Mumbai real estate is like a super-expensive Maybach-what we need are Tata Nanos

01-Mercedes-Maybach-1180x686The Financial Express had a very interesting newsreport on the super-luxury real estate market in Mumbai, a couple of days back. As per this report around 5,000 upmarket flats in Mumbai that are built and ready to occupy, have not been able to find any buyers. 

And how much do these flats cost on an average? The Financial Express estimates that each of these flats costs at least Rs 10 crore. Hence, the total market value of these unsold flats is at least Rs 50,000 crore. That clearly is a lot of money. 

As the newspaper points out: “Sales are tepid in central Mumbai – Lower Parel, Mahalaxmi, Prabhadevi and Parel. In these areas, the apartment sizes are typically between 4,000 sq ft and 7,000 sq ft accommodating three, four and five bedrooms. At the very least, they cost Rs 10 crore or approximately Rs 25,000 to Rs 30,000 per sq ft.” Interestingly, anyone who has moved around in this area would know that there are many other properties still under-construction and will hit the market over the next few years. So, this oversupply is unlikely to go any time soon.

In fact, super-luxury is not the only segment where sales are slow. Liases Foras, a real estate rating and research firm, estimates that the Mumbai Metropolitan Region has 46 months of unsold inventory of flats currently. “Months inventory denotes the months required to clear the stock at the existing absorption pace. A healthy market maintains 8 to 12 months of inventory,” Liases Foras points out.

Further, the sales velocity or the ratio of monthly sales to total supply currently stands at 1.05% in Mumbai. Liases Foras considers a sales velocity of 2.75% optimum as it translates into a gestation period of 36 months. And despite the slow sales, launches of new home projects have remained on a firm footing in Mumbai. 

During the period January and March 2015, the Mumbai Metropolitan Region witnessed new launches of 18.16 million square feet. This amounted to the second highest new launches ever-the highest having been in April to June 2010. What is interesting is that the new launches form around 9.5% of the total unsold space of 192.27 million square feet. 

Within this total unsold space, the maximum is for flats which are priced at Rs 2 crore or more. 62.06 million square feet of home space remains unsold in this category. This is around 32.3% of the total unsold inventory of flats in Mumbai. 

The weighted average price of a flat in the Mumbai Metropolitan Region is around Rs 1.3 crore. Banks and home loan companies give a loan of 80% of the price of property. Hence, on a flat which is available for a price of Rs 1.3 crore, the bank would give a home loan of Rs 1.04 crore. The remaining Rs 26 lakh would have to be paid by the buyer. 

Further, the EMI on this loan at 10% interest and repayable over a period of 20 years, would amount to over Rs 1 lakh per month. Hence, in order to get this loan the buyer would need to have a monthly income of Rs 2.5-3 lakh per month. How many people have that kind of income? 

Hariprakash Pandey, senior vice-president, finance and investor relations, at Mumbai-based developer HDIL,recently told Business Standard that flat prices in Mumbai had gone beyond Rs 1.5-2 crore and this meant that homes were beyond the reach of the middle class. As he said: “If you take a loan of Rs 1.5 crore, you have to pay an EMI of Rs 1.5 lakh. For that you should have a monthly income of Rs 4-5 lakh.” 

This was a rare occasion of an individual who makes his money in the real estate industry admitting that there is a problem. The usual tendency till date has been to blame the slowdown in the real estate industry on high interest rates and the fact that the Reserve Bank of India was not doing enough to bring them down

This as I have often pointed out in the past is a very stupid argument. 

All these numbers have some lessons to offer. First and foremost is the fact that the Indian real estate is now way beyond the affordability levels of the rich as well and not just the salaried middle class, as Pandey of HDIL pointed out. 

The Indian real estate companies have stopped catering to demand. As Dhirendra Kumar rightly points out in a recent column: “It’s as if the car industry would try to sell nothing but large BMWs, Mercedes and Jaguars while most of the country yearned for cheaper cars.” 

I think I would go a step ahead and say that “it’s as if the car industry would try to sell nothing but Maybachs.” (Maybach is incidentally also made by Mercedes). 

The second learning here is that the real estate industry has been for long been catering to the real estate investor rather than the real estate buyer. But now this business model seems to be breaking down as well. Take the case of Mumbai-as pointed earlier, the city has 5,000 upscale flats with a price tag of greater than Rs 10 crore, which are lying unsold. And more such flats are still being made. 

Even in a city like Mumbai it would be difficult to find so many genuine buyers who would have the ability to cough up Rs 10 crore or more for a home to live in. And those who have that kind of ability, already have a home or two to live in. 

It now seems that the price is beyond what investors would like as well. Even with all the black money going around in the country, there is only so much of real estate that can be bought. Also, at a price of Rs 10 crore or more, what kind of returns can the investor really expect is a question worth asking? 

To conclude, it is worth pointing out a couple of numbers from the latest Maharashtra State Economic Survey. The per capita income in Mumbai in 2013-2014 was at around Rs 1.88 lakh. In Thane, it was Rs 1.73 lakh. And we are selling homes priced at greater than Rs 10 crore. Who is the joke on? And when will we get around to build and sell flats at prices at which there is real demand? 

Mumbai real estate is like a super-expensive Maybach-what we need are Tata Nanos. Or maybe even bicycles. 

(The column originally appeared on The Daily Reckoning on June 18, 2015)