Real Estate bust Indian style By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

November 25, 2015 | Posted by bobbysrinivasan << back to blog

The inventory overhang of Indian residential properties is telling us something ominous. Inspite of the economy growing around 7.5%, the highest in the world the pile up of unsold apartments is telling story of serious recession. Look at the data. Also several thousand new apartments are waiting for completion and will join the inventory soon. Unsold inventory as of June 2015 are in the various cities,

Mumbai 194500

NCR 191100

Bengaluru 101500

Pune 64800

Ahmedabad 41400

Chennai 39100

Kolkatta 37000

Hyderabad 33500

Total 702900 Source: Knight Frank report.

What really has gone wrong? Assuming an average price of one Crore per apartment, we are looking at over 7 trillion rupees worth of inventory. This is a conversation between a student and his professor.

Student: Professor, We keep bragging that our economy is having a stellar performance. This data on the unsold units is very disconcerting and tells a different story. What type of growth is this not being able to sell the apartments?

Professor: Like the stock market, the real estate can also go through a bubble. US house prices dropped in 2008-09 by 50% or more during the sub-prime crisis. Japanese real estate prices have not yet reached the 1989 level as the recovery is very slow. I read in the papers that the Lincoln House the old US consulate in Mumbai Breach Candy had a reserve price of Rs. 850 Crore but ended up being sold at Rs.750 Crores, a figure substantially below MRP. The real problem is that the potential buyers have vanished from the market. There is infact blood bath in the real estate demand and prices. Knight Frank, a well-established international real estate company report said prices could fall as much as 30% over the next six months. The housing sales across the country have dropped 20% this year and hence it may take more than 3 years to clear the inventory.

Student: How about new projects? What about the employment opportunities?

Professor: According to Ambit capital report, new project launches are down by 40 – 80%. But will the developers cut prices? May not be possible. According to the real estate agent Anand, the real cost of the construction is constant ranging from Rs. 2000 to Rs. 3000 per Sq. Ft. Given that the land cost ranges from Rs.500 to 2000 per foot, there is no scope for a price reduction.

Student: What should an average buyer do?

Professor: The buyer should be in wait and watch mood. There are too many incomplete projects. The builders are in deep trouble. The RBI figures show bank credit to commercial real estate is a measly 5.3% compared to 20 to 25% in the past. Also black money is slowly exiting the real estate, thanks to the new laws about compulsory imprisonment.

Student: Makes sense. Should I be buying a property now, of course by negotiating a lower price?

Professor: Please don’t seek my advice. I have seen house price crash in Alberta Canada, when the oil prices dropped to $ 10 a barrel. People sold their houses to banks for a mere of 1 dollar. Please wait a while. The banks will soon squeeze the real estate developer. You can then see prices falling precipitously. Then you can buy more space for lesser amount. I tell you all bubbles burst and real estate in India will not be an exception.

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