THE “REALTY” SHOW

By - Swaroop Joshi and Siraj Mukherjee

· An Overview
The dream run started with the onset of the new millennium. India was fast making a mark in the global IT market creating a high demand for the educated intelligentsia. Followed by that was a wave of the BPO industry, requiring a whole new lot of educated urban professionals; and of course land in prime locations to set up their swanky offices . That was the time when better job opportunities, increased per capita income, dual income couples, easier housing finance, nuclear family concepts and higher standards of living fuelled the current real estate boom.
The corporates are never late to join a party. The neo-spender youth was not to be left unnoticed. Entertainment and commercial complexes, hotels, malls and multiplexes that mainly catered the new society burgeoned, further fuelling the real estate boom.

The government also had a part to play. After 100% FDI was allowed in real estate in February 2005, the residential property market got a major boost. The FDI in residential projects led to a spurt in huge 100-acre plus townships. The relaxation of the FDI ceiling saw big names like Dubai-based Emmar Properties — the largest listed real estate developer in the world — joining hands with the Delhi-based MGF Developments to announce India’s largest FDI in the realty sector, amounting to over $500 million in projects with a capital outlay of $4 billion. High economic growth has upheld the demand for real estate. The development of real estate on both the major areas: retail and residential; has been phenomenal. The real estate industry constitutes 5.8-5.9% of India’s GDP. It is said that of every Rupee spent on construction sector, an estimated 75- 80% was added to the country’s GDP. Real estate prices in key cities like Mumbai, Delhi, Gurgaon, Bangalore, Hyderabad and Pune witnessed a 35%hike in prices in 2005, and even 100% in select areas within two years.

The Mumbai Story – Mill Lands to Mall Lands
The Indian Supreme Court on; 7th March 2006; in a verdict sanctioned the sale of 602 acres of prime land in the heart of Mumbai city occupied by 58 mills textile mills to private developers. Prior to the Apex Court judgment, by a ruling, The Bombay High Court had set aside the sale of mill lands here by the National Textile Corporation (NTC), which had flared the prices by more than 20% within four months.

The high profile sale of the 5 National Textile Mills (NTC) in Mumbai to private builders, which was approved by the Supreme Court of India, was the latest spark in the real estate scenario in Mumbai. DLF Universal bought Mumbai Textile mill land for Rs 702 cr. for the construction of a hotel and a shopping mall. Two other NTC mill prime lands were recently auctioned for Rs 862.75 cr. While Shiv Sena leader Manohar Joshi- promoted Kohinoor CTN Ltd purchased Kohinoor Mill No. 3 with a winning bid of Rs 421 cr, financial services group, Indiabulls won the auction for another prime NTC property –Elphinstone Mills – with a bid of Rs 441.75 cr. The mill lands would soon shed the look of a haunted place with plaster peeling off the walls. It won’t be long before the land that once buzzed with industrial activity and produced quantities of yarn and cloth, is transformed into a glitzy glass and chrome building churning out IT products and services. Mumbai would now be set to garnish its inherent beauty by an all new oasis of elite business and leisure which would now swathe colossal residential villas, corporate offices, advertising agencies, art galleries, entertainment centers and aristocratic malls.The ripples of the Apex Court verdict were felt all over the country. Prices surged further in most of the metropolitans. The real estate stocks gained substantially following the Supreme Court verdict on the sale of NTC mill land in Mumbai. Stocks like IndiaBulls, Bombay Dyeing, Godrej Industries, Ruby Mills and Morarjee Realties were the major gainers. Stocks of companies like Hindustan Motors and Bata India, which have property in Kolkata and do not in any way benefit from the decision, also gained substantially.
Though the real estate prices usually keep abreast with the stock markets, the fundamental difference between the two markets surfaced out after the recent crash in the stock markets. Even after the markets shed more than 1/4th of the market cap, real estate prices had remained firm.
The real estate market, like the stock market, is all about supply and demand: when more people want to buy than sell, prices go up, and vice versa. Buyers often buy stocks based on future potential, not for its inherent value. People may invest in real estate for extra income hoping the price would rise further, but real estate still has inherent value because you or someone else can actually live in it or at least rent it out. If the property prices of area, in which a person lives, falls by 10%, is he going to move? Not really. The shifting cost and tiresome efforts involved in moving is not worth it for most of us.Supply and demand also work differently in the housing market. People realise that even if they sell their property for some extra income, they will have to pay the increased price to purchase a new house, which is rather vexing. This phenomenon is causing limited supply and even higher prices. In other words, the price increases are not necessarily about irrational demand, but rather limited supply.Time for a correction?
The Supreme Court ruling, though had produced a sharp price rise in a tussle to gain the prime mill lands, the verdict has also provided an opportunity for unlocking real estate potential in the heart of Mumbai. Rise in supply thus might pull the prices down in the near future.
The recent interest rate hikes would also have a say for the party to end. With fixed home loan rates rising from 7.5 to 10.75 per cent in most commercial banks, there will be a gradual decline in demand for home loans, which in turn would mean the softening of property prices. Coupling the interest hikes, the speculated tax reforms might shoo away those players buying property for the sake of tax benefits.
The other side of the interest hike might be that as the cost of credit goes up, the demand remaining the same, will lead to cost push inflation. The buyer may also feel that as interest rates are going up and property prices are moving up, it is better that he takes the plunge now, thereby spiraling cost push inflation. The projected retail boom might also be one of the reasons that would sustain the real estate boom. But as far as the residential estate prices are concerned, it might not create the necessary drive so as to sustain the prices.
The upward spiral this time has surpassed previous boom cycles. It is observed that the boom is more investor heavy with buyers going in for second and even third homes purely for investment. This means entry of short-term players or speculators into the real estate market has skewed the demand-supply equation in many cities. The speculation in the real estate market is seen to be feeding the asset prices. Speculators in fact might be shooed away from the markets; owing to the decline in demand for home loans and in turn lowering the prices; compelling them to book profits and exit the market. This in turn might unveil a bunch of unused land and residences, thus increasing the overall supply and making the land available to the real consumer.Thus, the overall trends along with supposition of slight retardation in the overall economic growth owing to the sluggish performance of the US economy in the last quarter, coupled with higher interest rates and thecrumbing infrastructures in most of the metros, the real estate boom might call it a day.

Effect of the possible property price fall on the consumer

A Study: The Property Price Fall Coupled with an Interest Rate Hike

The following table shows the monthly EMI a consumer might have to pay for projected price falls and increasing home loan rates. The comparison is vis-a-vis last year’s average rate of 7.25%. The calculations are for commonplace household costing 30 lacs and the loan period being 15 years.

Property Price : 3000000
Loan for years at fixed rate: 15 years
Current EMI (27,386) - @ 7.25%
The analysis shows that though the home loans are getting dearer, an expected price fall might leave the consumer untouched with the EMIs at current rate matching the figure one year ago. At a 10% fall in one year, which might not be a very bold conjecture, the consumer would still end up in paying lesser even at a loan rate of 11.25%.