I would start by talking about a certain change that has taken place in the Indian real estate market. Initially, the real estate market, like any other market, was driven by the demand-supply equation. However, as times changed, sentiment also started driving the market, much like it drove the equity market.

Now, if you look at the demand-supply ratio, different factors operate differently all over the country, since the demand for real estate is elastic in nature. There are cities where approvals have slowed down (for example, Mumbai and Chennai, where it takes six to eight months to clear the files), mainly due to a change in political leadership. As project approvals slowed down, the supply shrank. So, even if the demand has gone down, the prices have not gone down. It is hard to imagine that in a place like Chennai, the prices of residential property have doubled in comparison to those in other booming cities like Bangalore.

Now, let’s talk about the interest rates. These have increased manifold in the last year or so, resulting in pushing up EMIs by almost 25 per cent. Remember, if the EMI exceeds 50 per cent of the take home, it begins to hurt. Certainly, the income levels have not gone up as fast as the interest rates have. The EMI comes from the ‘after tax’ amount of income. Thus, if the EMI goes up, your gross earnings have to go up by one and half times to keep pace.

How do financers handle these changes? Well, if you are a young person, they just extend the repayment period and keep the EMI constant. However, if you are a 45 year old person, the option of extending loan tenure does not exist for you.

Another thing that is hurting the industry is the behaviour of the prices of construction materials, including steel, cement and bricks, which are getting increasingly volatile. If the prices are high, particularly in the affordable housing segments, it again begins to hurt. If you are selling for Rs 10000 per sq. ft., then your cost is only 20 per cent of the total amount, and you can absorb the frequent rate changes. However, if you are selling for Rs 2000 per sq. ft., you have a problem.

The net result is that we have all gone wrong. All the industry experts thought that the affordable housing segment would not be affected by a recession. However, it turns out that this segment is in fact, the most affected. There is also considerable noise about how growth in states like Bihar is affecting the construction industry, which is facing a major labour crunch. I maintain that this is not the issue right now, since the level of construction activity has gone down in recent times, mainly due to a lack of liquidity and a slowdown in demand, particularly for office space. I am not saying that labour is available in plenty, but it is not a problem for sure. Fortunately for India, there is high level of mobility. People are ready to travel to wherever it is that they get work.[PAGE BREAK]

Recently, a particular ruling by the Supreme Court regarding the Noida land issue created tensions amongst all. There were instances where even after the construction work started, some plot auctions had to be cancelled on the orders of the Supreme Court. What was unfortunate was the fact that third-party rights were created (people who bought the flats in the said project). Having said all this, I suggest that people should not worry too much, as the products in Gurgaon as well as in Noida fall within the norm of five-year earnings.

So, what is this norm of five-year earnings? Suppose you are earning Rs 10 lakh per annum, then the maximum amount you should spend in buying a house is Rs 50 lakh. The equation here is five times your gross earnings, which is the amount of risk a person can safely take. This ratio is called the affordability index, and hovers from 3.5x to 5x almost all over the world. However, this index becomes null when you come to cities like Mumbai. It goes up to as much as 6x or 7x, even though the earnings are higher in Mumbai.

Coming to the current hot spots, this differs for actual users and investors. Actual users generally do not give preference to market trends. They would buy a flat in the city, where they work. All of India is not a market for them. Only once they have bought a place to live, do they even think of buying a property in some other city or state, which would be more or less for the sake of investment. Now, if you come to investments, the market is very different. For example, the Ahmadabad real estate market is very good as of now, because people perceive the government to be stable. They feel that the government is active on the reforms front, and this would lead to cumulative growth. The people have also gained from the price increase, and yet, things are affordable. Today, in a city like Ahmadabad, you can buy a two-bedroom apartment for Rs 22 lakh. This is expected to give you decent returns in a year’s time. So, there are definitely pockets in India that are good for the housing sector, where you can make money and the exposure is also not very high.

The total cost of property consists of three aspects – land price, construction costs and developer profits. In areas where the land cost is less than 33 per cent of the sale price, the speculation element is not involved. This is called exposure, and less exposure always leads to less speculation. Hence, a stable government is what would also play an important role, because every developer would include the factor of uncertainty into the price – for example, in cases where the approvals are uncertain, or the timings of getting approvals are uncertain. Remember that developers are always willing to take the commercial risk (market volatility) but they are not willing to take the risk of uncertainty. It is December now, and a new reckoner is about to be introduced. How many people know what the new reckoner would look like? Sometimes these rates are driven by how much revenue the government wants to generate by way of stamp duty, registration cost and so on. At other times, these values are not in line with reality. This is exactly where the factor of uncertainty comes into play. Developers know the reality, but do not know the government’s compulsions. So, they would build these uncertainties into the price in advance.[PAGE BREAK]

Imagine a situation where a developer buys a piece of land, develops it and sells it to the actual user. Now suddenly, he is told that the land is a part of forest land. The administration asks the developer to pay seven per cent more to regularise the plot. Do you think the developer would pay from his own pocket? Certainly not!

