Jagjot Singh works for an export buying house but of late he has been earning more from his investments in property than from his regular job. An avid investor in property, he picks up properties in emerging areas in smaller cities or homes in on distressed sellers. In the past four years, Singh's investment of a few lakhs of rupees has appreciated manifold. "Real estate is a safer and more attractive investment option compared with stocks," he says.
|DEEPAK PAREKH, |
"Instead of putting their money in mutual funds and fixed deposits, people are investing in property."
The real-estate market is booming, with property prices in urban centres hitting a five-year high (see graphics). The good news is that unlike in the 1990s, when real-estate prices soared to astronomical levels on speculative demand, the current boom is mainly driven by strong fundamentals. The healthy growth across sectors like it, BPO, finance, telecom and retail has generated a genuine demand from home seekers across urban India.
In Chandigarh, Hyderabad and Bangalore, the demand for property-both residential and commercial-has primarily been fuelled by large it and ITEs companies, which are occupying close to a million square feet of space. Ashish Singh, property consultancy firm Cushman & Wakefield's regional manager, tenant strategies, says that residential property prices in Bangalore are up 50 per cent or more in prime areas over the past 12-18 months. "The demand is being stimulated by investors (local and NRIs) and actual users," he says.
Despite the rise in property prices, the demand is only growing. An average of 650 new apartments are purchased in Bangalore every year, compared with 600 in Mumbai and around 750 in Gurgaon, near Delhi. In Hyderabad too real estate prices in the Banjara Hills and Jubilee Hills and further west in Madhapur and Gachi Bowli are rising sharply.
If it's the booming information technology industry that is fuelling the demand in south India, the industry-friendly policies of Himachal Pradesh, Haryana and Punjab are triggering a boom in the north. Investors are flocking to Chandigarh, Ludhiana and Jalandhar, thanks to the many multiplexes and shopping malls that have come up in these cities in the recent past. Amritsar set a new benchmark when a prime commercial plot measuring 10,000 sq yards went under the hammer for Rs 78,500 per sq yard-roughly four times more than the reserve price fixed by the city's municipal corporation. With the introduction of international flights from Amritsar and the opening of the Wagah route for limited India-Pakistan trade, property prices in the city have spiralled.
| REAL ESTATE MARKET |
| REASONS TO SMILE |
| Robust economic growth and low interest rates have revived the demand for property across urban India after many years. |
Demand for residential property is largely driven by actual buyers.
Small portion of banks mortgage portfolio account for land loans and repeat home loan applicants.
Unlike in the '90s, developers are trying to keep speculators and brokers out of projects.
| CAUSES OF CONCERN |
| Increase in number of investors parking money in property instead of other investment options. |
Increase in loan applications for third, fourth homes and demand for loans against property.
Hype created around projects to create an artificial demand. Some projects are sold off within hours.
Developers selling property on land meant for agricultural use.
The story in other parts of India is no different-be it in the National Capital Region or Mumbai where the mill lands of the National Textile Corporation (NTC)have been lapped up for almost twice the estimated price by bulge bracket developers. Since March this year, NTC's mill lands in Mumbai have fetched prices far in excess of industry expectations, triggering fears of an increase in property prices across the island city.
One most talked about deal is the mill bought by DLF for an astronomical Rs 702 crore. While admitting that the price was steep, R. Vancheshwar, director of the DLF Group, simply says, "The DLF Group saw value in it." Some of the other deals include Jupiter Mill land which went for Rs 260 crore (when the market pegged the value at Rs 150 crore) Elphinstone (Rs 441 crore) and Kohinoor mills (Rs 421 crore).
|ANUJ PURI, |
MD, CHESTERTON MEGHRAJ
"The real estate market is on an uptrend but sectors like Gurgaon have peaked out."
Amid all this exuberance there are pockets of concerns in the property market today. For one, the momentum in the real-estate sector has attracted speculators and investors. HDFC is seeing a marked increase in the number of applications for third or fourth loans. As a policy, the company does not give loans to people who have already taken two home loans. Says HDFC Chairman Deepak Parekh: "Instead of investing in mutual funds and fixed deposits, people are putting money in real estate."
