings only have 3-4BHK whose minimum prices are Rs2cr+. There is an assumption that 2BHKs aren’t required anymore, just like in the past 1BHKs went completely out of fashion.

What’s funny is that fully constructed buildings are lying vacant (drive down Bandra and Khar and you can them dark and empty). Investors have been holding on to these flats for at least 6-9months under the assumption that there will be demand. But there isn’t and even then, rates aren’t falling.

3. Smaller builders under pressure: Newspaper reports suggest that smaller builders are at risk because they’ve borrowed heavily for their projects and now their flats aren’t selling. This is believable, because in some cases these smaller buildings are offering discounts of all forms (more amenities, EMI freeze, etc.). And yet there are other smaller builders who aren’t rushing to fold up.

For example, Chembur Tilak Nagar, a ‘fast-selling’ area because the Santacruz-Chembur Link Road will make access much easier. On the other side of Chembur, Raheja’s Acropolis is selling at Rs8,500/psf, which has emboldened Tilak Nagar builders to demand Rs7,000+/psf. As per local brokers, builders in Tilak Nagar were vegetable vendors once who hit it big thanks to Dy. Minister R. R. Patil. Most buildings don’t even have an occupation certificate (OC), meaning you can’t pull in that flower bed into your house just yet. Most houses in these buildings have completely random layouts. Some of these 4-5year old buildings are already being water-proofed for leakage. So even if a house is cheap in these areas, it comes with risks. And you might not even be able to trace the builder.

4. Big builders stand firm: In Dahisar, Lodha’s premium project –Aqua is selling for Rs5,895/psf with rate hikes happening almost every month. In Kandivali (East), the Lokhandwala’s were charging Rs6,500 and claimed that they would be hiking rates soon. In Goregaon and Malad (East) top-end builders like Raheja and Sheth are holding rates firm at Rs8,000 to Rs9,000. In fact, Rahejas are also asking for a 25% black component in some of their projects.

There are few exceptions. For example in Bhakti Park Wadala (East) where rates were hiked from Rs7,500 (late last year) to Rs8,000 (April this year) now the builder is willing to negotiate. So, even in distant suburbs, going by these rates, there isn’t any sense of a major slowdown or builders rushing to offer attractive bargains.

5. Real estate markets follow the stock markets – NOT!: The stock markets are down 30% this year, but property prices in Mumbai haven’t even fallen 10%. So I don’t buy this argument. Moreover, (a) Mumbai’s property market is much more illiquid so price movements aren’t as quick to fall and (b) Even in the stock markets, there is no sense of panic, i.e. mutual funds aren’t seeing any major redemptions.

However, the first signs of a crack are appearing; news reports suggest that investors who are holding on to their flats (as mentioned in #2) are beginning to undercut builders to sell off their flats. Perhaps, if the stock markets fall further, we might get a clearer picture.

6. Politicians support builders: The aspirations, and achievements, of Mumbai’s politicians in real estate are well known and so is the age-old politician-builder nexus. It is safe to assume that the government will protect builders. Chief Minister Vilasrao Deshmukhs’ much-publicized housing policy never saw the light of day. No extra land has come in from ULCRA. If anything, the Government has tweaked FSI more in the last few months than it has in the last few years. So the Government’s focus seems to be on keeping a tight leash on supply. Aside: Even Narayan Rane – whose despair for the CM’s seat would make Rakhi Sawant’s publicity stunts look noble – is grabbing whatever land he can in his home suburb of Bandra.

Bottomline: As long as the overall economy does well and wages in Mumbai keep rising at 25% per annum (much, much more in some sectors), demand should logically remain strong. So, while there might be a slowdown in Mumbai's real estate market, builders are still not rushing to slash prices. I'd love to be proved wrong when I say that I do not expect Mumbai's real estate to collapse. But a lot has to happen for that, because I think there will always be demand at lower levels. The question of course is how low.

For rates to reach their 2002-03 levels, they would have to fall 60%+. Improbable, but not impossible. And given the currently inflated level, a 20% fall from here doesn’t amount to a ‘crash’, but it would still be welcome. In all probability, that’s when demand might come in. After all, (this author included) who doesn’t want a house in Mumbai?

PS –Times of India is carrying this ‘real estate rates will decline 15%' news across all of their English dailies: TOI, Mumbai Mirror and ET. Given the TOI’s editorial freedom, I wonder if this was planted.

