Is real estate becoming an asset bubble?

DNA invited some leading real-estate players to help readers understand the trends in the industry in Mumbai. The key spokespersons were: Santosh Naik, MD & CEO, Disha Direct,  Prakash Shah, director (finance & business development), Hiranandani Constructions Pvt Ltd, Anand Narayanan, national director, residential agency, Knight Frank (India) Pvt Ltd.

DNA: We see Mumbai rapidly emerging as a services city rather than as the manufacturing hub that it was 30 years ago. Typically, industries expand horizontally, but service industries can expand
vertically. This is what appears to be happening in Mumbai.  But real-estate prices, too, are soaring. This raises the question: will Mumbai go the New York or Manhattan way where most of the workforce stays outside the city, while the city itself hosts offices? The only residences that remain are luxury apartments. Mumbai has many such apartments coming up. So, is real estate in Mumbai — and Delhi — becoming an asset bubble? Will it ever become affordable again to the middle class?

Prakash Shah: I don’t see the asset bubble at all. The downtown and mid-town areas will cater generally to the more affluent. The suburbs are for the middle class. But there is no land available due to the peculiar features of being an island city. Thus land is very limited in downtown areas. There is more land available in mid-town areas, so there could be some correction in Mumbai’s mid-town areas.

DNA: So a correction in mid-town areas could happen?

Prakash Shah: Mid-town means areas like Lower Parel. I don't see a price correction happening in distant suburbs like Thane where the price is about Rs8,000. That is affordable middle-class housing. That’s a place where land availability is still possible. Enquires and business are going on. There is reasonable demand and supply. Not at the same levels as in 2008, but  a reasonable demand-supply position is there. And Rs7,000-8,000 is an affordable rate in Mumbai. Maybe in other cities I understand Rs3,000-4,000 is an affordable rate, but Mumbai has a peculiar way of thinking. Compare the prices of Central suburbs, which are around Rs8,000 a sq ft, with those of Western suburbs like Borivli-Kandivli where prices are around Rs10,000-11,000 sq ft. These differences will remain.

DNA: Could that be because Kandivli-Borivli have more  businessmen, stockbrokers and diamond merchants who are picking up new properties?

Prakash Shah: But watch the trend for the last 8-10 years. The maximum people who have invested in real estate are basically the executive class rather than the business class. They leverage their income and their loans. The salary levels of present-day executives is also quite high and one major need for every family is to own a house. Then there are people over 55 years, who get dividend funds and gratuities and then think of investing in property. Moreover, during the last 10-15 years there has been a change where the young man makes more money than an old guy. Then there is a change in the economy. Thirty years ago, a Hiranandani Complex would just not have been thinkable.

DNA: What are the rates in the Hiranandani Complex today?

Prakash Shah: It is around Rs20,000 (a sq ft) in Powai, Rs8,500 in Thane. And over Rs11,000 in Kandivli. Most belong to the executive class who spend a lot and want to lead a quality life, distant location, a larger apartment to live very happily and comfortably.

DNA: That raises the inevitable question — for every service industry, you have a lot of support staff, clerks, carrier boys,  security staff, etc. Where do you see this support staff buying places? In Thane?

Santosh Naik: In Dombivli or Thane and Navi Mumbai. You do get
premises at affordable rates.

Anand Narayanan: I would agree with what Prakash says in terms of real estate being an asset bubble — but there is a yes and a no to all the questions. So fundamentally: is there an asset bubble in Mumbai? The answer is NO. But there are pockets where you might see prices being uncomfortably high. If you have to learn from history, learn from Dubai [where a real-estate price meltdown took place], the earliest of disasters that happened. There real estate is sold as a financial product. It's like I have money, I can put in stock, I can put in fixed income, or  I can put in real estate. So it is truly an alternative asset class for investing money. The sale process is as easy as the buying process. Today, in Mumbai, the buying process is very simple — if I have money I can close the transaction in 12 hours flat. I can register the property, everything in 12 hours. But the sale process is not easy. If I am an individual who wants to sell an asset it will take me three months or more to do so.

DNA: Why is that happening?

Anand Narayanan: Let me just complete my perspective. Swing back and go to Delhi. My own perspective is that Delhi — especially the NOIDA-Gurgaon region — is designed to be exactly like Dubai. But if you see Mumbai, when Hiranandani or Raheja take a parcel of land there is always a great deal of uncertainty where they would get another suitable developable parcel of land nearby. So the builder has to ensure that he gets the maximum value of that parcel of land. That is because Mumbai is a land-starved area.

