Pia Heikkila, The National
Mumbai, April 15, 2012
An average apartment, basic amenities and interiors in need of modernisation, is for rent in Worli Seaface in Mumbai.
"The apartment is suitable for a family or company executives," reads the property agent’s blurb.
Monthly rent? A mere US$17,000 (Dh62,442).
It’s even worse for those Mumbaikars daring to dream of buying their very own home. According to various agents, anyone with a budget of less than half a million dollars for a small one/two-bedroom apartment will be priced out of south, central and west Mumbai all together.
That seems quite lot in a city that can’t even offer clean water for most of its residents, proper roads or parks suitable for children.
It seems every inch of this island city has a high price tag. Recently there were reports of 10 square metre slum shacks being sold for $40,000.
It’s a city with a property bubble about to burst.
"Although some level of correction did take place during the slowdown, market activity over the last year and a half and reports indicate that prices have once again escalated to their peaks, keeping most projects out of the customers’ reach," says Sachin Sandhir, the managing director of the Royal Institution of Chartered Surveyors (RICS) South Asia.
"There is now a high inventory of unsold flats in the city, the reason clearly being over-pricing. Since most larger developers have considerable holding capacity, they have remained unyielding on their asking rates and now seem to have overplayed their hand," says Om Ahuja, the chief executive of residential services at Jones Lang LaSalle India.
The situation is so bad it has created a standoff between developers and potential buyers, with each party waiting for the other to blink first.
"Developers are offering discounts on the bargaining table, but remain firm on their officially quoted rates since lowering them would signal to the market that the long-awaited correction has finally arrived. However, we are seeing some relenting from investors who are saddled with non-moving properties and are desperate to cash out," says Mr Ahuja.
Market watchers say investors seem to be prepared to take a short-term hit.
"Sentiment has been impacted due to inflationary pressures and rising interest rates, which are only now starting to come down marginally," says Mr Sandhir.
"Slower GDP growth rate projections; shortage to the tune of 85 per cent in property and construction professionals available today, as highlighted by a recent RICS research and high debt burden of property developers have also impacted investor confidence in the sector."
Elsewhere in the country, while prices are nowhere near Mumbai’s level even in the capital Delhi, potential home buyers are – it seems – staying at home.
"Overall, with interest rates rising and the cost of home loans becoming dearer, coupled with continued price escalations, oversupply has set into the residential market in areas such as Delhi and National Capital Region. While markets in the south look to be relatively stable," says Mr Sandhir.
So how did Mumbai become one of the world’s most expensive cities?
It has been bursting at the seams for years. The surface area of Mumbai and its suburbs is almost 500 sq kilometres, but only 90 sq km of it is usable, the rest consisting of forest, government-owned land, salt caverns or other unusable land, according to the property research firm Liases Foras.
It’s not a lot of usable space for a city of nearly 21 million people.
Mumbai is India’s densest populated city with 27,000 people per square kilometre, and the brokerage Anand Rathi Research says the city will need an additional 30 sq km of residential developments by 2021.
Every week thousands of people move to the city, in search of a better life. Mumbai is the country’s financial capital and therefore has the highest job generation, which is why demand – even for properties that would be perceived as irrationally priced in other cities – is more or less a given.
"In metro cities, there is a significant and ongoing growth of immigrant population as the metropolises remain economic magnets," says Devangshu Dutta, the chief executive of Third Eyesight, a consultancy in Mumbai.
"However, the supply scarcity is also partially artificial, some due to government policies on land-use and some due to the major markets being led by investor-held properties."
The Mumbai market has attracted a fair number of players and risk takers too.
"Developers are willing to pay the steep prices of plots or redevelopment rights in Mumbai because they expect correspondingly high profit margins. Because of the high profit margins, Mumbai also has traditionally had a disproportionate amount of speculative property investment," says Mr Ahuja.
"There are a number of individual investors who have a capacity to hold a property empty for long periods if they don’t get the benchmark rates for lease or sale. This is demonstrated by the thousands of apartments and commercial office spaces that are empty because the asking rates are far in excess of what seems affordable to an actual user," says Mr Dutta.
Then there is the problem with lack of land, an issue in most Indian cities but particularly felt in Mumbai, which is surrounded by the sea.
"In Mumbai, land for new projects is scarce and what is available is priced extremely high. This exerts constant upward pressure on the prices of residential units in most central and suburban locations," says Mr Ahuja.
The Indian government must act before it’s too late.
"Government should facilitate land supply, offer better enforcement and stricter monitoring mechanisms, establish targets and lay down action plans, build capacity of town planners and other skilled property professionals, streamline approval processes for housing projects, among others, all of which would help contain costs, thus relieving some pressure on developer margins for affordable housing," says Mr Sandhir.
The experts say buyers should be given help.
"Research must be undertaken to assess a prospective homeowners’ requirements, not only as a factor of size and cost, but also as factors of accessibility and connectivity to basic amenities," says Mr Sandhir.
"Thus ‘affordability’ which is a relative term with different connotations for different individuals, needs to be assessed at a much broader scale."
(This article appeared in The National on April 15, 2012.)