Real-estate developer Unitech got a taste of this in December 2004 when it opened booking for Unitech Heights, its luxury multi-storey apartment project in Greater Noida near Delhi. Within three days, the project was completely sold out. But the company discovered that a lot of the applicants were property agents and speculative investors. By paying Rs 30,000-40,000 as application money, they had cornered flats worth Rs 30-35 lakh, which they could then sell at a premium. Unitech is now trying to ensure that only genuine users-people who buy houses to live in them-apply for flats in its other projects. To this end, applicants now have to pay the entire cost of the flat upfront instead of a token sum as application money. Unitech is also screening applicants to weed out speculators and brokers. Says Parekh: "There are indicators of a bubble-like situation in places like Gurgaon and Noida in the NCR and areas like Koramangla and Devanahalli in Bangalore. These areas are fired by investors who are investing in anticipation of a future appreciation."
Gurgaon is a classic example of a bubble blown out of proportion. In the late '90s the satellite township saw a large number of multinational companies setting up shop there, triggering development in anticipation of demand. Commercial and residential properties went for astronomical prices to investors who bought flats and shops in high end malls expecting to exit at a high price. But the prices reached unrealistic levels and owners were latched with properties which had no takers. Developers and investors have learnt a bitter lesson from the Gurgaon experience. Says Anuj Puri, managing director of real-estate firm Chesterton Meghraj: "The real estate market is on an uptrend. However, there are sectors like Gurgaon which have peaked out and demand has dropped."
| In Chandigarh, prices of prime residential property have increased from Rs 3,300 per sq ft in August 2004 to almost Rs 5,000 per sq ft now, an increase of about 50 per cent. Similar increases have been witnessed in the twin suburbs of Panchkula and Mohali. |
In Hyderabad, prices of property in prime locations like Banjara Hills have increased by 50-60 per cent in the past one year, rising from Rs 10,000 per sq ft in 2004 to Rs 15,000 per sq ft now. In Shamsabad, prices have risen 200 per cent in anticipation of the proposed international airport.
In Pune, property prices have appreciated by about 10-12 per cent in the past 12 months. In the Deccan Gymkhana area, real estate rates are up from Rs 2,500 per sq ft to Rs 2,800 per sq ft. In Aundh, prices are up from Rs 1,100 per sq ft to Rs 1,300 per sq ft.
Another time bomb ticking away in the property market is that of unauthorised real-estate development in class II towns and cities around Delhi. In anticipation of future growth, realtors are selling land in Panipat, Meerut and Ghaziabad to unsuspecting investors. Most of this is agricultural land and has been bought by these developers at very cheap rates from farmers. K.G. Krishnamurthy, CEO of HDFC's real estate fund, says that in most cases, the change of land use and other clearances have not been taken. Buyers should steer clear of such deals because they might not get permission to use such land for commercial or residential purposes.
Then there are concerns whether the properties for which borrowers have taken loans from banks and housing finance companies are overvalued. To check reckless disbursement of loans against overvalued properties, the RBI had increased the risk weights on home loans given by banks from 50 per cent to 75 per cent. This pushed up the interest rates on housing loans by around 50 basis points. In July this year, all commercial real-estate exposures of banks also saw an increase in the risk weight from 100 per cent to 125 per cent.
What does this euphoria mean for an average middle-class Indian who is looking to buying a house? "Actual users have no cause for concern," says Rajiv Sabharwal, chief operating officer of ICICI Home Finance. HDFC's Parekh feels that only those who really need a house should buy property at current levels. He says it is imminent that more stock will be released in cities which will cool down prices.
Of course, area specific triggers too are pushing up property prices. For instance, the proposed GVK One Mall on Road No. 1, Banjara Hills has fuelled a price rise in the locality. While it's the malls in Gurgaon, prospects of new international airports in Bangalore and Hyderabad are hiking prices around Shamshabad and Devanahalli. It is crucial that buyers understand the fair value of a property rather than the estimated future value.
|S. SRINIWASAN, |
HEAD, KOTAK REAL ESTATE FUND
"Prices have run ahead of themselves in some cities but over time they will level out."
Industry observers say that land prices are increasing faster than the prices of constructed property. As a result, developer margins are shrinking. The cost of constructed property around Mumbai's Parel area continues to stagnate at Rs 9,000 per sq ft while the price of vacant mill land has skyrocketed. Says Krishnamurthy: "Earlier developers used to make 90-100 per cent on a project but now the margins are down to 40 per cent." It is doubtful if developers will be able to pass on the full acquisition costs of mill lands to future customers.
While India may be on a growth path and markets are in the grips of a bull market, there are concerns that property buyers must watch out for if they want to avoid a situation of the '90s when prices reached unrealistic levels. It has taken almost 10 years for property prices to reach the levels of 1995. Any irrational exuberance shown by investors and developers may cause the bubble to burst.
-with Ramesh Vinayak, Stephen David and Amarnath K. Menon