The low voter turnout dilemma

In the recent Karnataka state elections, there was a very interesting debate regarding low voter turnout in Bangalore and associated issues of apathy of the urban middle-class, etc. [In fact, if there's any reader from Bangalore, I'd appreciate your views on this, because you'd have a better idea.]

Two articles of note here from the Mint.

1. The first article delves into some reasons as under.
Reason 1:

“The urban rich have other systems by which they can get things done, though it’s not necessarily by bribing (representatives),” says Rajiv Bhargava, head of the Delhi-based Centre for Study of Developing Societies. For instance, telephone and gas connections are freely available, and do not require the intervention of a well-connected local politician.

I was zapped when I read this. The thought itself is mind-boggling. So, the urban person votes because he/she expects the elected representative to get him/her a telephone line or a gas connection? And now since these are freely available, there's no need to vote? And this is democracy? I'm sure there's something to this argument, given that it comes from an expert, so I won't say anything much. I mean if the argument is extended, it supports the fact that slums see much higher voter turnout than middle and upper class - as is mentioned later in the same article .

“A very large part of the middle class in cities has enough money to get along with their lives. They do not depend on anybody for it and that explains why they don’t care,” Bhargava said, adding that it is only the poor who really have a stake in elections.

If extended one might even say that the indifference of those more privileged is justified, because, well, they don't need politicians. Whether it's true or not is debatable and I'll just leave it there.

Reason 2:

Politicians say the commission’s strict stance on campaigning played a negative role. “The Election Commission’s restrictions on campaigning this year and the timing of election day—coinciding with holidays—have contributed to the low turnout,” said K. Chandrashekar, a Congress party candidate from Bangalore’sBasavanagudi constituency and a former mayor of the city.

Not surprising, what else can you expect from a politician, but blame someone else.

Reason 3:

Political parties are used to low voter turnout in Bangalore—even municipal elections here see polling of between 35% and 40%.

This time around, say experts, the situation may have been made worse by the absence of charismatic candidates.

“There is a different kind of mobilization in rural areas where people know each other. It’s not so in cities,” said Sanjay Kumar, a fellow at the Centre for Study of Developing Societies.

Interesting thought. Reminds me of a certain charismatic candidate called Govinda - also a film star - who became an MP and soon enough all but renounced his duties claiming movies was his first priority. I'm also reminded of a how a housing colony in Mumbai achieved 90% voter turnout by making a concerted effort to gather it's residents and take them to vote, throwing in jalebi to keep spirits high (more here). So, I'm not sure I buy this logic either, but still, it comes from an expert.

Reason 4: Coming up next.

2. The second article is by Ramesh Ramanathan, a man I continue to admire for his work. In a well argued, cogent article, Mr. Ramanathan blames faulty electoral rolls for producing a suspect and highly debatable turnout figure.

When we say that voter turnout was 44%, we don’t know how many of these were genuine votes, and how many were proxy votes. Imagine two scenarios: one, where genuine voters were 240 and proxy voting was 200 votes, i.e., (240+200)/1,000; the second, where the genuine voters were 440 and proxy voting was zero, i.e., 40/1,000. Big difference in genuine voter turnout, almost 100%.

Here is what I think has happened in Bangalore this time around: We saw a much larger share of genuine voters — maybe 340 — and a smaller share of proxy voting — maybe 100. This is partly due to greater voter interest, and partly credit to the Election Commission, which worked very hard to reduce proxy voting. This means that genuine voter turnout actually increased by 100 votes, or 15% of the 600 genuine votes that are possible. This isn’t a trivial increase.

This now makes sense and puts things in perspective. Moreover, it points to something positive in society, i.e. people actually voting.

Back home in Mumbai, low voter turnout is an all-too familiar issue. NGO AGNI is doing a fine job, for e.g. in the BMC elections of last year, it (along with another NGO, ADR) even attempted to rate civic candidates, an important exercise that I hope is repeated in the state elections next year. The State Election Commission is doing, what I think, is an excellent effort- online and in the constituencies - for people to get voter ID cards.

So, the question I'm getting at is this - will we see a low voter turnout in Mumbai for next year's state elections? It's obviously too early to say. But I've seen the indifference in educated, highly-educated people. I've seen the sheer 'laziness' in getting a voter ID card and going to vote.

The excuses are all too familiar and go like "But how do I get a voters ID card?" (heard of the Internet? then go here), or "But my vote doesn't count" (yes it does) or "I don't like politicians" (and they don't like you either, but how does that matter?) or whatever. The fact of the matter is that apathy towards voting is real and it happens. I can't change it. I wonder how many of us think voting is a choice. Because I think it's a responsibility.

