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Real Estate in India on the upswing

January 22, 2007

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.

Related Reading: Globalisation has it’s detracters
NRI’s are needed in India

6 Comments leave one →
  1. Preeti Das permalink
    May 22, 2007 4:46 pm

    Hi,
    The rates in the cities are skyrocketing because of the level of saturation it is reaching. This is due to a avriety of factors that is staring us in our face. However, it is also important to understand the needs and preferences of the customers (consumers) of the real estate particularly in cities like Mumbai and Delhi. If you have any data and/or views I would most definitely like to know that. All articles I have read so far, I have not seen anyone approaching the issue with this perspective. It is briefly mentioned but it is not enough to understand the scenario.

    Preeti

  2. surya permalink
    August 20, 2007 11:35 pm

    In my opinion , one factor that stands out about the realestate in India is that the growth is very abnormal. So abnormal like it happened overnight or happened like in a competitive bidding . The consumer base that fuelled this growth comprised of small business owners and salaried employees. But now, as we watch this consumer base eroding fast simply because the atmosphere which once conducive ( friendly homeloan interests , almost affordable prices ) now turned hostile. Earnings of the middle income households did not unfortunately grow with the pace at which the real estate prices grew. So, the consumers took a pause and looking at the real estate as bad investment and say ‘not good value for money’. We have seen this happen in the US the economy on which economies of several other countries ( ours included) heavily depend on. When the real estate crashed in the eighties, it came down like a meteorite taking down every one. It might look like an exaggeration. But again, we have seen the manufacturing bubble, the stock market bubble and the IT bubble – which were never percieved as bubbles.

  3. October 24, 2007 1:59 pm

    Even NRIs cannot afford the prices in Delhi and Mumbai, inter alia suburbs. This seems like a ocean of (foriegn) money marching to suck up millions of drops of Indias hard earned money.

  4. aviral permalink
    March 24, 2008 6:12 pm

    i think that our govt. should take some steps regarding real estate,b’coz the salary of middle class
    is not growing as fast as the rates of real estate.these
    real estate are still far from the reach of poor & middle class.in mumbai you can see that all working persons outside from mumbai are not able to stay in good house, either they live in PG or paid ,which is much costlier either. boom in real estate is not synchronised with the economy & salary of middle class.its a big matter to take care,otherwise there will be time that in india there will be skystroking building
    but nobody to live except few rich persons,& rest of india in slums or little flats.

  5. krenim permalink
    March 25, 2008 4:41 pm

    The basic reason for spike in prices is that most economies of nation states are deeply skewed towards one or at the most 2 cities.For eg Greater London is 40% of the UK’s economy.

    I think the Germans are on to something basically unlike anyone else in the west their economy a bit bigger but in the same class as UK or France has no equivalent of London or Paris.

    Frankfurt,Munich,Berlin,Bonn,Stutgart,Dusseldorf and Hamburg are more or less the same size which all offer promising opportunities for anyone therefore the net acreage available is more evenly spread out and demand and supply matches up at a much lower price point.
    Result..The lowest house prices in Western Europe and on average the best homes (quality of construction and size wise)!

    Maybe you guys could study this properly before you get locked into something like the UK model with Bombay,Bangalore and Delhi taking ~60% of your economy.

  6. Vivek Khadpekar permalink
    March 25, 2008 5:41 pm

    Krenim

    //most economies of nation states are deeply skewed towards one or at the most 2 cities//

    That is too sweeping a statement. For more, look up a detailed discussion on “primate city” or “urban primacy” in any good work (post-1960) on urban economics or developmental economics. Your own example of Germany partly illustrates the point (as an interesting reading on a marginally allied topic, see Walter Christaller’s work on Central Place Theory, which was inspired primarily by the spread of cities of comparable size and significance across Germany — particularly Southern Germany)

    FYI, through most of the post-independence period, the lion’s share of India’s urban economy has always been taken by at least four metropolitan centres spread across the country. Today over a dozen cities account for it.

    The overheated real estate market stretches even further, and a lot of it has to do with land prices jacked up by regulations that don’t make sense any more, and by a high proportion of transactions in land happening in black (i.e. unaccounted) money.

    Urban development is also heavily skewed by vast pockets of land in some cities being owned by the railways, the army etc., and being prevented from being integrated into the planned development of the cities that have grown to engulf them.

    Incidentally, I am also surpirsed to see you (of all people) use “for eg”. I was under the impression that “for” was inherent in “exempli gratia”, and that just “e.g.” was adequate.

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