Price correction likely, but not a meltdown
Increased involvement of overseas realty fundsMore opportunities for corporates
MUMBAI: The real estate prices in metros in the last 15 months have seen a bull run. Although there are no indications of any meltdown, market watchers believe that the prices may be headed for a correction.
Figures released by Knight Frank India, a leading property consultancy, indicate that for `A' grade properties, prices have been on the rise last year. In Mumbai, for residential property, the rates have moved up from Rs. 17,000 to Rs. 30,000 a sq. ft., while for commercial property the rates have gone up from Rs. 11,000 to Rs. 29,000. Over the same period, Delhi has seen residential prices for `A' grade properties move up from Rs. 10,000 to Rs. 25,000 a sq. ft. and for the office space from Rs. 8,500 to Rs. 16,000. For residential property, Chennai has moved up from Rs. 3,500 to Rs. 3,600 and Bangalore from Rs. 4,000 to Rs. 4,800, while for commercial property over the same period, Chennai moved up from Rs. 4,000 to Rs. 4,500 and Bangalore from Rs. 3,500 to Rs. 6,000 a sq. ft.
The experts are unanimous on the sustainability of these prices. Anuj Puri, Managing Director, Trammell Crow Meghraj, a leading property consultancy, told The Hindu, that it was sustainable. "There may be a slight correction in the medium term but long-term prospects are excellent. The current boom is led by end-users rather than speculators. These end-users belong to the emerging middle-class who can afford a lot more these days than in the past.''
Gulam Zia, Head, Advisory Services, Knight Frank India, said, "this time, the boom seems to be sustainable because of a strong base. The services sector and particularly the IT and ITES sector account for more than 70 per cent of the demand for new properties and these have projected aggressive growth rates. This time, it is a well-penetrated boom where is it led by both an absorption of properties and of prices.''
Another phenomenon that has emerged in the realty sector is the entry of large corporates and Indian and multinational realty funds. In the last two quarters, in particular, there has been an increased involvement of overseas realty funds. "These funds average around $300 million each and around a dozen are eyeing the market now totalling a corpus of around $4 billion,'' said Sanjay Dutt, Director (Commercial), Cushman & Wakefield.
"The issue is the rate of return on investment of 20-25 per cent and optimistically 30-40 per cent in this market which has tempted them here. Typically, they would de-risk their investments by choosing a spread and avoiding exposure to a single sector or location,'' said Mr. Dutt.
Mr. Puri felt that the markets in developed countries were already perceived as experiencing an asset price bubble. "Returns on investment, including in realty, are higher in developing countries like India and China. The highest profit lies in long-term project sustainability and the potential is high in India.''
Corporate involvement in real estate is not new and, in fact, players like Videocon and Lloyds have had bad experiences in the past. However, the financial restructuring that has come into the real estate market over the last 12-24 months makes the model far more sustainable than before for corporates.
"We cannot look at earlier precedents there is too much happening of late that did not happen before. That is the essence of progress,'' said Mr. Puri. Also, special economic zones (SEZs) have thrown up great opportunities for corporates and while they require large commitments, there are attendant tax benefits and they will grow industry in Tier II and Tier III cities.
There are clear moves towards transparency in the operations of the companies in the sector. Realty companies opting for initial public offerings (IPOs) like DLF is a clear sign of things to come. There are half a dozen more IPOs from this sector in the pipeline.
There is optimism about realty being a long-term story. A correction will happen in certain markets and in certain segments as in Mumbai where it is not sustainable. Mr. Zia said that in Mumbai and Delhi, the temporary shortage and demand-supply mismatch will force values up but "one can expect a correction of 10-15 per cent over the next two years when supply comes in. It will be a correction and not a meltdown.''