B&E’s argues why real estate developers in India can go the full hog with their price hikes, at least for now; and we add a cheesy realty review to go along with it one last time this year...
A report by Jones Lang LaSalle Meghraj (JLLM) validates this inference by B&E. As per the report, while residential markets in India have already witnessed a rapid bounce towards higher values, commercial markets too are expected to recover to their previous glory in 4-6 quarters. Even the market value of investment grade real estate in India under construction has increased from $69.4 billion at the end of 2006 to $101.3 billion at the end of Q2, 2010, which equates to about 8.2% of India’s nominal GDP for 2009. No doubt, many markets have demonstrated higher than expected enthusiasm, particularly in the case of Mumbai, Gurgaon, Noida and Delhi. A lot of investors have plugged in considerable amounts of capital in these regions, and the values have, on an average, now gone 30% higher than the last peak.
But then, there is a concern too. The kind of volumes that these markets witnessed in the first half of 2010 are apparently coming down dramatically in the second half. So, does that mean are we looking at the formation of a bubble in the Indian real estate? “It’s possible, but only in the cities where prices have actually skyrocketed beyond affordability. The fact is that local people are still buying homes on an as-needed basis in most tier II and III cities. Nor is the supply in most of those cities either overly constrained or curtailed,” says Sanjay Dutt, CEO, Business, JLLM. Anuj Puri, Chairman & Country Head, JLLM adds to this, “Absorption rates might stabilise if prices continue to display the northward trend we have begun witnessing. Also, a hardening of mortgage rates might lead to decreased affordability, with fairly obvious consequences.”
Of course, there are builders such as the Lodha Group, Tata Housing, et al, who are focusing at the affordable housing segment under the Rs.40 lakh price bracket. However, even affordable housing is now witnessing a price appreciation. For instance, Lodha Group had launched a project called Casa Bela Gold at Dombivali in Mumbai at Rs.1,950 per sq. ft. in March 2010, but now per flat prices are being quoted at Rs.2,700 per sq. ft. Similar is the case with Tata Housing’s project in Boisar in Mumbai. From Rs.1,750 per sq. ft. in 2009 the prices here have reached Rs.2,650 per sq. ft. In fact, this is the case with almost all the so-called affordable housing projects in India. And with circle rates in high value areas like Delhi about to increase by 100% due to government notifications, there is no gainsaying the fact that land costs will necessarily go up further.
Should realty players then think about curtailing prices? Absolutely not! With the current supply gap, it would be both economically illogical and strategically disadvantageous to not cash in on the surplus money currently floating in the market. A few months down the line when the money supply dries up (both due to RBI measures and the demand-supply gap reducing) and interest rates go up further, wouldn’t there be huge loan defaults? Of course yes. But that’s not our problem; that’s the government’s. And we’ll cross that bridge when we come to it. Today, soak in the sun while the hay shines – or whatever that saying was supposed to be!
But then, there is a concern too. The kind of volumes that these markets witnessed in the first half of 2010 are apparently coming down dramatically in the second half. So, does that mean are we looking at the formation of a bubble in the Indian real estate? “It’s possible, but only in the cities where prices have actually skyrocketed beyond affordability. The fact is that local people are still buying homes on an as-needed basis in most tier II and III cities. Nor is the supply in most of those cities either overly constrained or curtailed,” says Sanjay Dutt, CEO, Business, JLLM. Anuj Puri, Chairman & Country Head, JLLM adds to this, “Absorption rates might stabilise if prices continue to display the northward trend we have begun witnessing. Also, a hardening of mortgage rates might lead to decreased affordability, with fairly obvious consequences.”
Of course, there are builders such as the Lodha Group, Tata Housing, et al, who are focusing at the affordable housing segment under the Rs.40 lakh price bracket. However, even affordable housing is now witnessing a price appreciation. For instance, Lodha Group had launched a project called Casa Bela Gold at Dombivali in Mumbai at Rs.1,950 per sq. ft. in March 2010, but now per flat prices are being quoted at Rs.2,700 per sq. ft. Similar is the case with Tata Housing’s project in Boisar in Mumbai. From Rs.1,750 per sq. ft. in 2009 the prices here have reached Rs.2,650 per sq. ft. In fact, this is the case with almost all the so-called affordable housing projects in India. And with circle rates in high value areas like Delhi about to increase by 100% due to government notifications, there is no gainsaying the fact that land costs will necessarily go up further.
Should realty players then think about curtailing prices? Absolutely not! With the current supply gap, it would be both economically illogical and strategically disadvantageous to not cash in on the surplus money currently floating in the market. A few months down the line when the money supply dries up (both due to RBI measures and the demand-supply gap reducing) and interest rates go up further, wouldn’t there be huge loan defaults? Of course yes. But that’s not our problem; that’s the government’s. And we’ll cross that bridge when we come to it. Today, soak in the sun while the hay shines – or whatever that saying was supposed to be!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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