There has been a sharp uptrend in real estate prices which started about one and a half to two years ago. Do you think there is a real estate bubble?

A bubble means prices are irrational and actually fuelled by investors. Ninety per cent of all purchases of apartments are being made by actual users or long-term investors who are buying for their children.

So, you don’t see a price correction taking place?

There can be a correction, but it’s not an investment bubble that we’re talking about. That doesn’t mean prices will not come down, if new production comes in, they might.

But there isn’t going to be a collapse. Flats are not going to be lying vacant waiting for people to buy them. The correction, according to me, is going to be on the higher side; prices are going to move 15 per cent upwards this year. I don’t see any meltdown anywhere.

Will affordability be impacted by the Budget?

Prices of all commodities are up, taxes are up and benefits for small housing have been removed. The government has treated real estate in a shabby manner and it’s trying to mop up money from the sector in every possible way. That is going to hurt the affordability for a lot of people. A lot of damage has been caused by higher interest rates and EMIs have increased by 30-35 per cent.

So, how will prices remain firm?

Because the overall demand is also going up. Today the average age of a house buyer is 30 compared to around 45, say, six years ago. They may buy modest houses in the suburbs, but they’re buying, because they’re getting loans.

The demand is increasing because people need to be in places where they get work and also because their aspirations are higher. Many of them are in a hurry to buy because they feel prices will go up further next year. The story’s the same whether it’s the metros or smaller cities like Pune or Jaipur.

Have banks slowed down on lending to builders?

Of course they have slowed down on lending, so ultimately the supply will drop and if the supply drops, the prices are going to rise again. They are lending, but more stingily and at higher rates, they’ve raised rates by about 150 basis points. That means our costs go up.

How do you bring down prices?

By increasing the supply, just as it has happened in telecom or aviation. The government is not talking of increasing supply. Compared with the demand, the supply has not increased at all. In housing, the demand has grown 10-fold but the supply is up just 7 to 10 per cent.

Now, you’re saying there’s too much demand, so increase the interest rates, so that it should not cause inflation. The government is going to buy the maximum amount of cement for roads or highways, but that’s not going to cause inflation. But, if you buy a house, that causes inflation! Cement prices will go up and it will be passed on to consumers.

How do you bring in supply?

By implementing policies. For instance, the Urban Land Ceiling Act is yet to be amended in Maharashtra. Year before last, the government had said, it would be done in one month. Last month, they said, it would happen within the next 12 months. There seems to be no missionary zeal on the part of the government to grow housing.

Will builders be able to pass on the higher costs to buyers?

Where is the choice? Unless supply goes up, I can’t do anything. Tomorrow, if I’m going to build only 3,000 apartments, instead of 10,000 apartments, I’m not going to be able to absorb the hike in costs. That’s why I’m saying there’s bound to be an increase in prices in real estate prices.

What do you think of the valuations of real estate listed companies?

They are the flavour of the day, so the valuations are high. But they are the real valuations; they’re not the figment of anybody’s imagination. Are these valuations right from an investment perspective?

The answer is that if the demand continues to be like this, if the opportunities in the real estate sector grow at the current pace, yes, they are correct valuations. But, if the opportunities get destroyed then obviously the valuations won’t be correct.

Would you buy real estate stocks at these valuations?

Of course, I would. But that’s not the point. The question is whether I would buy real estate stocks compared to putting money into pharmaceutical stocks or infrastructure? This is the mistake that the finance minister is making. Without meeting the objectives of shelter, the sector is already being made uninteresting. What signals are you sending by removing incentives for low-cost housing?

You have raised $750 million for a fund. What kind of return do you think your investors will make?

We have projects in Maharashtra, Tamil Nadu and Rajasthan, where we have land banks. About a third of the funds have been invested. Our investors should make 25 per cent plus per annum. We believe there’s a big opportunity in the next three years.

Do you think the Indian market is mature enough for real estate mutual funds?

I think they’re overdue. There is enough expertise and I think companies like HDFC or ICICI could set up funds. I feel retail investors should invest in real estate mutual funds at this point in time. The growth in the real estate business in the next couple of years is going to be fantastic.

Which are the Tier-II or Tier-III cities that you would bet on for appreciation in the next few years?

I think cities like Pune, Nasik, Surat, Baroda and Bhopal will grow. But the trend in many of these smaller cities is that land rates are appreciating much faster than prices of apartments.

In Tier-I cities, apartments are appreciating faster. But I would still bet on the metros, especially the peripheral areas.