Can India go the China way in real estate?

As the Chinese meltdown progresses, it is getting clearer that at the heart of the matter is the Communist government’s intention of diverting public attention from the debacle in the real estate market. 

Before the equity boom, the Chinese government tried to fuel the property bubble but could not manage it and had to create another bubble to allow investors to recover money. This ultimately led to the equity bubble which has just burst. The real estate projects have turned into a dead investment and the properties now represent ghost cities. Check this photo gallery to get an idea of what a ghost town looks like

Some of the recent satellite cities in India have a similar look. It becomes eerie after sundown when these dark structures rise above the ground without a single light in them. Is the Indian real estate market in a similar kind of bubble as their Chinese counterparts?

Around 77,460 apartments worth Rs 3,044 crore remain unsold in Mumbai, Thane and Navi Mumbai alone. The total inventory will take 30 months to sell. A survey done by JLL found out that sluggish sale is probably because of most of the ready units, which account for only 3.35% or 2,600 units, are priced above Rs 1 crore. 

In the western suburbs of Mumbai between Vile Parle to Goregaon, there are 205 completed-yet-unsold units in the range of Rs 2 crore and above. Low-priced houses are in locations which are in faraway suburbs.

Despite the high level of inventories, sellers are not willing to bring down their rack rates. Buyers, meanwhile, are hoping for a price correction and are putting off their purchases. In a report on the real estate sector, Elara Capital has pointed out that volume at across cities at the pan-India level were muted in spite of the marginal price correction seen across certain pockets. The NCR market continues to remain under pressure, while the Mumbai market continues to see sales volumes only in select projects.

The numbers clearly reflect the huge mismatch between buyer and seller expectations. In Mumbai alone there are 5,311 unsold units which are priced above Rs 5 crore while 17,000 units priced between Rs 2-5 crore remain unsold.

One of the other reasons that these units have remained unsold is because investors are no longer present in the market. These properties are being bought by the final user who will be staying in the house. 

The differentiating factor between China and India real estate market is that in the case of the former the investor was left holding the baby while in India the builder is sitting on the unsold inventory.

In any other market if demand does not meet supply, prices come down. This is not the case in real estate market which is artificially propped up by builders. But deals are being struck at lower than market rates. Though market rates are ‘officially’ high, if a buyer sits with his cheque on the table a deal is struck at a decent discount.

It does not require an economist to tell you that for the sector to revive, prices have to come down. It is unlikely that buyers will get enough resources to buy houses at such high prices. The buyer always has the option of staying in a rental property. The seller will have to come down from his high pedestal to meet the buyer.

A case in the point of the builder coming down to meet the buyer is well demonstrated in the pre-launch offering process which was recently closed in Thane, near Mumbai. The rates were at a substantial discount to the market price and the issue received over 2,500 applications. Incidentally this is marginally higher than the 2,600 ready unsold flats in Mumbai proving the point for a right price there are buyers.

If builders are not going to bring down prices, perhaps the government will have to push them to do so by bringing in a regulator to control prices and curb wrongful practices. Unless this done, we should not be surprised to see Indian ghost towns like their China counterparts.

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