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.