Even though the Finance Minister and the Reserve Bank of India (RBI)
have in the last couple of months repeatedly warned about the
repercussions of Indians hoarding too much gold, the role of real estate
as a traditional investment avenue has largely been ignored.
Gold may be a time-bomb for the government, given its high current
account deficit, but real estate is a bigger time-bomb for investors and
even the government – since a lot of bank collateral and government
revenues is pegged to inflated property prices.
Just last week, RBI governor D Subbarao dismissed concerns about
rising property prices and said: “There is no bubble. The housing price
index is showing an increase and we have reported that in our document
that came out on Thursday. The monetary and macroeconomic development
document shows the housing price index…in 9 cities of the country, and
there is no bubble building up there.”
And it is due to assurances like these that many people in India
believe that one can never go wrong with real estate as it will always
guarantee returns. However, columnist Dhirendra Kumar explains
how so-called promised and assured rates of return come from very
different models of real estate which can be classified into five
stages.
1. The change in usage from agricultural or simple barren land to residential or commercial.
2. Coming up of physical infrastructure
3 Improvement in livability or commercial viability
4. Periodic boom and busts
5. General inflation
According to Kumar, historically, those who invested in barren land
gained the maximum since there was neither any habitation or physical
infrastructure in place at the time. Add to that the general inflation,
and you definitely have a solid investment. But things are different
now. If you invest in property today, all gains accruing during the
initial stages will only benefit the developer.
The situation is similar to corporates paying high premiums for
acquisition targets with the hope that the price you pay today will more
than compensate with a higher future value. In other words, paying a
premium now for future returns without evaluating risks and market
dynamics.
This situation is abetted by the artificial scarcity of urban land
created by the politician-builder nexus and speculation money being
poured into real estate by the parallel economy.
What else can otherwise explain the high real estate prices in Mumbai
and Delhi, which are way beyond the actual intrinsic value of
properties?
Urban Mumbai and Delhi are priced beyond reach because of artificial
scarcities created by the bottling up of land and low floor space
indices. Little wonder, few people are buying.
Current statistics show that transactions are not occurring in metros
and so builders are constructing buildings in far-flung suburbs. In
fact, the RBI’s House Price Index shows that prices in Delhi have risen
47 percent in the last year but property transactions are down 35
percent in the last quarter. Yet the finance ministry has pressured the
RBI to give infrastructure status to the housing sector, and relax
provisioning norms for it so that banks can extend attractive loans to
buyer.
Already several real estate firms are highly leveraged with many of
them being downgraded to junk. Recent reports on global real estate
suggest that prime commercial real estate in India is one of the most
expensive in the world, which makes India economically unviable to do
business in. A report in The Economic Times
today pointed out that vacancy levels in malls across the country are
growing at an alarming rate, especially in smaller towns where over a
third of the space is unoccupied, as against just 7 percent in 2007.
“Many developers overestimated the appetite for retail in these small
towns. They did not realise that the consumption threshold here was
low,” the report quotes Ashutosh Limaye, head of research at Jones Lang
LaSalle, as saying.
Is the bursting of the housing bubble in the West, vacant commercial
spaces and empty flats not reason enough for Indians to re-evaluate
their attitudes to real estate? The endless belief in real estate as a
surefire bet needs to end.
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