The Changing Face of Indian Real Estate................The history of the Indian Real Estate sector in modern times started with the economic liberalization of 1991. India was a closed economy till 1991 and the first real estate boom happened in parallel with the first economic boom from 1991 to 1996. From 1996 to 2000 real estate prices saw a sustained correction in all major cities including Mumbai, Delhi and Bangalore. This was the time when India had political instability, economic growth had fallen off and the global factors were mostly negative including the South East Asian crisis of 1998 and the dot com bust of 2000. 2001 to 2008 was the golden period for Indian real estate as it was for the Indian economy and the Indian stock market. Investors need to remember that such golden periods do not recur frequently and thus should not have expectations of prices tripling in 5 years in the current context. The global economic crisis caught the Indian economy completely unawares and real estate prices witnessed a steep fall in late 2008 and early 2009 as was the case in most of the world. After this the behaviour of the Indian markets started diverging from those in the developed world. While volumes remained subdued elsewhere they were booming in late 2009 and the whole of 2010 in India as customers took advantage of the relatively lower prices to finally book their dream homes. This is reflective of the fundamental characteristics of the Indian market which is that demand is still far higher than supply. This is the core theme for any analysis of the Indian real estate market. Sometimes when prices run ahead of affordability it takes time for affordability to catch up and thus investors don’t make money in the short time. Thus many professional investors try to “time the market”. However that is easier said than done. Investors are better advised to concentrate on the fundamentals of the market and invest in good projects in good micro markets and with reputable developers. Current Scenario As volumes jumped in 2009 and 2010 most major cities also saw significant price rise in 2011 and 2012. The price rise was the highest in the National Capital Region (NCR) followed by Mumbai and Bangalore. This resulted in volumes again falling off in 2012 and 2013. The Indian economy also experienced multiple other problems during this period including slowing economic growth, rising inflation and a lack of general direction in the economy. This also resulted in much lower FDI (Foreign Direct Investment) and FII (Foreign Institutional Investors) investment in the country. For real estate developers it hit as a pentuple whammy because cost of funding went up, availability of funding went down, land prices had already gone up, sales had slowed down and inflation had resulted in development costs going up. This Phase culminated in the mini currency crisis of 2013 when the Indian currency depreciated by 25% against the US Dollar. With oil prices going up and inflation out of control this was truly the bottom of the cycle. Fast forward to 2014 and India has a stable single party majority govt. after more than 20 years. Oil prices have fallen off the cliff which has helped to balance the govt.’s budget and control both the fiscal deficit and the current account deficit. Wholesale Inflation has gone to below zero, the lowest in 6 years. Economists and even the RBI are all unanimous on rate cuts in the coming year and the only debates is on whether it will be a cumulative total of 150 basis points or 250 basis points. But all of the above is in the future and economic growth and prosperity is still to restart. Thus Developers balance sheets are still stretched and the customers and investors are still in wait and watch mode. Thus it is possible to get good deals even today where prices in many cases are at or lower than 2012 prices. Given India’s inflation of 10% per annum in the last 2 years that is anyways equivalent to a 20% lower price. Customers who have been waiting or plan to buy in the next 1-2 years should look to get a good deal in a good project and lock in the prices. This is because the green shoots are clearly visible and of the pentuple whammy mentioned above at least 3 factors have already eased (cost and availability of funding and inflation). If the economy does move on target and the inflation and lending rates come down then it is possible that there will be a significant price rise by early or mid-2016, similar to what happened in 2010 and 2011. This price rise might be in terms of actual price rise or in terms of the withdrawal of the various attractive schemes offered today. However all the above is not by any stretch a suggestion that customers should look into every project. Irrespective of where the economic cycle and the pricing are, customers should always concentrate on the fundamentals. A good location with a properly designed product which has inherent demand (as opposed to speculative demand) is an absolute must. Thus a 5 BHK duplex apartment in Virar, Mumbai or an ultra-luxurious project in Bommasandra, Bangalore is an absolute no go. Similarly a well designed 2-3 BHK apartment in Dadar, Mumbai or Koramangala, Bangalore will always have inherent demand. The second most important thing while considering a buy is the reputation and past track record of the developer. Potential buyers should always try to find out past buyers from the same developer and see what their experience was. Discussion forums on real estate are also an useful place to get such information. Beyond that the customers should try to look up the current status of the developer and see if they are in any difficulties or if the project has any regulatory approval problems. It is also important to note that most experts now expect the Indian Rupee-USD to be in the 60-65 range in the medium term from the 50-60 range of 2012-13. This has resulted in better margins for the large Indian IT Sector which will ultimately result in better growth prospects for employees and more affordability. Similarly NRI interest in Indian property has also picked up strongly with the double positive of a depreciated rupee and a stable govt. expected to give strong growth. This reinforces the probability of a price rise in 2016 and makes it important for potential customers/investors to lock in prices.
Posted on: Sun, 28 Dec 2014 13:36:23 +0000
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