Friday, November 24, 2006

Will Real Estate Bring Down India's Growth?

Just a thought...
No research. no home work.. Top of the mind as they say...
You don't even have to believe what I write :)
... at your peril !

When we were in Engineering college, and a senior got a job with HP (Hewlett Packard) for a princely sum of 25000 per month, which was more than my IITian cousin got at that time( it was ages ago), many of us refused to sit for the campus interview for the 13-15 K jobs. Some even declined after getting an offer, starting the mad rush for Bangalore. When this said gentleman bought a Fiero ( the TVS -SUZUKi Bike), it was rumoured that he bought a Cielo.

25000 could buy a lot of stuff, definitely not a Cielo, but 25000 could buy you alot of stuff then. It was not even too long ago. And 25000 could definitely have afforded you the emi for a House then. A good one at that. In bangalore. In 2003, Houses still were affordable. Another friend bought a pigeonhole for 800,000. He was paying a rent of 6000 per month, and the pigeon hole was what his rent when converted to an EMI bought him. A similar apartment in that area today goes for no less than 25 lakhs, when i last enquired. In Pune.

I doubt if someone with a 60K salary could afford a decent House today. That is Indian Real Estate Scene today!

End of the LIG:
With Land prices so high, I don't know if there ever will be the LIG housing schemes, tomorrow. LIG housing schemes or Lower Income group's Housing schemes were built so that the LOWER Income people could afford a house. The Houses came cheap because the house were built cheap, adjacent to land where there were Medium Income and Higher Income Group Housing complexes. The cost of housing was brought down by not providing luxurious Amenities', no frills as they say, but with a large portion of the cost of building houses going for the land acquisition, how will one bring down the cost of housing.

One way is Growing up. Skyscrappers!!! But there will master plans and policies before that!!!!!
What the hell is FSI?

FDI in Real Estate:
FDI in any other sector had more or less translated to benefits to the end consumer. Take the case of telecom, and more visibly Retail. If walmart came to India, there will be discounts galore. Prices won't shoot up.

Why, then have the prices of real Estate shot up with the opening up of FDI in the real Estate. The answer is quite simple I guess. Where as the Foreign Funds in all the other sectors were used to fight for a market share with reduced Prices, or in other words SELLING, the FDI in Real estate was being used in pushing up the costs. They were BUYING up lands, and lands are the scarciest resources. Supply and Demand mechanics.

Lots of money chasing the same piece of land. As a result the land prices shoot up. The same Builders are bidding for the new HIGH Priced (FDI Induced) land and they have to get the money some where (well everywhere) and the end consumers are the best choice. And prices have shot up unlike other sectors.

Same solution. Grow Upwards... prices should come down when there are more units of Apartments per square feet of the land.

Let me plug in a small personal opinion.
FDI is good, and moeny is always welcome but given a choice between Insurance and Real Estate, Insurance should have been the better Choice.
World over Infrastructure developments which takes a very long gestation period needs very long term funds and Pensions and Insurance are about the only source that could provide cheap funds for 20-30 years even more. Without good Infrastructure, there would be no roads to apraoch the Skyscrappers, no water to bathe the residents and no lights to pull the Lifts. And Chidambaram jee and Manmohan Singhjee Know this. Does Sonia and Yechuri ?

So it is not the NRIs buying up flats that have shot up the prices but the bulders buying up land. With Apartment prices skyroketting 100-200% in the last 2-3 years, the profit margin of property developers should have shot up, but the profit margins have remained flat.. Never mind the topline and the net worths.

The Investors are also fueling the Real estate Inflation in a way. We value the Real estate Stocks way too high, giving them money to bid higher and higher for land. That doesn't mean I won't apply for the IPO of Shobha Developers :) ..

Indian Real Estate should grow upwards for the prices to grow downwards.

Will Real Estate bring down India's growth?

Say what you, India's growth have been fueled by low cost. Skilled Low cost resources.

Exports of IT, ITES, Auto Components, textiles that are fueling the growth of the nation have all been because of Low cost. Salary in the IT and Financial services might have skyrocketted, but average salary of a skilled engineer at Bharat Forge and Bajaj Auto are still as low as that of an unskilled worker in medium developed countries ( This I read in an old swaminomics article today morning).. When your basic need of housing becomes unaffordable, you will join the next company that is giving you a better hike and the company will have to hire a replacement at a higher package than your previous salary because more often than not, your replacement will also come from a different company for a Hike.

And all resources being scare, this salary hike war will continue as is continuing, and the cost advantage of India won't be valid too much longer..

Why do I blame the real estate?

Well, but for movie tickets and petrol, I don't see any drastic price rises in any other thing than Housing. In fact, Mobile phones, Mobile phone calls, Food, Laptops, all have become all the more cheaper and when I see people cramped in 1 room houses but each with a laptop, I can clearly see where the real estate prices will bring us.

If only the real estate prices were rational!

Earlier, when I believed that the Inflation in real estate was due to bulk buying by NRIs, I thought the prices will come down eventually. But, then I saw that the Mills owners are not going to return the 100's and 1000's of crores back to the Developers, and those crores have to be recouped back :)

The prices will not come down as long as they building don't grow skywards.
For those who are waiting for prices to come down, it will be a real long wait.

>>Vote this on Indian Pad.

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Anonymous Jhinx said...


25/11/06 3:06 PM  
Anonymous Celina Jones, Real Estate Consultant said...

This is an interesting post and was quite informative.

Thanks for Sharing.

6/2/07 5:13 PM  

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