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The Way Forward- August 2, 2008. Times Property (Times of India)

Rising real estate costs and unrealistic expectations are among the factors that have led to current situation

In continuation to my last column on 'Sentiment' related issues that surround us in the property market, some realities cannot be escaped. For example, it is true some developers are feeling the cash crunch and having over-committed themselves whether it is for redevelopment projects or buying new plots and are looking at either borrowing or private equity or any other support theu can get.

This was bound to happen since the buyback offers made by the developers in case of redevelopment projects were almost like a contest to outbid other developers. Most project just did not make economic sense at those buyback offer stage. I sincerely wonder what drove some of them to create such undeserved hype in certain locations. Now, the same developers are backing out of such commitments.

Locations like Bandra Kurla complex are getting resistance at unrealistic pricing levels for commercial office space. Just like I mentioned last time a 20 to 25% correction on the quotes will show support for buying and leasing both. It is not as though all of a sudden the demand has disappeared, it is only the fact that the owners have got swayed with stories of high level deals; and all and sundry feel they will achieve the same levels too.

Also, if we push the raw material prices (land) to crazy levels by process of bidding we are bound to see such situations. I think and I am sure you will agree that land prices too have gone through the roof. For example at Juhu scheme land sellers or redevelopment societies are asking for 3 lakhs per square yard and more in some cases, which makes the FSI cost of almost Rs.30,000 per sq.ft. Then you dilute it by adding TDR at approximately Rs.3000 per sq.ft. Averaging your cost to 16,500 per sq.ft. Add cost of construction of Rs.2000 per sq.ft and other expenses like BMC and handling charges for the project of Rs.500,
your total cost is still around 19,000 How do you make profit if finished goods are sold in the region of 14,000 to 18,000 per sq.ft.?

In case of land, the price needs to be corrected too by approximately 25% to 35%, depending on location to location. It is a vicious chain or a circle and one owner or seller/s cannot be singled out and nor is there a formula for it to happen all at once. It is a process and it will take its time, unlike the stock market which gives you your stock value five days a week.

The only way forward is to work backwards at the number. If the raw material costs don't make sense, then the final product cost too will face resistance. As a country we are poised to grow and I have no doubt that Mumbai property prices will go up further over a period of five to 10 years but nothing happens all at one time. From 2006 to 2008 prices have gone up by three times. What more are we expecting? These are good signs for a healthy market. A correction will only lead to support at those levels and once the goods are absorbed we will see stability and again see an upward swing.

The only game left now is of holding power/capacity or of patience, and world over only folks who have bought cheap or have deep pockets are able to hold up. Having said that there is nothing wrong in 'not having' the holding power because at times you are holding on to a notional value which might not be achieved within the time frame targeted by you.

Quick BYTES

As a country, we are poised to grow and there is no doubt that Mumbai property prices will go up further over the decade. However, a correction will only lead to support at those levels and once the goods are absorbed, we will see stability and an upward swing