Realty Cycles

The law of gravity cannot be defied: what goes up must come down. The good news is real estate is as real as it gets. Bonds, stocks and equity are on paper or on an electronic interface. Property is seen and felt and is one of the most tangible assets ad amongst the last to fall in any financial turmoil situation.

The first financial crisis witnessed was in 1984. Almost all developers were affected and property prices came down and remained flat, projects got stalled and some prominent developers went bust. This phenomenon lasted till 1991-1992 when we saw first signs of liberal policy making by the government. Prices recovered quickly and by 1994 moved upwards at a non-stop pace and created peaks like never seen or heard before.

A seven year slowdown was forgotten by frenzy in buying, some if it being speculative and created lack of supply in almost all locations for almost four to five years. Early 1996 is when the second slowdown process began, which bottomed out around 2002-2003 and the turnaround for prices moving northwards only happened from 2005.

From early 2005 to March 2008 the market moreover, property buyers with their gains from stock market deals or business deals saw a turn around of actual buyers upgrading their lifestyles since similar properties to complement their needs were available. It was a new kind of frenzy. The speculative buyer turned more into a long term investor with a view to rent his/her property to generate rental income and enjoy capital appreciation. Hence, people were holding on to what they bought and not trading for short gains. Discounting the fact that some people have exited after short term gains but the driving force for this rise was based on genuine, actual buying and investment.

A slowdown witnessed in transaction numbers from late 2007 onwards and price correction was even. The financial worldwide crisis of the kind we are seeing now is perhaps something we have never dealt with and nor are we ready for it. But there might be light at the end of this dark tunnel. Property prices have already started correcting and have come to levels of almost 20 to 25% lesser than their demand (the price that ever was). It is predicted a correction of about total 40% (another 15 to 20% to go) to take place by June 2009, if not earlier.

So technically a fall has not happened yet, but in all probability it will. If a premium apartment at Santacruz managed to sell at Rs 22,000 per sq ft while the maximum market value should have been Rs 18,000 then a Rs 22,000 deal is not a benchmark. So correcting from 22,000 to 18,000 will be correction phase and going down from 18,000 to 16,000 will be a fall and 25% lesser than the last peak ‘Quote’ (not benchmark) of freak sales will put a NRI/PIO or international players or buyers in an advantageous position for various reasons. An international player investor, MNC is looking at India as a hub. Whether in SEZs for manufacturing warehousing or other business will gain an additional 15 to 20% with the rupee having taken a beating against the dollar, add to that almost averages 25% correction as on date gives them the edges of 45% gain.

The India story is still alive, but now is not story telling time. Believing in the India Story until six months ago about five to six real estate and infrastructure related fund managers from the world over consulted a consultant each month. Then the numbers almost dropped to one or two a month. The good news is that in one week alone recently two of the largest funds (yes. not all are dead) consulted an expert for investment options though their global opportunity fund vehicle. Furthermore, with most wells looking dried up, developers are now happy to work on realistic valuation, be it for joint venture structure or equity. All they needed was a jolt like this to come to their sense on valuations which were the biggest nightmare for any fund house or fund manager.

Locally too there are ‘real estate funds’ sitting on money looking for right opportunities and projects. A fund manager must deploy funds and invest in branches over the next three to four years and buy at every new low and make an average. Starting now would be a good time to look at opportunities with ‘Rated developers who are looking for fund assistance and come to their rescue when they need you. But today, cash/liquidity is king and the money cannot laze around idle either with the fund house or with the developer not deploying it to optimize its utility.

Advice to buyers (just when you missed the boat) is the price you are willing to buy the properly at, is the right price and is the right time. Make an offer and leave it for the seller to ponder on, as long as it a reasonable offer; you will find more often than not the seller will come around.