The Real estate crash

Though the prices of onions and tomatoes have hit the roof, those of houses and flats have crumbled during the last couple of years. The market is so weak that many investors feel that they would get a better return if they put their money in a bank fixed deposit. Why this crash of property prices that threatens to wipe out the savings of the middle class? Rashmi Chugh investigates.

The ball glides smoothly on the bare polished granite floor of an apartment located in the heart of central Delhi. The apartment, renovated with the most exquisite crystal and ceramic fittings money can buy, has often reverberated with laughter and music at parties hosted by various tenants who have occupied it in the past. But it is virgin territory for indoor cricket, as the children of owner- cum -landlord Vikram Chopra practice to bowl in the flat which has stayed vacant for over an year now.

"This is the first time in the last six years since we constructed this apartment on the first floor of our ancestral house on Sir Gangaram Marg that tenants we are seeking have been hard to find. In spite of slashing the rental by 40 per cent, the profile we are looking for is just not interested", he Chopra rues.

The scenario is similar in posh commercial and residential localities across the capital and in other metros. Whether it is Mumbai, Chennai, Bangalore or Chandigarh, the pinch is being felt by owners and sellers alike. "The decline began around two years ago as India suffered the side- effects of the South East Asian economy collapse", says a manager at a well-known brokering house. "Real estate prices are down from Moscow to Hanoi. The slow down of the economy, continued pressure on the Indian currency, high interest rates, political instability, failure of government policies and housing development schemes, and a general downtrend in infrastructure growth have all had far-reaching repercussions on real estate value. Lack of institutional funding combined with an immature debt/securitisation market for real estate development projects has weakened the market further. Major projects are practically non-existent, especially in the north, and lead to a slack demand in residential and commercial space. Values, when compared to prices two years ago, have declined by at least 35 to 45 per cent.

Executives at Cushman and Wakefield agree. Arshpreet Chaudhry, in charge of corporate services, says, "India was part of the South Asian crisis. The economy never recovered and has been floundering since the blow dealt by the nukes and subsequent sanctions."

The demand has declined and no one knows this better than the international brokering real estate consultants who had set up offices in the country. The new entrants were largely driven by their clients to set up operations here as India is still perceived as a large market. It is another matter that the consultants are yet to see happy times.

Lack of demand from the NRI segment, which in 1995 accounted for nearly 40 per cent of the big deals, especially in places like Chandigarh, Ludhiana and the prime segment, combined with a diminished domestic demand has led to business doing badly. Corporate houses, which earlier fuelled the market, have not been purchasing new property though a lot of consolidation and relocation of offices has taken place, especially in the suburbs. The past three months have also seen an increase in the leasing and buying activity as people feel that the decline has hit rock bottom and this is the right time to buy. This sentiment is echoed by several independent real estate dealers who say that it would be unrealistic to expect more than a 5 per cent decline from the current low levels. However, the big timers in the market say that a further 15 per cent fall can be expected over the next six months in both capital values and rental terms. From Mumbai to Delhi and beyond, the markets are falling, say dealers. The supply has far outstripped the demand. In Bangalore, every second commercial building is lying vacant and state of the art buildings like the International Technology Park in Whitefield have an occupancy rate of only 40 per cent. In New Delhi, the relocation to suburbs has hit prime commercial places like Connaught Place and Nehru Place hard, whereas in Chandigarh where property is still picked up either by end-term users or isolated investors, transactions are at a virtual standstill. Very few deals in farmhouses and four kanal houses have taken place in the past one year, say brokers here. Big land deals were a preserve of the dollar-rich NRIs and for two years in a row the big buyers have stayed away, inspite of the fact that Chandigarh property has declined marginally due to the holding power of the original owners and also due to the limited options available here.

"Commercial property, too, has witnessed a lack of buyer interest though the fall has not been as drastic as in other metros", says Abhinav, who deals in showrooms along the prime Madhya Marg area. "Showrooms which fetched around Rs 3 crore a year ago still manage to rake in around Rs 2.8 crore," he says, though the terms are more flexible.

