Tuesday, May 30, 2006

Real estate - tricks

The Indian real estate boom is an oft discussed topic on this blog, 1, 2, though not as much as the stock market boom. In any market scenario pyramid schemes, front running are pretty serious offences. In the real estate market, they are not.

What exactly is front running? In the mutual fund scenario it is a person with authority and/or knowledge of the fund, buying stocks in his personal account ahead of the mutual fund buying it.

What exactly is a pyramid scheme? It means many things in many contexts. One of them is about one person getting more and more people enrolled into a particular business in exchange for money.

What is the similarity of a stock market tip with a pyramid scheme or front running? It is that, by the time you get a tip, you are at the fag end of the price rise. By then operators, people in the know, FAR (Friends, associates, relatives) have all entered and made their money. So, when the retail investor, gets a tip and buys, it is really very close to the precipice at the end of which the price simply falls.

When a real estate project is launched with an advertisement in the papers, it is time for the investors to make their killings and exit. They would already have been sold the plots/apartments at a "pre-launch" price and at launch, they exit with a comfortable return. Before this, a closer set of investors who would invested their capital in the acquisition of the property would have exited - at the pre launch itself.

Now, at launch, a set of investors leap in, thinking they have got a good deal. At this point, the price has already taken into account all future developments in the area/locality and the price is "full" with little scope for an up movement. In a rising market, there is scope for further up movement since there is a gap between demand and supply - or in certain cases, there is too much money floating around. The market has been rising continuously for the last 4 odd years now with prices almost doubling in the last 2 years and rising about 10 times in the last 5. How long it will continue is anybodys guess.

When all these apartments hit the market post launch, somewhere there is going to be a shock. So, in the face of a global asset value increase, perhaps it makes sense to wait. Wait until all those 2 and 3 house owners put their assets out for sale. Wait until, demand picks up in other areas while the areas which have full price escalation cool off. For those who believe "real estate never falls", take a look at 1996 for a recent memory.


Wes said...

I've never been a fan of pyramid schemes especially those involving real-estate. But if it works for you maybe I should give it more thought.


Anonymous said...

Nice post ! One only needs to look at empty apartments in housing complexes in Bangalore to understand the amount of speculation going on. Sometimes about 60% apartments are vacant.