Monday, August 13, 2012

Fitting tombstone to Mumbai Mill Lands

As per news reports, DLF has sold off 17acres of its land in Lower Parel to Lodha Builders for Rs2,700crores. Bought from the National Textile Corporations (NTC) for Rs703crores in 2005, the deal implies that DLF has made an annualized return of 21% on this deal. Over the same period, the NSE Nifty returned a paltry 12%. Smart deal? Sure.

While newspapers are full of the details, I write this post only for nostalgia and to add an epilogue (tombstone?) to the famous Mumbai Mill Land case of 2005-06. In March 2006, the Supreme Court overturned the High Court's broad definition of "Vacant land", deciding instead that the term did not include lands vacant after demolition. This reduced the land available to the BMC and Mill Workers as per the controversial Development Control Rule 58.

The stock markets cheered real estate stocks, experts said this would release supply of land and prices would fall. Seven years later we know that real estate prices in that area have risen about four times (I'd guess from Rs7,000 per square foot then to current levels of Rs30,000 per square foot). Which makes DLF look smart. And no rules were broken. DLF played by the rules and made a killing.

That's Mumbai Real Estate for you. All the rules and regulations and maze of laws that govern this city's prime property seem stacked in favor of the builders. Time and again laws have changed to increase the supply of land and bring down prices. Think repeal of the Urban Land Ceiling Act, a new Housing Policy. Nothing works. Prices just keep going up.

Because the laws of economics don't apply to the real estate sector in Mumbai. Prices can't reflect demand and supply when supply is controlled by a few and demand is on tap. The last time prices fell meaningfully was in the market bottom of March 2009 when, post financial crisis, a funds shortage drove builders to raise funds by launching new projects and clear inventory by selling at significant discounts. Since then prices have most likely doubled in most areas.

Does the current market situation resemble March 2009? I don't think so. Weekend newspapers are full of real estate ads but they hardly seem desperate. Banks seem to have learnt their lessons and haven't lent much to Mumbai real estate. Mortgage major HDFC says prices are the most affordable in 30 years. Can prices crash from here? Depends what you mean by crash. 10-15%? That's more like a "fall" or a "correction". A crash would require a financial crisis type panic. And even if that happens, the 2009 experience shows that there's enough demand if prices fall by 15%+.

Finally, spare a thought for the Mill Land Workers, some of whom are still waiting for their homes. Mills have been replaced by malls and chawls have been replaced by towers. Girangaon is dead. The ruins of cotton mills await prospective buyers for the next tallest tower in Mumbai even as the roads adjacent to them house slums.

I wonder if there is anything real about Mumbai Real Estate.