Saturday, June 21, 2008

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!

Saturday, June 14, 2008

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.