Friday, March 03, 2006

(Sur)real estate

India, like many other parts of the world is zooming away in the face of a real estate boom. In India there is a real estate boom in any direction you wish to see. Whether it is Bangalore, Pune, Calcutta or Chennai or Hyderabad or even already sky high Mumbai - the story is the same.

Just a few years back, Mumbai was dying in the face of a sharp shortage of housing options. But now things have reversed and there is a glut of housing options - if you have the money. Now apartments are more than just houses. They are about lifestyle. So while the first housing colonies had nothing but a security guard, these new housing colonies have a gym (spa, jacuzzi, steam), swimming pool (heated, lined with Italian marble). Some have a multiplex, shopping complex. There are those which offer a servant entrance.

The next step is creating an ambience. What does one differentiate in a house? So you now have themed houses. In Bangalore there are options themed on Resorts, Venice, Bali, Europe among other things. There is now a rush to "discover" new themes.

There are those who believe that this boom will continue, there are those who are not sure and those who think that this is "irrational exuberance" to borrow a phrase used by Alan Greenspan. But at this point, we see more action. JM Morgan has entered to take a piece of the action by investing in Mantri developers, one of the biggies in the Bangalore real estate scene.

The concern is that in India, stock prices are at the height of a boom (this time it is supposed to be different - really). As it happens, a boom in one sector (usually stocks) translates into a boom in another sector (usually real estate) with investors rushing to park their money in a safe place. Also, add the foreign exchange glut in India fuelled to a great extent by software engineers parking their dollar salaries in real estate (especially near the tech hubs). Low interest rates (relatively, as compared to 10 years back) over the last few years made bank loans easier. Needless to say, it became a self fulfilling boom. There is a latent demand for housing in India, but the people who buy today do so more with a view to make money out of rentals rather than with a view to stay in these houses. The end result is that people own multiple houses, when all they need is one (feel free to differ with me here) and real estate is now a speculators paradise.

On the other hand it is true that there is a lot of demand for real estate options in India. Vast portions of India are undeveloped or underdeveloped, but this is not necessarily where the boom is happening. Also, the "connections" in terms of better roads, urban transport systems, public transport, water and reliable electricity need to improve by leaps and bounds. People want cheaper, affordable (not low quality) housing options too, which atleast in places like Bangalore is non existent. The market at the premium end is only so much. A significant portion of the demand is real, but with about 20-25% (as per various estimates) driven by speculation.
But interest rates in India have slowly started rising. That means that loans will be harder to get (and service). Optimism about future salaries still holds true with India fairly at the bottom of the pyramid as far as outsourcing goes - there is still some space for rise there.

Is it a bubble? Right everybody is in a state of denial. Real estate creators (the builders) are laughing all the way to the bank. The banks are in turn sitting on crores of housing loans. The buyers (many of them) are using the combination of low interest rates and high salaries (and other income) to invest in multiple homes via housing loans. The stock market is seeing a time of boom too, even in the face of high oil prices.

The question is when will the boom snap out of this dream or will the dream run continue longer?

(Cross posted on The Indian Economy Blog)

1 comment:

Manoj said...

To atatract the bachelors with a fat pockets why not create blocks with a theme 'harem'????