I don't want to switch on the moral button here, because I can't change your mind. If you have to vote you will. And if you don't want to, you won't. I'll just know that the ministers out there ruling over Mumbai are there because of me, and also because of you.

BRTS in Mumbai? bus ho gaya

Delhi's controversial experiment with the Bus Rapid Transport System (BRTS) is a sad one. In all the media headlines and interviews with commuters, what will most likely get forgotten is that it was not the system that was at fault but the people executing it. (Read this BS Editorial for a saner look at the issue. Also read Paul Barter's post which has useful links on the success of BRTS in other cities in the world.)

The inherent risks in implementing a Bus Rapid Transport System in India are quite evident. Public apathy is only to be expected given the poor quality of public transport. Moreover, road discipline being what it is the prospect of a lane exclusively for buses is an open invitation for any driver.

But all this doesn't change the relevance of BRTS. For one, it's quicker and cheaper to implement than other options like metro rail. Then there's the principle of equity - i.e. shouldn't more road space be given to transport that carries more people? So, I'm not sure if it's a choice of whether we need BRTS. I think it's more a question of how it should be implemented.

And given the nature of BRTS (as against that of metro rail and local rail and buses) it's not surprising to see how easily it can be dumped. No one in the Government or even the contractors would take the time or effort to explain it's benefits and educate the public before launching the project.

Back home, Mumbai was toying around with the idea of BRTS some time back. The Chinese Kinglong buses bought for this purpose are already being used on Mumbai's roads and have received an enthusiastic response, even after a recent fire on the bus. Sudhir Badami makes a compelling case for BRTS in Mumbai (isn't the prospect of transporting close to 100,000 people every hour every day across both express highways good enough?).

So, will Mumbai ever see the BRTS? Given Delhi's recent experience it now seems highly unlikely because no politician would now want to touch it with a bargepole. If anything the prospect of public 'outrage' against a system that 'failed' in Delhi would be used as the predictable excuse.

But Delhi hasn't totally given up on the BRTS. If things go right, who knows, the BRTS might even see the light of day there. And if it does succeed, Delhi would be yet another example of not one but two excellent public transport systems, after the Metro. And for us in Mumbai, we'd have another thing to envy.

Time for batti bandh

During winter last year I'd posted about the impending power crisis for Mumbai during the peak summer days. As the chart below shows, we consume much, much more (3,100MW) than we generate (2,200MW).


(Source: today's TOI, e-paper link here which might not be active for long)

No wonder then that the spectre of load-shedding and power cuts looms large in the summer, which is almost here. Last year, eastern suburbs like Bhandup and Mulund suffered power cuts of close to 4 hours every day with neighbouring Dombivli and Ambarnath going through a nightmarish 7-8hours of power cut. Unfortunately, this year promises nothing different.

The notion of "24x7" power for Mumbai is a myth which, at best, is restricted to a few western suburbs and of course, the island city. And as compared to the treatment that all the other cities in Maharashtra get, Mumbai looks like a spoilt child.

So, how do our three power companies (Reliance Energy, Tata Power and BEST) meet this shortfall? By buying it from other states and the Central Government. The good news then is that all three companies have firmed up sourcing agreements for meeting this shortfall. Albeit not entirely. As the chart shows below, unmet requirement will reach 200MW in June which could imply power cuts for the city, unless the companies firm up this shortfall till then.


The bad news is that this extra power will come at a cost. And a very high cost.

BEST additional general manager S A Puranik said early planning and procurement deals ensured Mumbai would get adequate power to cope with the demand. “But we will be paying a high price of Rs 9 per unit for power purchased from outside. It is almost three times the cost of power generated by city utilities,’’ [Source]

So, if you thought that rising food and fuel prices were your only concerns, get set for a higher bill, and perhaps even power cuts this summer. Batti bandh now?

Bandra Worli Sealink photos and status check

Last year I'd clicked some photos of the Bandra Worli Sea Link (posted here). Thought I'd do a round-up again.

First up, a one-shot reality check of then and now. This was the progress in April 2007.


And this is as things stand now in March 2008.



As you can see, the main central tower has seen the most progress. The Bandra side entry road is the same, and one stretch from the Worli side has been added. Bear in mind that last year, disputes between HCC (contractor) and the Government (MSRDC) had stalled work for quite some time. Also remember that a lot of work, in any case, comes to a standstill during the monsoons. So, any guesses if this will be complete by end of this year? I don't think so. April 2009 should be a better estimate.

