Realty Real Scenario

A valid question - and one being asked by almost everyone looking for property in Mumbai, Delhi or any of the other city where real estate prices have spun out of control - still, speculating about real estate bubbles on the Indian property market without looking at the facts is the work of a doomsayer, not an analyst.

First, a much-required definition: What is a real estate bubble? How does it happen? A real estate bubble happens when the cost of homes climbs unrealistically fast. In a normal market scenario, prices do rise, but only in tandem with the rate of inflation or a rise in middle-class incomes. When a real estate bubble goes critical and finally bursts, the prices of the same home come crashing down and the real estate market takes a nosedive.

In nature, a bubble is the most energy-efficient configuration for something as fragile as a stretched sheet of soap water. As long as it is not acted on by an external force, it can stay that way for a long time. In a way, that is true for a real estate bubble as well - unless something happens to disrupt the status quo, it will prevail. Fortunately, it is not the nature of the property market to leave a real estate bubble alone for too long. The artificial pressures that create it are always defeated by the pressure of demand for rationality. Once demand for irrationally priced
properties drops sufficiently, the bubble bursts.

Is there a bubble forming?

So, are we looking at the formation of a bubble in Indian real estate? It’s possible, but only in the cities where prices have actually skyrocketed beyond affordability. It can be argued that they have done so almost everywhere in the country, but the fact is that local people are still buying homes on a need basis in most Tier II and Tier III cities. Nor is the supply in most of those cities either overly boosted or curtailed. So, when we talk of the possibility of a bubble, we’re actually only talking of property in Mumbai and Delhi right now.

Delhi’s was the real estate market that led the correction, and Mumbai was the last in line. Both bounced back after the introduction of stimulus packages and the government’s direct actions in restructuring debt, which staved off further fallout on the Indian sector. Also, both these markets had in any case reached the bottom.

During the revival phase, a large volume of capital sitting on the fence immediately saw an opportunity. This was first seen in the equity markets, and then later in the real estate and the gold commodity markets - all three classes bounced back convincingly, and Mumbai and Delhi’s real estate markets made very decisive comebacks.

Current status

There is now a concern that these two markets have demonstrated higher than expected enthusiasm, especially in the central parts in the case of Mumbai, and Gurgaon and Noida for Delhi.

A lot of investors have plugged in considerable amounts of capital in these regions, and the values have, on an average, now gone 30% higher than the last peak. Some of the residential developments in central Mumbai in 2008 had peaked at Rs 30,000/sq ft. Today, it stands at 38,000/sq ft.

The kind of volumes we have witnessed in the first half of 2010 have come down dramatically. However, the liquidity situation on the market has not dropped, and neither has the appetite for investment. In fact, the same enthusiasm, which had previously contracted to the central parts of Mumbai, is now spreading towards the other parts of the city. There is yet another reason for the concern over a bubble building on the market. All developers who had ventured to buy land overseas or across India are now buying only in their primary cities. In other words, Mumbai developers are concentrating on acquiring land solely in Mumbai, and the same is happening in Gurgaon. Investments are now chasing these Tier 1 markets - and if this continues there is certainly the probability of a bubble in residential property by the end of the year.

Banks and housing finance companies are also eager to exit from their nonperforming assets and convert them into liquidity. At the same time, there is a considerable amount of lending to investors who have an unrelenting focus on high-end projects. If this continues, we may see a number of high-value NPAs on the market in a couple of years. The larger high-value residential projects in Mumbai will undergo at least two property cycles before completion, and that evaluations of their viability will change accordingly. Because many of these projects are looking at longer periods of completion, there will be many opportunities for developers to change their final use according to where the market potential leans. Some projects, originally planned for office use saw an intended transformation to residential use because that was where the greatest market potential lay at a certain point in time. These may still be put to their original use by developers who, in light of the many market fluctuations, may wish to derisk these projects.

In short, the more established and forward-looking developers will be studying the market gaps over the next two or three years. They will secure their land and take a studied view of how this land would best be put to use for optimal retur