Category: Realty

I had blogger earlier about Mumbai’s realty (see here and here).

It appears that now the bubble has finally burst.First, check out the tweet below by noted crusader Y.P. Singh:

A builder having criminal cases and politician money, refused to return money to politicians till cases sorted out and more investment made.

— Y.P. Singh (@yogeshpsingh) January 27, 2013

I think the key phrase is “more investment made”. Mumbai builders are struggling to raise money.The normal source of funds (aka customer advances) is not available as people are now not interested in buying at nose bleed valuations.To give an example of how absurd Mumbai valuations are, just look at this example:

In a premium realty project, a 4BHK purchaser has to take 4 parking lots compulsorily.Each lot costs 10 Lakh Rupees.So he is shelling out 40 Lakhs just for parking !!

Right now, there is a huge glut of inventory and half completed projects.A serious buyer armed with a cheque book can easily get upto 25% off from the rack price.

Investors are besieged with offers of buyback deals.One recent deal in Dahisar (E) goes like this:buy at 5000 psf and sell back to the builder at 6250 psf within a year.Before you get too excited, remember registration,stamp duty,vat,service tax, brokerage etc will eat up a chunk of your gains !And there is no guarantee the builder will actually honor the buyback !

Commercial space is another area where the inventory glut is noticeable.The most happening commercial area in Mumbai is BKC-where NSE,ICICI Bank etc are located.There are entire buildings there lying unoccupied.Tenants are bargaining hard and landlords are caving in to their demands.

Most realty observers felt that there would be a time correction but not a price correction in Mumbai i.e. prices will remain stagnant for a long period of time.But the current situation indicates that a price correction is truly underway.

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.