Landing Trouble In Mumbai

This is because, on one hand, the demand for property has fallen. NRIs, for instance, one of the largest punters in this segment are no longer interested at these high prices. Phase II of a Cidco-developed NRI complex in Nerul in New Mumbai was tendered at $100 a square foot last year, after the first phase (two years ago) was lapped up by NRIs at $50 per square foot and subsequently resold at prices as high as $110. However, whereas Cidco received more than 1,800 applications for the first tender, they only received two applications for the second.

Other property investors and speculators have also left the market, having burnt their wallets just as badly as their primary market counterparts. Many investors are now stuck with finished property, which has fallen in value by 25 per cent. In addition, many property speculators have their monies stuck in half-finished developments, which cannot be completed due to the lack of funds. Elsewhere in the world, property has never been a short-term investment. It is only in Mumbai that people have made phenomenal short-term gains, comments Marcus Wraight of property consultants, Chesterton Meghraj. Besides, those who want to buy flats for their own use are also waiting to see if prices fall any further before making any purchases. In any case, these users are only looking at finished property and not at bookings in upcoming projects.

On the other hand, corporates cannot exit by selling land either. Lower prices mean that they'll have to book losses, which their fragile balance sheets do not allow them to do. For instance, the Ispat group is stuck with a 70,000 square foot plot on Peddar Road in Mumbai bought reportedly for Rs 72 crore. It is unable to develop the land because the lack of investor demand means that it cannot fund the construction of the project. At the same time, the liquidity crunch and rising interest rates have meant that the cost of holding onto land has become prohibitive. As none of the real estate companies are established, they have been paying 20-22 per cent to borrow from banks and term lending institutions, whereas property prices once they bottom out are not expected to rise more than 15-20 per cent annually.

Faced with these stark realities, some players have been forced to take desperate measures; Lupin recently sold one of its properties in North Mumbai to Star TV for Rs 40 crore and is trying to sell four other properties in the same area; Lloyds Realty is in the process of selling land acquired in New Mumbai back to Cidco; Videocon, it is learnt, is looking for someone to take over its entire real estate subsidiary. Industry observers like the HDFC managing director, Deepak Satwalekar, are not really surprised by these distress sales. Says he: When the cost of finance is higher than the price rise expectations, there is no other option but to liquidate holdings.

The fate of most corporates' real estate ventures will largely depend on what shape the market takes in the next two to three years? Opinion on revival of Mumbai's real estate is divided. HDFC's Mr Satwalekar feels that there will be a slight resurgence in the market, after which price rise will once again taper off as additional supplies hit the market. He points to the eight million square feet area being developed in the Bandra Kurla area, that will become available next year. He also expects the mill land imbroglio to be resolved, now that an expert committee has been set up to look into the matter. Historically, Mumbai has never seen such high supply of land, he says. Amit Choudhary, CEO, Godrej Properties, foresees prices stabilising over the medium term after an imminent pick-up in demand. A senior Lloyds Realty executive agrees that property prices are bound to go up by January-February next year, as this is nearly the bottom of the cycle. According to him, the property price cycle has a phase of 18 months, when prices rise followed by a three-year period when prices stay flat. The last cycle was an aberration because prices were pushed up very steeply by the sudden entry of corporates into this market and this led to a sharper correction than ever before.

Though there is no swift recovery in sight, most players will tell you that there are small signs that the market is beginning to pick up, even though the volume of transactions are still thin. There is genuine user demand surfacing again and it is not only from individuals looking to buy flats. Most finished projects in south and middle Mumbai are being sold, although in some cases investors are selling flats to users at a marginal loss over their purchase prices. Says Mr Chowdhary of Godrej: There is an actual demand, it is just that many buyers are biding their time for prices to fall while sellers are holding on waiting for prices to firm up.

Demand from the corporate sector is also beginning to rise. As prices in Mumbai have fallen, there are not many companies which are thinking of leaving the city in search of cheaper premises in Bangalore or Delhi. Many are still moving from the prohibitively expensive Nariman Point to other areas like Prabhadevi, Bandra and Andheri but it is no longer an automatic decision to leave Mumbai. Companies are realising that there are very good reasons for staying in Mumbai like the good infrastructure, efficient transport systems, availability of skilled labour. In fact, for many companies which have already moved, the decision to move may not be looking so good now, says Mr Wright of Chesterton. Indeed, even established companies, especially foreign banks and MNCs, are also looking to acquire new residential properties now that prices have fallen.

For corporates in real estate, this is good news and bad news. The good news is that with demand rising slowly, the worst days of property recession may be over. However, the problem is that the demand is only visible for finished property. For new developments, there is still no sign of any recovery. This is because construction costs are normally financed from the money raised from bookings and deposits. Here players have two problems: one is that they are unable to sell flats at the prices required for them to break even, because land prices have fallen in the interim. Moreso because buyers, expecting a glut in supply, are also waiting. Two, with investors and speculators out of the property market, the demand for bookings have also fallen dramatically.

Many corporates are no longer serious about being in real estate, concludes Arvind Pawha or Reliance Land Ltd, a company which is yet to start its operations. If nothing else, these corporate players have learnt one lesson: property like any other business needs specialised skills (even in markets like Mumbai). They require knowledge and skills to figure which areas will develop and how to develop them. They need special skills to be able to buy land at reasonable prices. Above all they need a holding power which allows them to ride the boom and bust of property business cycles. But then, nobody could have ever guessed that property prices in Mumbai would fall.