Gurbir Singh
Businessworld (edition: February 18, 2008)

On 21 November last year, a four-bedroom apartment at Mumbai’s posh Nariman Point was sold to a UK-based non-resident Indian (NRI) for a princely Rs 34 crore. The value of the seventh floor flat in NCPA Apartments — at Rs 97,000 per sq. ft — is the highest price ever paid for a residential property.

Recently, builder Zubair Lakdawalla and three of his cohorts were arrested on charges of engineering the killing of a Buddhist monk in Mumbai’s slum pocket of Govandi. The monk had resisted the builder’s attempts to push through a realty project on slum lands, and his death sparked widespread public ire and rioting by the monk’s Dalit supporters.

A lease of an NDTV office in the commercial hub of Bandra Kurla Complex came up for renewal recently. The company, unable to meet the demand for tripling the rent, decided to move out. Another media company TV18’s CEO Haresh Chawla says wryly, “Real estate costs have ballooned beyond control.”

A Bubble? Really?
The real estate sector in India is a series of micromarkets with different characteristics. Mumbai and Delhi cannot be compared with smaller cities such as Bangalore and Hyderabad; in cities like Jaipur and Indore, behaviour is even more varied. There are also some differences in how residential and commercial property markets behave.

Micro-markets in Mumbai that have little housing stock coming in continue to see values moving. “Residential bookings at a C.L. Raheja project in Hindoostan Spinning & Weaving Mills in central Mumbai opened at Rs 18,000 per sq. ft a year ago, but are now at Rs 26,000 per sq. ft,” says Akshaya Kumar, chief of broking firm Parklane Properties. Similarly, residential bookings that began at Rs 12,000 per sq. ft at Bombay Dyeing’s Spring Mills at Wadala, have now touched Rs 25,000 a sq. ft.

So how much of a bubble is it? Take a two-bedroom, 850-sq. ft flat in the western suburbs of Mumbai that could cost Rs 1.2 crore, 80 percent of which is financed by a housing loan. Let us assume that the annual interest cost is Rs 12 lakh, or 10 percent. At a monthly rental of Rs 50,000, the annual rental is about Rs 6 lakh. The return on investment is about 5 percent — less than consumer inflation. Buyers bank on gains on capital or property value.

In comparable markets, home prices should be about 12 to 15 times annual rent, analogous to a price earnings multiple. Across the board, they are much higher. Then there is the affordability test, which should be about 4-5 times annual income of the home buyer. Again, most are well above that range.

Similary, Chennai’s sought-after IT destination — Old Mahabalipuram Road — has seen a decline in rentals by around 10 percent recently. A housing complex planned for IT professionals by the Surinder Hiranandani Group on that road opened bookings at Rs 3,500 per sq. ft, but lack of demand has pushed down rates to Rs 2,500 a sq. ft, says local brokers.

Indian and foreign realty funds have also raised humungous amounts. Since 2005, realty funds have mobilised around Rs 20,000 crore. Realty funds were allowed registration by the Securities and Exchange Board of India (Sebi) as venture capital funds in 2005, with a tenure of 7-10 years. Investors poured in as industry forecasts predicted the real estate market would spiral from $12 billion currently to $90 billion in 2015, driven by a shortage of 200 million sq. ft of demand from the IT/ITES sector and a requirement of 18 million housing units by 2010.

... Loopholes...
But there are troubling questions. Save for RBI’s reporting system, there is very little monitoring as to where and how foreign funds are being parked. This has raised fears that foreign or joint venture firms may be bending the law and illegally engaging in speculative activity.

For instance, acquisition of agricultural land with FDI funds is illegal. Yet, disclosures by joint venture (JV) Emaar MGF reveal that 83 percent of the 12,544 acres the company acquired was agricultural land. Emaar Properties, a Dubai-based development company, has a 41 percent stake in the JV, which is raising around Rs 6,000 crore through an IPO this February.
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  • Ipo Closed

    No Home Buyer. These People Are Cheating. It Will Follow The Us Housing Market Soon, Dont Worry !!!;)