India Real Estate - Spiral or Plunge

With property becoming unaffordable to many, is it time for a correction in the realty market? Or, with an estimated shortfall of 48 million housing units in India by 2012, will the intrinsic demand for property sustain the current boom?

Property prices have been racing skywards across the country over the past two years. Most cities and towns are witnessing construction frenzy. From metros to tier II and III cities, real estate prices have seen phenomenal hikes ranging from a 30 to 100 % appreciation. Experts believe that this spiralling up of property prices has not only been triggered by pure demand for housing but also the rising stock market which has made people look at property as an attractive asset class.

So is the present upswing in the market here to stay?

Nalin Kumar, Head - private equity and real estate, India, JM Morgan Stanley, “I think the demand in tier I, II, III cities will continue to grow - the question is have the prices gone up too much and out of control? The affordability for the consumers and the reality will be tested over a period of time. If the consumers can't pay for those properties then you will see a lot of bad debt and closed down properties - like we saw in East Asia in 1997.”

“This is a cycle where you are seeing the demand side coming up in the form of capital chasing real estate but you will see the supply coming up in the next 1 - 1.5 years time and at that time you will be able to determine whether there is an equilibrium in the market or not - the prices at that time will be real prices, the speculators will be out and the consumers will have the choice to walk into ready apartments. Today most of the people can't walk into ready flats - the price is frankly hypothetical,” feels Kumar.

Experts are unanimous in the opinion that the current scenario of the property market is no bubble, though a minor correction is expected in certain over-heated pockets.

“While there has been an appreciation in asset values - its not true across the board - there are certain parts of the country which are very speculative in nature and these areas we do expect a correction and there are parts not so speculative and over the last few years - the supply has not really caught up with the demand. So that's part of the reason why prices have gone up, but as it comes in there will be some stabilisation, but our view is that we are not headed for a crash,” state sources from kotak Real Estate fund.

Niranjan Hiranandani seconds the thought. “I don't think we are in any bubble. The demand for real estate is really shooting up the roof. Unless we get the supply in terms of housing into the market you are not going to see any fall in prices so we need a substantial delivery of goods in the housing, rental, commercial and it markets. In all these markets the demand is growing much faster than the supply. So we need to work hard to ensure that the supply comes in, so that we can see stabilization in prices,” he states.

But there is still some indication that speculators are cornering apartments at the time of bookings, and selling at a later stage nearer completion. And this could get in the way of attaining a more mature level in the property market.



Ali Lokhandwala, of Lokhandwala Builders says, “Yes, there are investors - HNIs who are still approaching developers like us with offers like ‘we want to buy the entire project and the entire sale component at one go right at the beginning’. So we look at who the investors are and then make a decision, though we always prefer actual users moving into our property and if we do one off such deals - its a rare case when we give the entire building to one investor and they sell it later on.

Ashish Raheja - MD, Raheja Universal has another opinion, “In many cities, particularly in the north you have integrated townships which is not really group housing - there are actually no condominiums coming up there - developer just buys 100 acres - puts out some roads, gardens and 500 sub plotting schemes and trades it to a wholesaler. He in turn sells it to some investor and it never reaches the end user. The house or bungalow that is to come up may be built in 5-7 years, maybe in Gurgaon and Noida in the NCR. The fundamentals are strong but outside cities in tier II and III, how many thousands of these plots will actually be sustained? Ultimately the bubble will burst - land cannot keep going up 4-5- fold - a reversion in the cycle will happen.

Industry watchers also observe that with many city based developers wanting to establish a pan India presence, they are willing to go to smaller cities and pay higher prices for land there as it is comparatively lower than the bigger cities they come from. This is also driving up land values beyond market prices. The demand take up of the end product is yet to be seen. However, experts are quick to add that this construction boom is being driven up by end users.

“As compared to last times' slow down, I don't see that kind of a crack, because the last time we saw a lot of NRIs who did not understand the market but this time there is more thought out money - the economy is far more matured - so even if there is a correction, I don't think the bottoms are going to fall out. I don't predict any doomsday,” foresees Arun Nanda of Mahindra Gesco.

And in spite of property prices reaching all time highs in most areas across the country, industry players feel the Indian real estate market has potential for further growth. While the RBI has tightened the screws on banks lending to developers, fund flows into India from foreign investors have only just begun and this is expected to keep prices firm.

“As a rational investor I would think they should come down, but given the amount of liquidity there is in the market place, I don't see that happening any time soon just because there is too much money that is flowing into the country as far as real estate is concerned,” says Sameer Nayar, MD – real estate finance, credit Suisse Ssecurities.

Subodh Runwal of Runwal Group also feels that there is a lot more opportunity and that is the reason why the investors are coming into the market at this stage.

“There is some concern on the property values but again we have seen cycles and we are not afraid of them - its not going be static - but will have ups and downs - so we will look at it on a project to project basis. Some of the markets are overheated but we will still consider them as we are here for the long term,” Stan Erwin - Senior MD, Trammell Crow Company.

Experts say the property market is going to look very different in about 18 months from now when substantial supply comes in.