In Delhi, you can just keep expanding. Manesar or Gurgaon. The Delhi model is to give the first investor all flats, who then sells them to a second investor and then to the third. In Mumbai, because land is scarce, the builder (except for the small part he has sold to original investors) normally wants to sell to the real user. It also ensures that the market does not get too speculative, and prices don’t fall. The flats may sell very slowly, but the builder can afford to wait because he does not have a million square feet to sell, with the knowledge that he can develop another million square feet tomorrow. That is why, in Mumbai, when I go and buy a product in Hiranandani or any of the good developers. there is a lock-in period. If I put in money today I may not be able to sell for a period of time which is a reasonable period of time. It could be as high as one year to three years. Then there is a high exit cost.  There is a transfer charge which is designed to stop investors from flipping it and which can go as high as 15% of your sale value. These exit costs could be in the region of Rs50-100 per sq ft.

Prakash Shah: Just to add to what Anand is saying. Mumbai’s developers want 90% to go to actual users.

Anand Narayanan: And the fundamental thing is, if you eliminate the intermediaries, the buyer and the seller make more money. In Delhi, the investor is the intermediary. He takes the financial risk from the developer. I mean, the developer sells the stock to him; then the risk of selling or not selling is on the investor. So, obviously, he will take some portion of margin away from the developer. In Delhi the developer model Is totally different. I get land easily. I can borrow easily as well. So, if I have land today, I make my 20% IRR [internal rate of return], I sell 100 flats each to 10 investors. You 'derisk' the transaction by selling it quickly to another set of 10 people.  These investors then sell smaller parcels to many more smaller investors.

DNA: So if someone gets stuck with the risk, who gets hurt? Is it the common householder or the financier, or both?

Anand Narayanan: If you have to learn again from history, in Dubai the investor got burnt very badly.

You could also add that the biggest market is for housing in the
Rs10-30 lakh range. The Tatas have come with a property with Rs1,300 a sq ft in Virar. The biggest thing which we should work on is infrastructure.

To give you an example — if in Thane there is a pricing of Rs20-30 lakh, there is a demand for one lakh units there. But if we go to a 50 km radius from Thane, say, the Mumbai-Nasik highway, if you
can create a good, self-contained township with schools, hospitals, and give good commuting, demand will soar there as well. For instance, at Shahpur, land prices are very cheap, say, Rs100-150 a sq ft as of now. But if you get these places infrastructure, demand will go up, and so will the pressure of people on Mumbai.

Prakash Shah: I personally feel for housing you really need a good national leader who can only think of housing. I can give you the example of telecom. Twenty-five years ago, I used to pay Rs8,000 just to get a telephone connection. Today, I get it on demand without paying anything.

DNA: But telecom is a central subject while land is a state subject. Can you have the Centre dictating policies to the state?

Prakash Shah:  But the direction should come from the Centre. See what happened to ULC [urban land ceiling controls, which were recommended for being phased out, first by the Centre and then by the courts]. If we have a national leader who says, I want every Indian to own a house, and introduced model policies to encourage the same, it could be the biggest statement ever. IIf he makes the statement, then let him take the action — tax incentives, low-cost financing, forest and agricultural land clearance guidelines [are some examples] — and everything will fall in place. On the contrary you put extra taxes and service taxes. This is stupidity. You make costly housing costlier. Like food and clothing, housing should also be cheaper.

DNA: The service tax has been challenged.

Prakash Shah: Yes, it has been challenged, but it is stupidity on the part of government to [introduce the]  tax. On top of that you levy VAT of 1%. You go on putting extra taxes on the basic necessities of life. If a national leader is there, he will think that what my people need are Rs20-30 lakh homes. Work out schemes. Cheapest financing for those owning the first house, more expensive for the next, and so on. It will discourage investors. But I don’t think our country has a leader with that type of vision.

DNA: How can you differentiate that this guy is the first flat owner,  because he might put it in the name of his wife? There is no one who would know.

Anand Narayanan: The UID [Unique Identity project] could address this situation.

DNA: How would you define an investor?

Anand Narayanan: There are two kinds of investors. One who speculates. They buy today and sell tomorrow, maybe after six months. There is a whole model for such investors.

