Reality check

Escalating real estate prices in Mumbai have made housing almost unaffordable for practically all sections other than the affluent.

IN November 2007, a four-bedroom apartment in NCPA Building at Nariman Point in south Mumbai sold for the gravity-defying price of Rs.34 crore to a United Kingdom-based non-resident Indian. It cost Rs.97,842 a square foot, perhaps the largest ever residential property sale on record in the country.

A week later, the city recorded the biggest ever commercial land deal. The Wadhwa Group bought a plot of less than two acres (1 acre is 0.4 hectare) at Bandra-Kurla Complex in suburban Mumbai for a record-breaking Rs.821 crore.

Towards the end of 2007, particularly after these staggering sales, there was talk of Mumbais unreal realty market seeing a correction. These sales were freak cases, said most people in the industry. There had to be some checks on the skyrocketing prices. Yet, almost six months later, and in spite of a dip in the stock market, prices continue on an upward course. Housing in the island city has never before been so expensive. It has become virtually unattainable for all other than the very wealthy.

The unreal rates are not restricted to purchases. The citys landlords are now demanding astronomical prices for rentals. While multinationals or rich Indian companies are able to fork out vast amounts to house their executives, people with smaller budgets find it increasingly difficult to find a home. Many have shifted out towards the northern suburbs and commute at least an hour each way every day.

I came to Mumbai from Bangalore a year ago to work in an ad agency. Apart from the prohibitive rental rates, my company does not take out company leases and that makes it doubly hard to find a house in south Mumbai. All the landlords want leases with MNCs or banks or big Indian companies, said Sunil Rao. I finally found a two-room apartment for Rs.20,000 in Andheri. It takes me an hour and a half by train each way. If we work late, I have to take a cab, which costs around Rs.500. For this price, said Rao, he could have rented a three-room flat in Bangalore and perhaps lived reasonably close to his workplace.

A recent study by the rating agency Crisil found that in the past four years Mumbai saw a nearly fourfold jump in residential real estate prices in certain areas. The residential real estate price increases in Mumbai have been of the order of 50 per cent and 300 per cent over the last three years, varying areawise, the report says.

The report also points out that most of the available housing is targeted towards higher-income households, rendering it largely unaffordable for 56 per cent of the population of the city, with an annual household income below Rs.2 lakh. Though most households in this category aspire to buy a house, residential real estate for this category is largely unavailable. Only 3 per cent of the total households have annual incomes above 20 lakh.

Owners have become greedy, said a housing loan banker. Just when a deal has been agreed on, at the eleventh hour the owner would raise the price by no less than Rs.50 lakh or Rs.1 crore. Apart from being unethical, such actions shatter the buyer, who by this stage would have already spent a fair amount on legal and bank fees. In one instance, a seller got an offer at Rs.21,000 a square foot but was not prepared to talk unless a rate of Rs.21,500 was offered. Its plain greed that makes people haggle over Rs.500 when they are getting several crores. Its a ridiculous sellers market, the banker said.

Money from abroad, increased disposable income, huge upgrades in salaries over the past few years, a bullish stock market, companies shifting to cost-to-company structures in salaries and a continuous flow of immigrants have contributed to the upward trend in commercial and residential real estate prices, said Pankaj Jaju, an analyst with Enam Securities Private Limited.

Mumbai has emerged as the most resilient real estate market with most developers holding or increasing prices steadily, said Jaju. His colleague Neelabh Sanyal, an analyst of the industry, agreed. They expected Mumbais commercial real estate to be more resilient than the residential, though it would be difficult to predict a correction soon.

With several mill properties in Central Mumbai up for sale, it was expected that the increased supply of land would balance the demand. But Jaju and Sanyal pointed out that this would have a limited impact on prices. There are visible supply schemes such as affordable housing in the suburban centres, slum rehabilitation schemes and the redevelopment of nearly 19,000 dilapidated buildings in the island city. Additionally, the repeal of the Urban Land Ceiling Regulation Act will free up land that will be used for mid-lower income housing. Yet, this supply is expected to come in only after three to five years and so will have no immediate effect, analysts say.

