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Not A Bubble - 17th March, 2007. Times Property (Times of India)

While over-priced properties will continue to meet resistance, locations from Worli to Borivali will see a steady growth pattern

About six months ago if you browsed through papers, you would have seen fewer advertisements than you see today. If one called the developer's office asking for inventory in a particular project, the typical reply would be that everything was sold or that the sales were on hold. Today the same developers are advertising for the same projects but at an increased price and it is obvious that there is resistance at those levels.

There is a clear divide in sentiments and comfort levels within the developer's faction. The developers who have acquired land before the prices skyrocketed are sitting pretty. Their acquisition costs allow them to hold on to their goods till they attain their desired price. The scene on the other side is not that pretty; the developers who have bought land at high prices through bids etc are going through some anxiety whether they will be able achieve their targeted projections.

Having said that, most of the locations that saw land sale through bids are the locations of high demand and low supply. Bandra Kurla Complex and Parel are locations where there is urgent need for office supply. Similarly, a void in residential supply exists in the same locations. These are the locations where land sales happened most. The sad part for the buyer is that the high cost of land acquisition by the developer + cost of construction + his profit, will add up to a final cost that will be higher than what it should be or it deserves. The main reason for all this has been the process of bidding. Where the land cost should have been 100 the bidders have acquired the land at 300 and are finally passing that cost down to the buyer.

The resale or second sales in older buildings have witnessed a slowdown in the last two years. The number of transactions have reduced substantially. It is a chain reaction; when the prices shot up due to land purchases at ridiculously high prices, the sellers in the resale/developed properties segment obviously wanted more. The buyers, on the other hand, have resisted such demand and most negotiations have met with a stalemate situation and hence the transactions have reduced. If you look at the other side of the story the seller is also a buyer.Once he sells in an X location he is a buyer in Y location where he is a victim of the same chain.

However, the new development and under construction projects have been doing fairly well. Demand both from actual users and investors (for the purpose of renting) have kept the prices just going up. Locations from Worli to Borivali will see a steady growth pattern over the months. Even here the over priced properties are meeting and will continue meeting resistance. The in crease in interest rates too is a factor that becomes an added burden on the buyer's account.

I know of a family with a budget of two crores looking for a three bedroom apartment of approximately 1800 to 2000 square feet; they are unable to find a property suitable in location of Dadar-Matunga belt. Logically everything makes sense - 2000 sq.ft. at approx Rs 10,000 rupees per square foot for a B + grade developed building should be an achievable target. But nothing is available for less than Rs.14,000 a square foot.

Having acknowledged that such events do contribute to a slowdown in number of transactions, the fact remains the market is looking strong and will hold up with capital growth at approx 15% per annum. With income levels rising and non-stop inflow of "multinationals" bringing in their demand for real estate, the consumption appetite is increasing at an enormous speed. While buyers are living with hope that the prices will fall, with regret I have to say this again that no such thing is about to happen or is deserved. But, if a project like "Beaumonde" at Prabhadevi was quoting 22,000 per sq.ft about three months ago and now starts demanding 27,000 odd or more it will be met with resistance. Similarly, many such projects will have such issues if they drift too far away from reality.

But if the resistance is broken and like in the example above they manage to sell about three to five properties at Rs.27,000 per sq.ft., the new benchmark will be established and prices will move up further or stabilize. The fact is that the demand is real, this rise is not a bubble. If there is a bubble, it is in setting wrong benchmarks and it will burst because it is all gas and is artificially inflated by an expectation or hope.

Quick BYTES

With income levels rising and non-stop inflow of MNCs bringing in their demand for real estate, the consumption appetite is increasing at an enormous speed

Demand both from actual users and investors (for the purpose of renting) have kept the prices just going up