Then there is an investor who wants to leave behind a house for his son or daughter. Or to give it out on rent and earn an income to supplement his existing income. Moreover, the property appreciates 30-40%. They, too, are investors. But they are not traders.

Prakash Shah: I think there is an easy way to identify an investor. If somebody tries to buy more than one apartment in the project, he is an investor. So if there is a project launch and if he buys three apartments, by the rule of thumb he is an investor. The percentage of investors in luxury apartments would be in the region of 30-40%.

DNA: There is another trend among developers of commercial property. Tata Housing and Raheja have begun offering more commercial property on rental than on sale. IL&FS, India’s largest real-estate financier, has also started a property management division. Is the market for rentals growing? What about rentals in the housing sector?

Prakash Shah: Yes, I would say that 20% of the houses in Powai are on rental basis. We have customers who are giving out their premises on rent, and we have developers who also give their unsold properties on rent. But, largely, we sell to people who give on rent.

DNA: What about a developer-promoted rental apartment scheme?

Prakash Shah: We are beginning to realise the advantages of giving out places on rent. When I give out a flat on leave and licence, I make the person my slave. Because [my flat] is so beautiful to stay in. So he stays there for one month, then two months, then a year. Then the wife wants him to buy it because the children, too, are happy with the house, their friends in the neighbourhood, and their school. So I am creating my secondary market.

Santosh Naik: I have just shifted to The Meadows on rent. But I don’t think it would be a trend for developers in the residential segment because nobody would like to hold on to the property.  Rental is good for property that remains unsold.

Prakash Shah: We are doing two buildings in Powai which are almost complete only for rentals.

Santosh Naik: But again, if you see the size of rental projects, the  percentage [of total development] would be very small.

DNA: So it was reactive rather than planned?

Anand Narayanan: Basically the ROI [return on investment] is very
low. Developers are basically used to a good ROI. ROI on commercial property is around 12%. But on residential property the ROI would be 5-6% and at times just around 2-4%.

Prakash Shah: We get about 5-6% in Powai and 2-4% in Thane.

Manish Gupta: No developer would like to earn 2-4%. If my inventory is not sold, it is a dead investment. At such times it is better to earn 2-4%. It is a stop-gap arrangement.

Anand Narayanan: Rental of property will start only if the sales velocity is low.

Prakash Shah: But we have realised over a period of time that we made a mistake in selling all our property. This is because property prices have grown 4-5 times. So keeping a part of the property on rental could make business sense.

Anand Narayanan: There is also a need to look at how, unlike in the US or London, where residential buyers do not buy in underconstruction projects. They purchase only ready properties. In India, almost 90% of the project gets sold before the project is completed. Customer preference has not reached the point when he starts saying, “Hey! I am not going to buy until you get your property ready.” But shortages, the fear of rising prices, and the absence of government regulation have allowed this to happen.

Prakash Shah: Then there is another difference. In Europe and the US people don’t mind staying on rent for their entire lifetime. They don’t want to own the house. The typical Indian thinks
differently.

DNA: How do you manage sales during inauspicious periods — like the recent Pitrupaksh?

Prakash Shah: There is nothing inauspicious. This was true 20 years ago, when people who were buying houses were business guys above 55 years of age, so they think a lot about good days and bad days, good time and bad time. But today the younger generation basically doesn’t see shraadh and all this. If the price goes down, then take it. So in our opinion the people to whom we are selling are more of the executive class.

Santosh Naik: Moreover, 15 days is too short a period. We as
builders do not mind if we get fewer sales during such periods, because the rush in sales before and after averages out the dip. But sales do pick up around festival times like Dussehra or Diwali.

DNA: What about the need for a real-estate regulator?

Santosh Naik: We welcome any move that regulates the industry.

DNA: But you do not want prices to be controlled.

Prakash Shah: Price is a matter of demand and supply. You control price, and the prices will go underground.

Santosh Naik: I think a regulatory body is required. This is my view. But the price should not be controlled because prices are driven by the market. They should not be driven by any regulatory body. If you take the example of SEBI, it is doing a wonderful job in
regulating the stock exchange, but it does not control market prices.

We need laws that do not have retrospective effect. For example,
in Nagpur, last month the Nagpur municipality scrapped more than 200 NA [non-agricultural land] permissions granted in the last two years. Permission was granted, people have bought those lands, customers have bought those properties, and now they say it's not NA. If there was corruption, penalise the corrupt. Don’t harass the innocent.