Look at the case of Hyderabad, where due to political uncertainties, things are not moving anywhere for the last few years. Note that we are talking about Hyderabad, a place that was brimming with IT expansion at one point. Going forward, I expect the revival of the IT sector there mainly due to the rupee depreciation. All these companies who signed their contracts when the rupee was playing in the forties have benefitted recently. The effect of this would not be felt immediately, but in the next three-four months. The excess capital would go into expansion, and hence, we can see a revival in commercial real estate sale in IT cities including Hyderabad once again. I do not claim to understand the forex market, but I know the impact it will have on the commercial real estate market, as more than 80 per cent of the commercial office space is driven by IT. Thus, cities like Bangalore, Hyderabad, Gurgaon, Chandigarh and Pune could see a rise in demand for office space going forward. This would also lead to residential demand, as most of these companies have the ‘walk to work’ culture.

So, how should investors play in the next year? The answer lies in whether they are big investors or small investors. What is their risk appetite? Also, are they borrowing money to invest, or is it their own money.  Why I raise these questions is because there are some maturing markets in the country that are available at throwaway prices. For example, there are some offices available in Pune. You cannot go wrong with them, provided you have the ability to wait it out. If you have borrowed money and your meter is ticking, then there is no point. The scenario I have presented is for the medium term and not for the short term.

If you are a small investor, you should invest in real estate funds. The experts there would spread your investments over cities and various categories. Yes, the appreciation may not be as much as I mentioned, but at least it would be a safe bet.

I would also like to express my disappointment over the decision to stall FDI in retail. If passed, it could really boost the retail segment in the real estate market. The demand for standalone stores, malls and departmental stores would have skyrocketed. With the stalling, all of this would take a back seat. There is not much scope in the current market, since the initial phase of creation of malls is over.

The Land Acquisition Bill, which is being talked about astutely in the developers’ community, is another factor that would impact the market. I personally feel that the concept is good, but it needs clarity on various elements of the bill. Some definitions, for example the employment guarantee, would create trouble for the developers. Whenever there are grey areas like this, it leads to corruption. So, there needs to be consistency. The issue should not go the SEZ way. I think after the initial hiatus, the industry would get adjusted to it.

Speaking of clarity, I would like to discuss this a bit further. Let’s take the case of the Dharavi redevelopment project in Mumbai. Initially, there were 19 bidders, and now, the government is left with only three. This is because initially 260 sq. ft. were to be given to the residents, which later became 300 sq. ft. Finally, the new leadership decided that 400 sq. ft. of developed area will be given to the existing residents. Where is the profit margin in this? There is also no announcement coming from the government on the issue. The government must understand that the bidders have earmarked funds for this project. How long can they will keep these funds idle?

Environment is another issue that has become a bone of contention between governmental agencies and the builder community. The Prime Minister visited Mumbai and said that the salt pan land would be developed. Then, the environment minister rejected this because it would lead to an ecological imbalance. So, where is the clarity? Property is a state subject, while environment is a central subject. The state government clears most of the permissions, but for environment clearance, you have to approach the central government.

To sum up, I would like to make certain assumptions:[PAGE BREAK]

•    The stock market will not be worse then what it is
•    The rupee-dollar parity would not change drastically
•    The government will be stable, because that affects the sentiment
•    Interest rates would probably not go up any further
•    The prices of construction materials would not be violent

Subject to all these conditions, we can expect a huge demand for housing. People are sitting on the fence, waiting to buy once some clarity emerges. This is not only true of investors, but also of the actual users. As for commercial real estate, the demand from the industrial sector would be limited due to low numbers, while the demand from the IT industry will pick up. However, there would be no demand on the retail side. Indian chains are expanding, but are looking at much lower rentals. Remember that any retailer is willing to pay a maximum of 12 per cent of their monthly sales (some of the anchors such as the Biyanis’ look at six per cent only).

Certain local factors would have a huge bearing on the markets. For example, if the Dharavi project gets a green signal, 20 million sq. ft. of free commercial space would be available. In that case, do you think the BKC would be able to command the sort of premiums that it is commanding now?

The last factor is infrastructure, which is very critical. Look at how the newly constructed flyovers and the Metro have actually changed the overall real estate market in Delhi. The all-new Terminal 3 has given a real boost to the real estate sector. The eight lane highway has been the key factor in developing Gurgaon. Remember that development follows infrastructure. So, the key lies in connecting satellite cities to the main city. This lessens the pressure on the main city and the pressure on the prices also goes down.