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The Writing On The Wall Greed pushes real estate developers to the brink

Updated: February 26, 2011 10:38 am

All the symptoms indicate a fatal malady. Mumbai’s real estate sector is ailing due to the alienation of large number of house seekers who have been priced out of the property market. As a result, construction of new buildings has slowed down and several new buildings have huge number of unsold flats lying in their inventory and developers are heading for default.

                Unless timely corrective actions are taken, the whole economy would be in shambles. Wrong and motivated steps taken by builders have created a logjam forcing the Reserve Bank of India to tighten lending for the real estate.

                The fear is that banks would lose thousands of crores of money, real estate developers would go bankrupt, construction workers to remain jobless and the overall economy would suffer as several sectors depend on the growth of real estate, the second-largest employment provider after agriculture.

                In less than eighteen months of revival, the real estate sector is once again heading for a downturn, this time primarily due to overheated property prices caused by developers’ greed.

                According to municipal records, proposals for new buildings in Mumbai has dropped by 50 per cent than that a year ago period and as per a survey by real estate research form Liases Foras over 90,000 constructed flats are lying vacant due to lack of buyers in Mumbai.

                Rather than allowing the natural appreciation in prices in sync with the movement of the real estate cycle, the developers conspired and ganged up to multiply their profits at the cost of house buyer. And this gamble has backfired gripping the whole sector, specifically Mumbai’s developers who are now running for cover.

                Land-locked Mumbai is the biggest and most attractive real estate market in terms of capital value due to land scarcity where an acre fetches over Rs 200 crore and a square foot of apartment space commands over Rs 1 lakh in the island city which thrives on robust economic activity and Bollywood dreams.

                If the sector goes down shortly, it would be the shortest-ever bull run as normally an uptrend continues for around five years before hitting a roadblock. In the immediate past the sector started catching up from 2002 to 2007, before undergoing slowdown till mid-2009 due to the impacts of global recession and economic downturn in India.

                Having being aided by a generous central government’s bailout package that forced banks to reschedule their loans, the developers bounced back from the end of 2009 jacking up prices in the name of market demand. With speculators entering the sector, property prices went up by over 60 per cent from the 2009 levels, making it difficult for the middle class to afford a house.

                According to Pankaj Kapoor, chief executive officer of Liases Foras, the builders have jacked up prices to benefit on the valuation game to rake in profits by listing their stocks from equity market and selling stakes in private equity deals.

                “For builders, house buyers have now no significance. Every builder is engaged in the valuation game and only artificially high prices can enhance the valuation,” Kapoor says.

                Real estate experts predict that prices would fall by 10 to 15 per cent in the near future but this is insufficient to lure house buyers.

                To put things in prospective a 550-sq-ft one-bedroom-hall-kitchen (1BHK) flat in Mumbai’s border areas costs not less than Rs 45 lakh and a similar flat in south Mumbai costs Rs 1.5 crore.

                In the central Mumbai area of Worli and Lower Parel a top-end apartment in one of the planned skyscrapers costs Rs 40 crore. In the 1980s this amount was sufficient to put up a factory providing employment to 300 people.

                The trend is certainly alarming. But developers can throw a surprise any moment. Their political partners can again bail them out. A lot is at stake.

By Jully Acharya from Mumbai

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