Bubble in the making?

Inventory of unsold flats may have piled up but prices continue to rise, helped by a steady demand

If you travel on the road to Noida and Greater Noida, you will find a large number of banners and hoardings of new residential real estate projects on both sides of the road. The moment you get close to construction sites, salesmen of property dealers descend on you like a horde of bees. Start talking to them and you will be offered discounts of up to 9 per cent on the published price straightaway. Most developers have thrown in freebies like free parking bay and club memberships. It is also an open secret that most of these developers have a mountain of debt on their balance sheets. So are they desperate to sell their flats? Is this the first sign that the real estate bubble is all set to burst?

The pile-up of unsold inventory surely points towards that. The numbers have almost doubled in the last three years. In the National Capital Region, the inventory level reached 31 months at the end of March 2013 against 15 months at the end of March 2010, while in the Mumbai Metropolitan Region the inventory level jumped from 17 months to 40 months. In Hyderabad, it reached 49 months in March 2013 as compared to 23 months in March 2010, according to data by real estate research firm Liases Foras. Inventory denotes the number of months required to clear the stock at the existing absorption rate. An efficient market maintains an inventory of eight to ten months.

In spite of this, prices are on the rise. Look at some of property hotspots: prices shot up 27 per cent between March 2012 and March 2013 in Gurgaon, 25-30 per cent in south-central Mumbai, 33.3 per cent in north-west Pune and 59 per cent in central Chennai, according to real estate consultancy Cushman & Wakefield. The only exception seems to be south Delhi where prices have softened up to 20 per cent as it has lost the market to Gurgaon. With returns such as these, real estate happens to offer the best returns amongst all asset classes. Shveta Jain, executive director (residential services), Cushman & Wakefield, says investors in high- as well as mid-end projects have made 22-23 per cent returns in most markets in the last year. This is better than the returns on fixed deposits (9 per cent or so), returns of -13.10 per cent on Gold Rs /10 g returns, and stocks in BSE (11.25 per cent) and Nifty (10.51 per cent).

"Despite the slowdown, there are green shoots in many micro-markets with significantly high returns," adds Samir Jasuja, founder and CEO of PropEquity, a real estate research firm. "The markets in various cities have seen price appreciation of 50-150 per cent since 2008-09."

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One reason why prices have gone up in the overall economic slowdown is the acute shortage of housing in the country. For instance, it is estimated that 200,000 people migrate to Delhi and its suburbs every year. This puts a great strain on the city's existing infrastructure. Various surveys have also shown that buying a house, apart from children's education, is accorded the highest priority by Indian households. As a result, the demand for homes is unlikely to slacken for several years. Of late, property dealers say, there have been increased queries from non-resident Indians, or NRIs - with the rupee depreciating rapidly against the dollar, Indian homes have become that much more affordable for them. Most NRIs have family back home, or are on the lookout for houses where they can spend a few weeks every year. This has given a boost to the demand for houses in recent weeks.

It is also well known that a lot of people deploy their cash in real estate. "The residential sector is immune to economic conditions as it is driven less by demand and supply and more by the excess cash in the economy," says Aniruddh Wahal, managing director (occupier services) of real estate consultant DTZ India. "Hence, there is no real bubble in the realty sector. As long as cash is pumped into the realty sector, the developers will sustain this period of low liquidity and not resort to price cuts as their target audience is investors and not the end users."

The closest prices came to crashing was in 2008-09, when there was a global financial meltdown. So, with a huge inventory and increasing prices, are we in a better position than in 2008-09? "If you see the overall macro numbers, we are no better than in the 2008 crisis," says Jasuja. "But the fundamental difference, and an important one, is that in 2008, everyone was expecting the global crisis to be the biggest post the Great Depression. Not only was there uncertainty, people were losing hope in the global economy. Now, there is uncertainty, which is also impacting the real estate sector, but the prospects in the long term look bright." Adds Jain of Cushman & Wakefield: "In 2008-09, there was a lull in most markets driven by the negative segment. Today, we are nowhere close to that scenario."

There is a contrarian view as well. Sumit Jain, the CEO of real estate website CommonFloor.com, says we are in a worse situation than 2008-09. "There are opportunities for private equity funds outside India. The input costs, coupled with approval cost and taxes, have increased the cost for a developer by up to 40 per cent." To overcome the slowdown, the developers are currently experimenting with different options to boost sales: limiting the supply through controlled new launches, lucrative schemes and deep discounts have helped them offload inventories and not resort to price cuts. Some experts feel that a bubble might be building up in some locations across cities. For instance, the Dwarka Expressway, some locations on the Yamuna Expressway, Navi Mumbai, some locations in Bangalore are some of the over-hyped and highly priced investor markets.

India has been sitting on the bubble since the global recession in 2008-09, experts say, but it has not exploded yet due to some strong measures by the Reserve Bank of India, including restricted foreign inflows into the sector. In sum, it seems there is no bad time to invest in real estate.