Real estate: Where it is heading?

In the past 18 months alone Indian real estate market has witnessed unprecedented growth. Especially in metros residential property prices has soared as much 70% and in some cases 100% according to Outlook magazine. For a common man living in metros ‘Apna ghar’ is becoming a day-dream because of atrocious pricing. Apart from that home loan interest rate is heading north because of increase in global interest rates. Major Banks like HDFC, ICICI have announced another 50 basis points increase in the home loans. Where all this is heading to? Is the real estate industry in India is in ‘Bubble’ stage which will burst soon? After thinking in this direction I came out with the following observations. Please read on.

Compared to other investment vehicles (Stocks, Bonds, Mutual-funds) real estate is different because ‘home’ is more to do with individual’s emotions. For evaluating this vehicle we need to look the ‘Macro’ (Top-down) as well as ‘Micro’ (Bottom-up) economic factors. Coming to Macro economic point of view the real-estate sector is looking ‘bullish’ at least in the 3-5 years point of view because of the following reasons:

1. From 2005 government of India has allowed 100% entry to Foreign Direct Investments (FDIs) which was not the case some years ago. Since India’s economic story is fully yet to be explored FIIs are flocking into this sector with huge amount of investments. According to PWC report on real estate Indian real estate is going to get 7 Billion USD investments in the coming 18-30 months. Recent real-estate meltdown in counties like Singapore is making India as a better place to invest.

2. Apart from that Asset Management Companies (AMCs) and Mutual-fund houses are launching ‘Real estate sector funds’ and lot of these funds are in IPO stage now. These AMCs will now look for investments which is pushing the need for real-estate.

3. The raising numbers in knowledge workers (IT Engineers, ITES and BPO employees) and their huge raise in ‘disposable income’ are fuelling the growth even further. According to Times of India Bangalore edition the average age of a person opting for apartments is 26, which is really mind-blowing.

While the above mentioned macro economic factors are looking really positive the ‘Micro’ factors are really concerning me. Compared to the equity market the real estate market in India is not regulated at all. There is absolutely no system in place which is controlling the prices and prices are always going ‘Up-up-and-up’ for the past three years. Residential layouts are developed without proper approvals and apartments developed without following the government rules. The ‘Mad-rush’ of knowledge workers is making the ‘Ever-greedy’ property developers become millionaires overnight. Instead of using this boom to develop country’s infrastructure (People who traveled abroad can very well say where we stand in-terms of infrastructure) this is becoming more an ‘under-table’ dirty political stuff. Unfortunately countries like ours we need to swallow this bitter pill and see what we need to do and make smart decisions.

The western world also witnessed the similar situation during 1990s. Because of the ‘Dotcom-bubble’ property prices in Silicon valley Bay area went up like anything. I remember reading a Wall-Street-Journal (WSJ) article on this but unfortunately not able to get the link for the same. Even after the bubble even today Silicon Valley continues to be one of the costliest areas in-terms of real estate prices. What we can get for $400K in pacific north-west part of the US will cost couple of million dollars in Silicon Valley. Even though there is a huge difference between India and US in-terms of real estate the pattern of behavior is same. So even if the so called ‘Real-estate-crash’ happens places like Bangalore, Chennai and Hyderabad are bound to be costly. Unlike the equity market, the crash in real estate means prices will stabilize of come down by 5% but not more than that.

At the point of time the alternative option in India is to move to Tier-II cities like Mangalore, Mysore, Coimbatore, Ahmadabad, Cochin and Pune. These cities are not completely affected by the ‘Real-estate-virus’ and still we can get a good deal. I am following this Tier-II market for the past 6 months and it is showing a good potential. Even IT companies are planning their next level of expansion in these cities.


Anonymous said…
Got a good insight in to the real estate market man, thnks fr tht..

recently this week the Indian stock markets lost abt 92 million $ in jst a week to the emerging markets n the other a broader perspective there are always other countries catching up and we need to keep heading fast to keep our lion's share of investment and potential inflows in to the country growing..this might n a way or other affect the real estate.

But the total system is not mature enough or well framed to materialize on all the is jst like make hay while the sun shines...n god knows what next

let me knw ur thoughts...
The recent stock market crash is mainly because of increase in the global interest rates and FIIs started selling their shared big time in emerging markets.But the good point is Indian market reacted the same way other Asian(Emerging) markets.This shows that the stock market is very well regulated and we are in sync with the world economy.

But on the other hand real-estate there is no regulation at all.Irrespective of the amount of investments the dire need to keep a system in a place and that should be a foundation for our Infrastructure development which is not happening. As you said everybody is trying to make their best from this 'Bubble'.
Anonymous said…
Good article. I completely agree to your points. Just to digress a little bit and add to what you have written, there seems to be a constant peer pressure nowadays to go for a house of your own. The average age of 26 for guys opting for apartments is truly mind-boggling. But at the same time one should weigh other options if you are just considering a home from investment point of view. I recently read an article (perharps in REDIFF, and in some other financial times) that real estate does not necessarily beat the inflation rate and especially in the current boom it just might turn out to be a risky proposition (again if you just concentrating from investment point of view). Equity is the channel which truly beats the inflation, but you need to have that appetite for risk, which I feel should be there at the age of 26! :)
Anonymous said…
Shows the u have done a good research. Definitely an eye opener for people like me who totally ignorant abt such topics
Anonymous said…
good one.
Neel said…
Jayakumar.. really good article dude.. you have become a professional blogger I must say -:)

I would have loved to write my thoughts about your each points (micro analysis in your words ;)) but then my comments will be of your article's size n it needs some time too ;)

In brief :

There is a huge supply-demand imbalance in bangalore real estate market(for that matter even in the other tier I cities like Gurugaon). The huge demand has been fueled by the massive liquidiy which is due to the huge disposable income of the middle class people (IT jobs), other macro economic factors like opening cap on FDI and big fund houses opening up reas estate funds etc as you have pointed out clearly. Now the solution to this would be to develop a good infrastructure in the tier II cities so that these big IT companies start moving out the town. This will really ease off the demand side of the curve and will push it more towards equilibirum. Now its very clear what should be the role of the Govt. here.

Neel, Thanks for your comments :)

I completely agree with you. The growth in real estate is because of the good economy. But the dire need for India now is good governance.I am planning to write a seperate blog on this soon.Stay tuned.

- Jayakumar
Unknown said…
good blog mate...
Anonymous said…
Real estate is similar to a dividend paying stock. The Rent you collect from your property (or the rent you save by living in your own property) is the dividend.

Those who are counting on pure appreciation are going to be sorely disappointed. This is an artificially created bubble which will transfer wealth from the young IT workers to the builders and politicians who are making hay doing all sorts of underhanded deals in the land / property market.
I am not sure who you are but you are obsolutely rite.

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