Several projects and housing development plans have been stalled as the demand is just not there to sustain the big builders. In the Capital as elsewhere, sub-urbanisation is in full swing. Places like Gurgaon, Noida and Faridabad in that order are witnessing the arrival of both multinational and Indian companies. In the last three months, ICI Dupont and SmithKline and Beecham have followed giants like Pepsi and Coke and set up their national offices in Gurgaon. Others have moved into the less preferred Noida. Noida, which is a second choice due to the perceived law and order problems of Uttar Pradesh, is seeing an expansion contrary to the common trend of big companies entering after the area has developed. Long after government agencies like the NTPC shifted their operations here, neon lights blazing logos of the HDFC, Nirulas, MacDonalds and Global Trust have erupted across the evening skies. This relocation and consolidation by companies which had their workplaces scattered all over Delhi have given some fluidity to the real estate market but it is still a far cry from the boom of late 1995 which was fuelled by NRI money, speculative investment and stock market winnings.

It was the time when multinationals had entered Indian markets and were looking for quality space and interiors then available only in a few buildings. Prices spiralled and new builders entered the market offering the ultimate in living and work style. Prior to 1996, prime buildings in Connaught Place would rent at Rs 225 per sq. feet, which in today’s market are available aplenty at Rs 110-115 per sq. feet. The sale price then often crossed Rs 21,000 per sq. feet, whereas today the same is available at Rs 13,000 per sq. feet in prime buildings like the Statesman House. In Mumbai, Nariman Point was the business destination where rates and rentals have fallen between 45 and 50 per cent. In Chennai, areas like Anna Salai road and Mount Road have seen a 30 to 35 per cent decline,while in Bangalore areas like MG Road and Richmond Road are down by 30 per cent. "Today the supply has outstripped the demand", says Amit Grover, and even prime areas like Vasant Vihar and Shantiniketan have been reeling from a 30 per cent crash in the last six months. In Vasant Vihar, some 45 apartments are open for negotiations. This in an area which is the first choice for the diplomat corps and where landlords have been known to have held an auction for renting out their houses.

"There are areas like Gurgaon where rentals and purchase price values of residential areas have declined only by about 20 per cent with commercial rental values holding out", says Amit Grover, who heads agency services at Cushman and Wakefield.

"The future, according to studies conducted by our company, will have rental values fall by 10 to 15 per cent, which by the year-end will be about 20 per cent lower than the rates which prevailed in December last year. However, prime office space is likely to recover slightly", he says.

Hope is, however, around the corner with the Ministry of Urban Development detailing a new policy. The expected policy has raised hopes of some amendments in the Urban Land Ceiling Act which will release upto 10,000 acres of land for development in the National Capital Region. The prices may decline when this happens but it will bring benefits only in the long run, feel brokers.

The major players in the real estate market so far have been developer-builders like the DLF, Unitech, Ansals, Malibu, Ardee etc., who began buying land on the outskirts at prices as low as Rs 1.5 lakh per acre in 1984. With the DLF having possession of over 2500 acres, the Ansals 2000 acres and Unitech around 700 acres of land, they developed and transformed the skyline of this area which was once the outpost of Delhi. The land, which was originally bought as agricultural land, was consolidated, developed and then changed to commercial and residential usage prior to colonisation. With peak rates touching Rs 24,000 per sq feet in 1996, the land still sells at prices between Rs 14,000 and Rs 15,000 per sq yard today in a plateaued out market. It is an indication of a severe slump that prominent developers have recently launched schemes in which a realistic reduction has been brought about in the cost of the land and apartments. They are now being offered for as low as Rs 5 lakh.

In the rest of the areas the small time builders dominate. Picking up old houses they strip them down and then proceed to build luxury multistorey apartments, handing over one floor to the original owner while pocketing the money from the sales of the rest. This segment too has been badly hit, with several small-timers offering flats at prices barely covering the cost of construction.

Today the depressed market still has some best buys to offer. In South Delhi, several distress sales are taking place, especially of apartments picked up by corporate houses for residential use. Flats, which were earlier priced at around Rs 60 lakh, are today available at around Rs 35 lakh. "In the commercial segment it is the rented properties which offer a combination of capital appreciation and a yield of around 13 per cent per annum in the form of rent given by the multinational already sitting there", says Amit.

For the corporate houses and companies, places like Gurgaon, Noida, and, closer to Chandigarh, Dera Bassi make sense. Picking up land and constructing your own office to suit one’s requirements is more practical and cost effective than renting. The price varies from Rs 20 lakh per acre average in Dera Bassi main road to Rs 1200 to Rs 1300 FSI (Floor Space Index) in Gurgaon. (The cost of land at several high value plots is now calculated on a slide scale basis of the extent of construction one is allowed).

"In the residential segment, the rates of middle and small- sized holdings, traditionally dominated by the middle class, have not seen much decline as the holding power in such properties is tremendous," says Arshpreet.