Floor space index (FSI) is another area of contention. Developers believe that if the government increases it in the island city, the supply may increase as taller buildings would be allowed to come up. But the authorities, instead, compensates this loss by giving transfer of development rights (TDR) to developers in the northern suburbs. This means that those developers who have taken on the responsibility of redeveloping a slum in the city will be allowed to have large-scale developments on lands bought in the north. Some of these lands are sold at subsidised prices.

Activists, urban planners and even some real estate professionals have been appealing to the State government to amend or introduce laws to improve the housing situation. The government has made a few attempts by drafting a housing policy which, however, is yet to be implemented. One of the recommendations is to sell property on the basis of carpet area and not super built-up area, which is the current norm.

One of the oddities in Mumbais real estate market is that a large portion of south Mumbai is actually owned by the Collectors office. This includes land on which there are buildings as well. If a residential sale takes place, the Collector has to be paid Rs.500 a square foot. For commercial sale the rate is Rs.1,500 and for industrial sale it is Rs.1,000. This year the Collectors office earned Rs.50 crore in sale and transfer fees Rs.8 crore from the NCPA sale itself.

Recently, in an effort to control expenses on property purchase, the State government said it would abolish these fees. While the news cheered buyers, Collector I.A. Kundan says it is unfortunate as these fees benefit the Collectors office. Besides, the land legally belongs to the Collectors office, so it is only right that a fee is paid if a sale takes place.

Mumbais real estate issues are exclusive to the city, said Kundan. The fact is there is very little land. The city has developed on a very narrow strip of land. Unless the spread takes place further north, the city will not decongest. And until infrastructure is better in the suburbs or northern areas, there is no attraction to live there. This part of Mumbai will always remain expensive because of the demand on housing.

The problem is no one wants to leave this pocket [south Mumbai]. It is hardly 20 kilometres in length. And the Bandra-Juhu belt, also very sought after, is only about 10 km, said Usha Thakkar, a real estate broker. Infrastructure is not the same there, that is why people do not want to move out. Also, if they do something about the central business districts (CBDs) and have companies move, that might motivate people to settle in those areas so that they can reduce commuting.

Each area has a distinct culture, and people used to living in the southern areas of the city do not want to buy property in the suburbs. Areas such as Matunga, Dadar or Parel are clearly dominated by one or two communities, though, said Thakkar, this is changing, particularly after the mill properties were sold.

The construction of plush residential towers and commercial complexes in Parel, an area once dominated by textile mills and possessing a distinct blue-collar culture, is now emerging as an upscale upper-middle-class neighbourhood, complete with big brand stores and fancy cars.

Thakkar said that the large-scale construction in the Parel belt was unlikely to affect Mumbais property prices. Prices have only gone up. A flat selling for Rs.7,000 per sq ft in 2005 is now going for close to Rs.22,000 in 2008. As soon as a project is announced, there are enquiries from prospective buyers.

She recalled how in 1998-99 prices were going through the roof and nobody thought they would come down. But they crashed. We may not see a crash, but prices have to steady eventually. The dynamics are different now. With 100 per cent foreign direct investment allowed in India in real estate, the sector is now being eyed as an investment opportunity, so prices will remain in the upper brackets, she said.

Several private equity funds and investment banks have already begun investing in this sector. According to a leading bank, Indias real estate sector is slated to grow to $40-50 billion in the next five years. The Federation of Indian Chambers of Commerce and Industry (FICCI) predicts that Indian real estate is poised to emerge as one of the most preferred investment destinations for global realty and investment firms in the next few years.

Mumbai is among the top 10 cities in the world when it comes to costly real estate. London and Tokyo vie for the top position. As an island city it has only that much land for development and, therefore, historically has always been expensive in terms of real estate.

Official estimates peg the population of Mumbai at 13 million. Unofficial sources say it is more likely to be 18 million. Demographics in Mumbai are constantly changing, but it can be said without doubt that a large chunk of the population would fall into the lower- and middle-income segments.

It is unfortunate that in these home loan friendly times, very few can actually afford a home in this city, which, ironically has plenty of opportunities for Indians in every category from the rural poor to the corporate affluent.