From what I could see, the issue remains work from the Worli side. Let's take a look...

This is the entrance from the Worli side, and I'm assuming they will widen it, because it doesn't look like an eight-way lane.



The next three photos show how little the progress from the Worli side seems (if you compare it to the Bandra side, photos here).







A smiling PWD Minister, who will also be hoping the BWSL is completed next year, so he can flaunt it as an achievement during state elections 2009.



Some statistics of the length of the cables





The boat seems to be enjoying the view.



Remember that the BWSL will consist of two main towers - one each on Bandra and Worli. Work on the Worli Tower has just begun, while the Bandra Tower is almost done. The photo below shows work underway on the Worli Tower



And this is the larger, 135metre tall tower on the Bandra side. The cables are being installed and the tower is expected to be ready before monsoons.



Finally, here's another look at the BWSL as it stands today. For more details and my earlier posts, click on the BWSL tag.



More photos on my Flickr page and the pages of Brajeshwar, Kapil and Preshit -as part of the Bombay Photodrive earlier this week.

Are Mumbai's planners looking at Bangalore?

Sudhir Gota's excellent, detailed and still simple post on Bangalore (link via the sustran group) is a must-read, if only for the photos. While I've visited Bangalore a few times, I've never stayed there. Via blogs, and a couple of friends, I'd heard of the traffic chaos in the green city. I'd assumed it was because of fly-overs and such-like. But there's clearly more to it. Read Sudhir's post to get a sense of how bad urban planning can make life hell for it's residents.

While Bangalore is now facing the consequences of a car-friendly Government urban policy (i.e. priority for roads over rail, buses, etc.), Mumbai has been seeing it for time immemorial. In all the debates and controversies over the Peddar Road Flyover and the Bandra-Worli-Nariman Point Sea Link, not even half the attention has been given to transport systems from the Metro to bus rapid-transport systems.

There's a thought process at work here goes like - more roads = less traffic. Now, I'm not an urban planner, but in Mumbai, 88% of commuters use public transport. So by any logic, any policy that focuses on flyovers and sea-links over rail and bus has to be, at best, questionable.

And yet, for as long back as I can remember, the conventional way of measuring Mumbai's infrastructure progress is by asking how many new roads and flyovers are getting added. Which suits politicians well because roads and flyovers are easier to build and become vote-winning propositions. Yet, I doubt this line of logic is ever going to change.

And yet, any Mumbaikar can tell you that traffic in Mumbai is just going haywire. Sure, that's always been the case, but that's not the point. The development and expansion of the Western and Eastern Express Highways were much-needed relief for the far-flung suburbs. But picture this for a moment - with all the development in Central Mumbai (i.e. Lower Parel and the surrounding Mill Land areas), where are the roads to support them? For all the hype and hoopla, the Bandra Worli Sealink will not really solve the problem because it will offload all the vehicles at Love Grove Junction on one side and the Bandra Reclamation junction on the other. What about dispersal from there?

The issue at the core is much larger than a sealink or a road or a flyover or a Worli, Bandra or whatever. The issue is the thinking. Let me put that in perspective for you. Forty-six years ago, in 1962, our urban planners thought of sealinks to connect the island city to the suburbs. In 1968, the planners thought of underground rail. Till date, nothing has been achieved.

We're in 2008 now. All the phases of the Metro will be functioning anywhere between 2011-2012 (best case). The MUTP should have expanded the rail capacity by then and - hopefully - some kind person would have consented to the Bus Rapid Transit System (BRTS). My guess is with that, we should have taken care of our current requirements.

But here's the thing. Way back in the 70s, something called New Bombay was thought of. A few years back, the Special Economic Zones were mooted by the Ambanis. Till date, nothing meaningul has happened on either front. Almost all of the expansion and development in the last few decades has remained concentrated in Mumbai (with some suburbs like Andheri and Malad opening up to the services sector).

Question - why have we not thought of creating more Mumbai's around Mumbai?

It's that simple really in the end. The more you build, the more they will come. People, cars, etc. Look at how it's wreaking havoc in Bangalore. Our planners probably knew this in the 60s and the 70s. But nothing was done.

I don't think the planners and the politicians can take that same risk now. Else Mumbai 2050 (with a population exceeding Australia and perhaps many other Western countries by then) would make our current Mumbai look like Utopia.