Real Estate in India on the upswing
The real estate market is certainly going places in India. One of the world’s best investment banks, Morgan Stanley, has invested as much as $ 152 million (Rs 675 crore) in Mumbai’s construction firm – Oberoi Construction. A TOI report has said that this is “the single largest direct investment in India’s booming real estate sector.”
That is the real estate market in India is booming (Hindu article) is not spectacular news today, but this particular investment by Morgan Stanley is. All the more significant because it shows the immense confidence that foreign investors have in India.
Some sections of the foreign press have been sceptical about India’s economic future. This is only one example from Peter Foster of the Telegraph, U.K:
London prices, as any recent first-time buyer will tell you, are mad but Delhi’s are in many respects madder still. The price of good residential property in Delhi has more than doubled in the last couple of years and continues to sky-rocket as lots of money chases too little property -the builders at the bottom of my garden notwithstanding.
The result is a micro-bubble which is pushing prices into the la-la land. Another Indian friend reports looking at a house in the West End suburb of Delhi recently priced at 8 crore (80m) rupees, or nearly one million pounds. Now we’re not talking about a classic Lutyens Bungalow here but a normal, Indian concrete box with all attendant problems of intermittent electricity, dripping plumbing and fizzing electrics.
He concludes: In fact, on the contrary. I’m sure some economist will explain, and I’m sure that people felt the same way in London a few years back when they paid £100,000 for flats in Notting Hill now worth a million, but for now I still don’t quite buy into the Indian economic miracle – nor, if I were advising my friends, would I.
There are many in India too who are pessimistic. (Indian Express article)
True, the Indian real estate market seems to be going haywire, but there are explanations. The intense demand for residences/housing and for commercial complexes coupled with the high buying power of NRI’s and those with high incomes in India, is pushing up prices beyond a reasonable limit. Besides, real estate is where those with black money often park their funds.
There is such a shortage of good real estate that today the common man in India is unable to afford a decent apartments even in distant suburbs of cities like Mumbai or Delhi. Today’s TOI (Mumbai) has an article by Nauzer Bharucha on this:
“Ketan Vadalia, a property developer in the eastern suburbs, says 70% of the buyers in locations like Ghatkopar and Mulund are traders from the metals and textiles market. The other 30% are salaried people, mainly from IT companies…”
Well, Mulund and Ghatkopar are distant suburbs of Mumbai!
One more excerpt:
“Haresh Mehta, one of south Mumbai’s largest property redevelopers of dilapidated chawls and buildings, says that 80% of his clients are diamond merchants and traders from the metal market….market sources reveal that customers buying flats in redeveloped cessed properties in South Mumbai have to pay as much as 40% of the amount in hard cash.”
Hopefully, with the likes of Morgan Stanley investing in India, the gap between supply and demand will decrease. I seriously doubt that the bubble will burst, or that prices will come crashing down. The demand for real estate will to continue to grow and after a while there will be a gradual levelling off. One hopes that with more investment coming in, the middle-classes of India will be able to enjoy the benefits of affordable housing.
Update: 4th April 08. An interesting article by Swaminathan S Anklesaria Aiyar on this subject says that it is the black money which is saving the Indian real estate sector from bursting. The U.S. housing bubble has burst but the Indian one is still going strong. He explains why the United States housing bubble has burst and why the Indian one hasn’t. An excerpt:
Indian borrowers do not walk away from their homes — and loans — if prices dip. This is because a large proportion, often half, of almost all home purchases is paid in black money. If a house is sold for Rs 100 lakh, the official registered value will typically be only Rs 50 lakh, with the balance paid under the table in cash.A bank may loan Rs 50 lakh, covering the entire formal price. However, the owner’s contribution is not zero: he has paid Rs 50 lakh in black. To preserve that black investment, he will keep paying his installments even if house prices dip… The reason is that banks enjoy, without asking for it, a huge safety margin provided by the black money invested by every home owner. To preserve this black investment, borrowers will do their level best not to default and lose their property. Ironically, black money enforces loan discipline in India, far more effectively than formal contracts or legal processes.