R Jagannathan in an interesting article in FirstPost makes a case that “Mumbai property is a sell rather than a buy”
After making his case, he ends with a disclaimer:
Disclosure: I am currently acting contrary to my views above for personal reasons. I am in the market right now for a small property since I plan to live in it after about a year
Sirjee, if your own actions are contrary to your own views, aren’t you being a hypocrite by telling your readers to act on your views?
But I digress.Let’s look at why R Jagannathan thinks Mumbai realty is a sell:
1.Very few transactions are happening at these price levels
2.Rental yields are absurdly low…investors can get better returns from savings deposits
3.Gap between affordability, investor returns and quoted prices will ultimately have to be closed.Property prices will have to crash by a third to a half to make that happen.
While R Jagannathan has his facts right,his conclusions are incorrect.His own biases makes him such a poor realty investor as written in this earlier piece:
I remember I had bought a home in Thane (a satellite city of Mumbai) in 1997, and for the next few years not only did the price not rise, it actually fell 20 percent. It was only after six to eight years that the price stabilised and started rising consistently. Now, despite what builders tell us, prices are again levelling off. If I had bought my small flat just for appreciation, I would have lost money in the initial years. Even a bank fixed deposit would have doubled my money in those six to eight years.
What R Jagannathan does not get about Mumbai realty is the motivations and incentives of the people who are involved in it.Lets consider each one of the stakeholder involved:
1.Builder:Wants to get the building developed fast.Sells flats in pre-launch phase to financiers/investors to garner funds quickly for building the project.Once 40% of the project is sold, his holding power increases tremendously and he can wait for years to get his price.
2.Financier-Lends money to builder.Takes flats as collateral.Interested in return of capital and quick project completion
3.Investor-Does not lend money.Buys flats in pre-launch phase at a discount.In this phase, many times the approvals are not obtained from the concerned authorities.He sells immediately after project completion.Builders want their relationship with such investors to be good…so the builder always tries to ensure that the investor in pre-launch phase is rewarded in the form of higher prices for his trust/loyalty to the builder.
4.End User-Intends to use the flat for self use or rentals.Time horizon to hold the flat is similar to that of gold.Many plan to live in the flats till alive.Often, wives/children will not allow to sell flat even if a good offer comes.
Also, Indians understand instinctively that real assets will increase with time due to persistent inflation. In all metros,cost of land,approvals,speed money charges,cement,steel,interiors,labour,capital etc have increased exponentially.
It is inconceivable that a project built 5 years from now in any metro can be built at a cost cheaper than current levels.
Now lets look afresh at R Jagannathan’s arguments why Mumbai realty is a sell:
1.Very few transactions are happening at these price levels
The market will find its own equilibrium.Does not mean that a crash is imminent or is inevitable
2.Rental yields are absurdly low…investors can get better returns from savings deposits
Dividend yields for blue chip stocks are around 1% .Does that make them a sell?
3.Gap between affordability, investor returns and quoted prices will ultimately have to be closed.Property prices will have to crash by a third to a half to make that happen.
Has already happened for commercial realty which has different supply-demand dynamics.No chance of such huge corrections for residential realty owing to tremendous latent demand
Now my humble submission to R Jagannathan is this:
If you still had your Thane flat now, it would have given you better returns than fixed deposits and equities.And you wouldn’t be looking for a roof over your head at this age.
4 replies on “Why R Jagannathan is completely wrong about Mumbai realty”
Lets look at your own arguments:
1. The market will find its own equilibrium.Does not mean that a crash is imminent or is inevitable. [So then how does market find an equilibrium. If prices are unaffordable then its logical to expect that they will have to come down to find equilibrium]
2. Dividend yields for blue chip stocks are around 1% .Does that make them a sell? [Does not make them a buy either.]
3. Has already happened for commercial realty which has different supply-demand dynamics.No chance of such huge corrections for residential realty owing to tremendous latent demand. [How long can there be a divergent trend between commercial and residential. Ppl are not so secure about their jobs and salaries and will not make large commitments especially ones which they cant afford]
Lets see volume of transactions returning and then we can talk.
Hi Anish,
1.Markets can find equilibrium even with time…heard of a time correction where prices remain stagnant for long periods
2.Err…have you heard of something called “hold”
3.Divergent trends between commercial/residential is very common.For e.g,Nariman point commerical is in doldrums but NCPA which is a stone’s throw away is at all high time highs.
Raoji,
Pointers on the clarifications:
1.Markets can find equilibrium even with time…heard of a time correction where prices remain stagnant for long periods
—-> That is still a correction…. heard of a concept called cost of capital
2.Err…have you heard of something called “hold”
—–> Buy, Hold or Sell depends on the perspective..so blanket statements do not make much sense…….but why do u compare real-estate with stocks …are they asset classes with similar underlying characteristics in your view??
3.Divergent trends between commercial/residential is very common.For e.g,Nariman point commerical is in doldrums but NCPA which is a stone’s throw away is at all high time highs.
–> Agree . Exceptions like the one sighted is possible
1.The point here is that for mkts to find equilibrium it is not necessary for prices to come down.Sure there is a cost of capital involved but the sticker price remains unchanged
2.For many people,cash flows from realty are not the primary objective of owning it.Hence the comparison with blue chips,gold etc whose yields are negligible/nil
3.In a recent interview Deepak Parekh,Chairman of HDFC was asked:Coming to real estate, are you seeing a bubble there?
He answered:”I don’t see a bubble. All real estate prices have come down significantly—commercial, office space, SEZ (special economic zone), IT space, retail and shopping malls, but not residential. The residential prices have not moved up; the prices are tending to go softer. “