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Understanding Cycles - 6th December, 2008. Times Property (Times of India)

Property is one of the most tangible assets

The law of gravity cannot be defied; "what goes up must come down". The good news is 'real estate' is as 'real' as it gets. Bonds, stocks and equity are on paper or on an electronic interface. Property is seen and felt and is one of the most tangible assets and amongst the last to fall in any financial turmoil situation.

I have enjoyed studying 'cycles'; the first financial crisis I witnessed was in 1984. Almost all developers were affected and property prices came down and remained flat, projects got stalled and some prominent developers went bust. This phenomenon lasted till 1991-1992 when we saw first signs of liberal policy making by the government. Prices recovered quickly and by 1994 moved upwards at a non-stop pace and created peaks like never seen or heard before.

A seven-year slowdown was forgotten by frenzy in buying, some of it being speculative and created lack of supply in almost all locations for almost four to five years. Early 1996 is when the second slowdown process began, which bottomed out around 2002-2003 and the turnaround for prices moving northwards only happened from 2005.

From early 2005 to March 2008 the market, moreover, property buyers with their gains from stock market deals or business deals saw a turnaround of actual buyers upgrading their lifestyle since similar properties to complement their needs were available. It was a new kind of frenzy. The speculative buyer turned more into a long-term investor with a view to rent his/her property to generate rental income and enjoy capital appreciation. Hence, we saw people holding on to what they bought and not trading for short gains. I am discounting the fact that some people have exited after short-term gains but the driving force for this rise was based on genuine, actual buying and investment.

We witnessed a slowdown in transaction numbers from late 2007 onwards and price correction was evident. The financial worldwide crisis of the kind we are seeing now is perhaps something we have never dealt with and nor are we ready for it. But there might be light at the end of this dark tunnel. Property prices have already started correcting and have come to levels of almost 20 to 25% lesser than their demand (the price that never was). I reckon a "correction of about total 40% (another 15 to 20% to go) to take place by June 2009, if not earlier.

So technically a fall has not happened yet, but in all probability it will. Let me give you an example: If a premium apartment at Santacruz managed to sell at Rs.22,000 per sq.ft. while the maximum market value should have been Rs.18,000 then a Rs.22,000 deal is not a benchmark. So correcting from 22,000 to 18,000 will be in 'correction phase' and going down from 18,000 to 16,000 will be a fall. So, 25% lesser than last peak 'Quote' (not benchmark) or freak sale/s will put a NRI/PIO or international players or buyers in an advantageous position for various reasons. An international player, investor, MNC looking at India as a hub whether in SEZs for manufacturing, warehousing, or other business will gain an additional 15 to 20% with the rupee having taken a beating against the dollar, add to that almost average 25% correction as on date gives them the edge of 45% gain.

The India story is still alive, but now is not story telling' time. Like I said to someone recently, I believe in the 'India Story' but I would be wary of the story India Tells. Until six months ago about five to six real estate and infrastructure related fund managers from the world over consulted me each month. Then the numbers almost dropped to one or two a month. The good news is that in one week alone recently, two of the largest funds (yes, not all are dead) consulted me for investment options through their 'global opportunity fund' vehicle. Furthermore, with most wells looking dried up, developers are now happy to work on realistic valuations, be it for joint venture structure or equity. All they needed was a jolt like this to come to their senses on valuations which were the biggest nightmare for any fund house or fund manager.

Locally too there are 'real estate funds' sitting on money looking for the right opportunities and projects. If I was a fund manager and had to deploy funds I would invest it in tranches over the next three to four years and buy at every new low and make an average. Starting now would be a good time to look at opportunities with 'Rated' developers who are looking for fund assistance and come to their rescue when they need you. But, today cash/liquidity is king and the money cannot laze around idle either with the fund house or with the developer not deploying it to optimize its utility.

I am often asked if now is the right time to buy. My advice to buyers (just when you thought you missed the boat) is "the price you are willing to buy the property at, is the right price and is the right time". Make an offer and leave it for the seller to ponder on, as long as it a reasonable offer, you will find more often than not, the seller will come around.