I had earlier wondered if Mumbai real estate is in a bubble.Now, new signs are emerging that the market may be cracking.
Howard Marks of OakTree Capital in a masterpiece letter to his clients says that the downcycle of risk (or end of a bubble) begins when “Once the last potential buyer has bought, there’s nobody left to take the prices higher”
It appears we have reached that stage in Mumbai realty.Many realty companies in Mumbai (including listed ones) have started offering a buyback scheme.
The scheme works like this:
The builder has a rack rate of say 20000 Rs (USD 367) per square feet.Any retail investor/ordinary broker who approaches him is quoted this price.
But he offers a sweet deal to the High Networth Investor.
The builder sells the investor commercial/residential/retail space in his project of say 5000 sq feet @ 14000 Rs (USD 257) per square feet.This entails an investment of around 7 Crores Rs. (1.28 Million $)
After two years, the builder buys back the property from the investor at a higher price say 20000 Rs (USD 367) per square feet.The investor gets a cool 3 Crore Rs profit (550,000 USD) on his 7 Crore (1.28 Million $) investment.
Of course, I am oversimplifying things here by ignoring brokerage, legal,registration,stamp duty,society,maintenance and other charges.
But the drift is clear,the investor gets a damn good return for bailing out the developer.
But the question arises, why are builders resorting to buybacks (or IPOs) ?The answer is simple…the last potential buyer in Mumbai for 2.5 Cr+ (458,000 USD) properties has already bought.
So the rush for buybacks and IPOs.
There is one other factor-elections. 2014 will have both the Maharashtra assembly and general elections.Last time around, builders had to do a fire sale to clear inventory to raise money for their political patrons.They probably want to avoid a similar scenario this time around.I find it interesting that the buyback entails the builder buying back the property in 2015 i.e. when the elections are over.
So is the clock ticking for Mumbai realty?I think the party is over for now.