The surreal rise of real estate

Experts feel that rising interest rates and high prices of properties will leave no buyers in the market, while builders and dealers are optimistic in the extreme. But with a boom comes chicanery and duplicity—so, what we urgently need is a regulator

By Sandeep Suman

Recently, when founder and chairperson and managing director of the Bharti Group, Sunil Bharti Mittal, was asked why he was not buying properties for his mega retail business, he said: "I am waiting for the right time as prices for land and commercial complexes are too high."

If a person of Mittal's stature is so cautious about the rocketing prices, are you planning to burn your fingers at this time of artificially pumped-up rates?

While there is no doubt that real estate prices are escalating, people, in general, see it as a bubble and expect it to burst vis-à-vis the rising interest regime and the rollercoaster market. Builders, however, are optimistic creatures—they do not believe in such loose talk, since they feel that scarcity of land and the rising demand for houses will make even real estate on Mount Everest available.

The domestic property market is luring global realty funds as the fast-growing economy boosts demand for office space, houses and shopping malls. But the soaring prices pose a distinct threat of a meltdown. Realty funds in India are worth about $4.7 billion, with industry estimates on growth by 2010 varying widely from $30 billion to $90 billion.

Recently, a tony seafront apartment in South Mumbai was bought for the equivalent of $1,400 (roughly Rs 63,631) a sq ft-double that from two years ago, and as expensive as an apartment in New York. Prices in big cities like Mumbai, Delhi, Bangalore, Kolkata and Chennai are rising at 30-40 per cent a year, boosted by scarce land and rising incomes in an economy that has been growing at about 8 per cent for the past three years—which is expected to be maintained for years to come. Small towns haven't escaped the price-hike virus either.

Interestingly, even villagers have begun upping the ante on their agricultural lands. Three villages—Thikaria, Bhamoria and Sanjharia—on the Jaipur-Ajmer Road in Rajasthan have sold 1,700 bighas of land for a whopping Rs 600 crore. Farmers estimate one bigha near the highways at worth between Rs 35-50 lakh.

According to industry experts, spiralling prices and interest costs, coupled with shoddy property transaction and ownership records, may sap demand and hasten the bursting of the currently hot property bubble. However, Parasnath Developers Ltd chairperson Pradeep Jain is not ready to buy this theory: he says that stock market volatility might, on the other hand, give a leg-up to the real estate business. On rising interest rates, he says that Indians, having paid 20 per cent interest rates in the past, are now paying only 9 per cent. This will hardly discourage people from buying properties.

Most banks have raised their home loan rates where the new floating rate will be 9 per cent and the fixed rate 10.25 per cent. And every quarter, banks are revising the interest rates by some basis points. To improve the quality of loans, the Reserve Bank of India has increased the risk weight provision from 0.4 per cent to 1 per cent for loans beyond Rs 20 lakh in the first-half credit policy for 2006-07. (Home loan rates had hit rock bottom at 7 per cent in 2003, when banks had started a rate war to win over customers.)

ICICI Bank deputy managing director Chanda Kochhar says that interest rate revision has been made in the light of the changing economic scenario and that "still, it is not too high". Some loan rates have risen by as much as 150 basis points since the beginning of January this year, with the largest lender, the State Bank of India, increasing its rates by 50 basis points last month.
Analysts say that the reason for the real estate market escalating is that this industry has no regulator, and builders and property dealers are laughing all the way to the bank. "High prices and rising interest costs could slow down demand and hasten the property bubble to burst," says one. "The housing finance-driven demand is under threat." They estimate that demand for homes have jumped on the back of tax breaks and low interest rates for the past five years.

"There may be a lull for some time in real estate, but I don't think of any possibility of home prices going down vis-à-vis the sharp demand-supply gap," says Omaxe Group vice-president Amitabh Bhattacharya. "Housing is a basic need and people want to grab it any cost. So, the boom continues."

Bhattacharya says that India's retail real estate market is expected to top $463 billion by 2010, up from $292 billion in 2004, and that high price appreciation in property is fuelling the boom. As India's real estate market is getting warmer, he says, following the so-called Great Fall in the capital market, small investors will gravitate increasingly towards property acquisitions.

Besides, a new concept of a "Second Home" is now developing. People already with houses are scouring the market for additional ones, which is raising the industry's tempo. However, those who don't have houses are going in for rentals, since they continue to maintain that it is unwise to cough up exorbitantly for "undeserving prices", and that, too, on a higher interest scale.

Furthermore, changing government policies and a refocusing on infrastructure are driving up the demand for housing developments, malls and offices. "For investors seeking the high returns that are no longer possible in the mature European and North American real estate markets, India and China are hot," says an analyst at Merrill Lynch, adding that every foreign investor group, including pension funds, high-net-worth individuals and private equity funds, are all keeping an eye on this sector.

In the past, investors were wary of the opaque business practices of the Indian real estate industry. The land laws were archaic, mortgage financing was expensive, and the quality of the developments was abysmal. These days, however, the country's $12 billion estate market is expanding at an annual 30 per cent. With the economy expected to continue growing rapidly—the current rate stands at about 8 per cent—and a swelling middleclass with an insatiable appetite for quality apartments, modern malls and a variety of stores, the forecasts are optimistic enough.

And it's also all going public. In what is billed as India's biggest share sale, real estate developer DLF Universal will have a public offering that is expected to raise more than $3 billion. It tops earlier public offerings such as the $2.3 billion share sale of the government's Oil and Natural Gas Corporation two years ago.

DLF chairperson K P Singh observes that more than a third of India's billion plus population is under 25 years old. Such a youthful demographic, coupled with low mortgage rates, is helping make the housing sector buoyant. Simultaneously, the outsourcing industry, growing at more than 30 per cent a year, has helped transform the commercial real estate industry.

According to Merrill Lynch, outsourcing will annually create 200,000 jobs a year, and demand for more than 15 million sq ft of commercial space. According to government data, India has a shortage of 100 million homes and about 100 million sq ft of office space.

Analysts say that the prices of homes in India have, on an average, tripled in the past two years and will probably expand fourfold in the next three to four years. On the upside, the average cost of a home was about 22 times the average annual salary of an individual; today, it costs about 4.7 times. Exploding cities and new-fangled job opportunities add an army of people to the workforce every year. Urban and mofussil lifestyle and family values are in constant flux. All this adds up: no indication of price dips is in sight. Nonetheless, since all booms are occasions for chicanery and duplicity, the need today is the setting up of a regulator for the industry. Otherwise, it might just all fall through the ground.