Real Estate Boom : Real or Mythical?

- Chandrashekhar Prabhu,
Consulting Editor

The Real Estate boom seems to be unending. The prices have been increasing like nobody’s business. Each metro has its own reasons to explain why the boom is exclusive for itself. The national capital region seems to be providing an ideal example as to what should not happen. On one hand we have the Lutyens” New Delhi standing still in time, on the other, we find the rest of Delhi is virtually saturated. Portions of UP like Nodia and the like have suddenly been developed and the vital link between Delhi and these areas which facilitate communications between them [through surface transport or metro rail] have made the distances shrink. Delhi is surrounded by several states. UP has had its share of Delhi’s growth through the upcoming townships on the fringes of Delhi which fall with UP. Haryana, has several such developments, the prominent amongst them is Gurgaon. Gurgaon was once a sleepy village and its only claim to fame was its proximity to the airport. We have today a situation where development in Gurgaon can match the development in any other metro anywhere else in India. The kind of shopping malls and multiplexes coming up in the fringe areas of Noida and Gurgaon and other such developments around Delhi have been seen with a certain amount of awe and disbelief. The way in which the development is increasing has been alarming and experts have been busy just documenting the increase in prices all the time.

If Delhi could lead in Real Estate prices rise could Mumbai be far behind? Mumbai is unique in many ways, as it is surrounded by the sea on one side and the Thane creek on the other. Every single square meter of land seems to have been put to effective use. There is no vacant land available. The only empty pockets appear to be those which have been saved due to coastal regulation zones, the no development zones, the salt pans and other such lands on which laws have forbidden building construction. The demand is enormous and supply comes in the form of a trickle. This leads us to a situation where in properties which are already occupied become the prime target for the promotion of development. The mill lands and other industrial lands get released for development, and commercial development starts happening in a big way. Industrial units close down and in their place we have huge shopping malls, multiplexes, office complexes etc.

The slums which were earlier considered as encroached lands have suddenly become a source of great opportunity and in most cases resulted in eviction of the original slum dwellers. The old and dilapidated buildings were earlier selectively taken up for reconstruction and the consequences where disastrous. Now the game plan appears to be to do what they earlier did to individual buildings to whole precincts and areas. The talk of moving entire portions of South Mumbai into transit camps and bringing down all the buildings and developing the entire area in a skewed manner seems to have found favor with a section of the politicians. With virtually no space available within Mumbai, the only way out seems to be to go to the hinter lands. With Mira-Bhayander Municipal Corporation; Vasai-Virar Municipal Corporation; Thane Municipal Corporation; Kalyan-Dombivli Municipal Corporation, Ulhasnagar Municipal Corporation; Navi Mumbai Municipal Corporation; all urban areas in their own right surrounding Mumbai from all sides the only scope for expansion appears to be in direction of such areas in the MMRDA region which fall beyond the scope of the Municipal Corporations mentioned here in above. The growth of these areas is however, determined by the connection of the hinterland through the Trans harbour link. Decision making, process on this link appears to be very slow. The net result is that the real estate prices have gone beyond the imagination of any reasonably thinking person.

The situation in Chennai and Kolkata is not very different. Chennai is growing in all directions and the speed of this growth is very difficult to control

In Kolkatta too, the Rajarhat area has been targeted by a powerful section of the developers and now the entire corridor between Kolkata and Khadakpur, Kolkata and Haldia and the portions beyond the airport are seeing growth in the rate of development. Prices in Kolkata and Chennai are also increasing. When the larger metros grow at a certain space can the other large cities not be affected? Bangalore, Hyderabad, Pune, Chandigarh, Ludhiana have started witnessing a real estate boom similar to those seen in the larger metros. Bangalore and Hyderabad have a lot in common. The Bangalore boom came with the increase in floor area ratio which was done after conceiving a series of ring roads around the city. Not to be outdone in the game, Hyderabad came up with new set of regulations granting unlimited FSI if the roads were of a certain width. Roads are truly the best indicators of the capacity of the area to take a load of development. But they are not the only ones to determine the rate of increase of floor area ratios. When the floor area is increased the densities naturally increase. This results in the need to augment crucial infrastructure such as water, drainage, waste disposal system, schools, colleges, hospitals, fire fighting system, public transportation system such as railway, metros, etc.

Hyderabad did not wait for the infrastructure to come. It went ahead and permitted development without putting in restrictions; with lands available in plenty the supply increased and the rates started growing in one direction, as was seen in other cities too. The government policy of liberalization came around the same time and Foreign Direct Investment was permitted in real estate. Earlier the threshold limit to invest in real estate was 50 acres. This was brought down to 25 acres for land assembly and to 50,000 meters for constructed areas. The threshold limits for infrastructure areas were removed and free flow for Foreign Direct Investment is now permitted into infrastructure projects. The net result is obvious. More then $ 0 billion have already come in and more money is coming aggressively on a day to day basis. The developers in the country saw the opening up of the FDI as one of the greatest opportunities of all times and inside the trading started. They knew fully well that the investors will have to invest through them and the benchmark would be the existing values. A cartel was developed by certain developers and speculating began so that when the foreign investment comes in, the risk of the local developers can be offloaded on the foreign funds. This would ensure that in the event of a correction in the market, the developers would lose nothing and the investors would bleed heavily.

It is not that the government did not understand what was happening. The RBI conducted an exercise to understand the emerging scenario and tried to rectify the situation but the dynamics of the markets did not permit the RBI or the Government of India the leverage which could make a difference. The net result of this entire exercise has been that the money is parked with select developers and rapid development is taking place. The prices have reached the level where in it has become virtually impossible for the urban poor and the middle class to participate in this exercise. Real estate has become unaffordable to more than 90% of the population. Despite this the development continues. The going appears to be good for everybody and the market seems to be booming. The million dollar question which is seldom asked is --- who will buy such expensive real estate? There are no easy answers of such questions. The capacity of Indians to raise money, to buy real estate is something which is known and this capacity has its severe limitations. The IT and IT enable services have been buying real estate but with the slow down in the US economy this rate is likely to go down. With the Indian industrial houses putting them in an acquisition mode and buying companies in the United States, and in other countries as well, the available money which could have been diverted to real estate has been used elsewhere. Not many transactions are taking place and yet the prices are increased by the day. The argument appears to be very simple. The example of those who invested in the early stages taking advantage of this speculator price, and made profits, is fresh in the minds, and no investor wants to be left out. With most investors wanting to invest heavily in the favour of real estate boom in India, the going may be good in the short term. However, it must be understood that in the long term the investor has to book profits and will rely on the sale of space. If such sale doesn’t happen, and that seems to be more likely, what may happen is anybody’s guess. The market is still not prepared for the correction because the flows of FDI have increased multifold. This brings us to the state of the Indian real estate,- a boom, as we would like the world to believe it to be, or a myth perpetuated by of those whose role has been restricted to be mere spectators in this game. We therefore thought it appropriate to have a cover story on this subject and we hope you would enjoy reading different perspectives on the subject.