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The Right Price - 19th May, 2007. Times Property (Times of India)

"In order to create a benchmark one has to take an average of minimum 10 to 12 transactions in the same price bandwidth"

There seems to be a major confusion on the current valuations of various locations in Mumbai especially due to redevelopment of older buildings and societies in the suburbs and on the other hand a misconception in the difference between a correction and a price drop. How does one try and resolve this once for all? The benchmark for rates as seen on the first page of this paper are rates based on averages. We have various people saying that the prices mentioned there are lower than the market rate (read: Demand/asking price) and another side saying that it is too high and they should be lower. Of course, both have their vested interests in mind. In order to create a benchmark one has to take an average of minimum 10 to 12 transactions in the same price bandwidth to accept 'that' as the market price in that particular segment.


The major confusion exists because of the disparity in area calculations, FSI and TDR usage across the city and across projects and buildings. Each developer has their own methodology for calculating area. Most new developments have a difference of almost 40% from carpet to built up. Here is where the confusion starts; when we classify South Mumbai A grade property rates to be at Rs.45,000/- per sq.ft. which in some properties are also Rs.50,000/- and a little above too, are based on one fact, that it is calculated on carpet or almost carpet which is how areas were calculated in the 1970s and before.


If you look at the lower end rate of Cuffe Parade or Malabar Hill which has been recently updated and are at Rs 18,000 per sq. ft, that makes a 1000 sq. ft. (850-900 carpet) apartment, worth 1.80 crore, which is really expensive for a twobedroom layout. The price may seem high, but you get size (read: area) what you pay for. In case of a re-development situation of the same apartment building you get FSI @18,000/- add cost of construction and unforeseen expenses an additional 3000; you still have a NEW property that the developer can sell @30,000/- minimum. But that is only a possibility if all occupants agree for redevelopment and if the laws permit. In a situation where one cannot redevelop, however, and the worth of the property is no more than 14000-15000 and we set a benchmark of Rs 18,000 there is bound to be confusion. Hence the benchmark should be treated as an average and the price band could vary from 10 to 15 % either side.


Similarly, if you see the price in Andheri west, the low end is @5000/- but if you try looking for a one bedroom with an area of 600 sq ft in a B or C grade building, it is almost impossible to get an apartment for Rs 30 lakh. Redevelopment of old properties has changed the valuation logic and method. Land values are now directly correlated to the price the highest bidder is willing to pay, even though it makes no business or commercial sense.


One of the occupants of a MHADA building in Andheri west 'Navnit Sadh' says, "Our family owns three apartments in one building which we bought over a period of time for actual use. Now with various developers approaching our society with offers for redevelopment the valuations of our properties have skyrocketed. Our idea to buy was for actual use and not for investment and after having spent a lot of money on interiors we would not be keen on selling."


Living in a democratic country, what is good for one is good for the other. That kind of democratic right has been exploited without paying any heed to the burden it has on infrastructure and discomfort we cause to others. I know of a family living in Juhu Scheme who have been through hell and are still going through it, with construction that happened due to TDR on their property, then on the neighbouring property on the right, then on the left, then the property across and finally the property behind. Trust me, this is a complete nightmare and an issue that can become a human rights issue. These folks keep their windows closed all day, their lungs are almost full of concrete, their ears are tired of hearing the churning sound of cement and sand mixers and there is no sight of this stopping for another 10 months.


Moving on the topic of why the prices will sustain and we will see a correction on over-priced properties but not a drop in prices - the major reason is lack of supply and constant growth in demand across the board. It is getting tougher by the day for the 'average income' earning family to think of buying a home in the city. I know for a fact that very soon they won't have to. Because there will equal opportunities available in two and three tier cities due to massive developments that are taking place across all sectors. I know of BPO companies who tell us - 'Take us to a location where there is an influx of people and they will set shop there'. They achieve two things; get property at lower costs and manpower at a slightly lower cost than the main city. Also it is a win-win situation for the employees as they get where they are without any extra burden of housing to their heads.


Folks waiting in anticipation that the prices will fall are in for a surprise. If the seller is unable to sell, he will rent the property and capitalise and then sell it to an investor if required or just be happy with rent and capital appreciation. That means the property will not come back into the market as supply till the seller gets his price or gets close to it. If you were a seller, you would do just the same unless you wanted get liquid for any particular reason.


The other main reason it will sustain is because of local real estate funds and FDI invasion into real estate within their prescribed norms. A live example is the stock market, which is steady and grown from an index of 4000 three years ago to 14,000. Most of the pushing factors have been mutual funds, which contribute to almost Rs 90,000 crore and FII, which have pumped in enormous amounts and are bullish, based on our "overall growth" in economy.


Similarly, we will see a different graph in pricing and valuation because of such funds into real estate. Recently, we were approached by an US pension fund wanting to invest one billion dollars into real estate with a very long-term view of 15 years. All of this is real, and let us rejoice that out time has come. There is an opportunity for everyone out there; no matter what industry they belong, to make it big in the next five to seven years. We will see consolidation of businesses, the big guns buying out the small and giving anyone who has created a 'market' to cash out