Resurgence (or not) Of Mumbai Real Estate Market
Mumbai's home buyers can expect, over the next decade, a smaller number of high quality developers, a more gradual increase in property prices, and a more consistent quality in product and buying process
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There is no doubt now that between 2016 and 2017, Mumbai's complex real estate landscape has undergone a metamorphosis. This transformation consists in large part of the consequences of close to a decade of unorganized growth, unsystematic business practices, the influx of a large number of low-quality 'developers' and the final tapering off of increase in real estate prices.
The key challenge in the industry, despite the desire of a lot of stakeholders to blame developers exclusively, is the broken nature of our permitting system. Myriad departments, opaque land laws, constantly changing regulations and dramatically increasing governmental premia have all led to a fundamentally unpredictable underlying business model for real estate development in Mumbai.
In such a context, with unpredictability (and therefore risk) being the chief hallmark of operations, capital providers (banks and NBFCs as well as investors / consumers) have no choice but to expect risk-adjusted returns in the high teens or early twenties. In a nutshell, only extremely expensive capital is available for deployment in Mumbai real estate for all asset classes except for OC-ready completed property (where operating risks have already been mitigated).
High cost capital means that developers have no option but to operate with even higher leverage ratios, which further adds financial risk to an already risky operating model. It is apparent to me that an inefficient bureaucracy, riddled with middlemen and agents, continue to make acquisition, permitting and physical construction of real estate in Mumbai a highly fraught process which only individuals with deep political / bureaucratic connections can successfully navigate in a timely fashion.
In this context, it is worth mentioning that RERA has not impacted the underlying operational context of real estate at all. Instead, they have simply focused on ensuring that developers are prevented from making unscrupulous decisions in relation to customers during the pendency of projects.
From the perspective of Tier-1 developers therefore, RERA simply gives additional legal teeth to practices that they would have eschewed in any case. However, RERA does have a psychological / perception based impact on the Mumbai market, since the slow pace of sales velocity in Mumbai has seen a slight improvement since the introduction of RERA due to general consumer confidence increasing.
Going forward, Mumbai's real estate market is going to be driven by three factors - one, the overall massive imbalance between supply and demand, where despite current apparent unsold inventory, the underlying truth is that there are far more individuals and families in Mumbai who need proper housing than there is housing stock; two, the fact of increased transparency through RERA making apple-to-apple comparisons and performance evaluation easier, the process of buying real estate in Mumbai for the average consumer will become smoother, more consistent and more easily predictable; three, the nature of capital that developers attract will need to change, with more long-term, patient capital being the need of the hour, and less intensive debt-instruments with onerous servicing obligations.
Mumbai's home buyers can expect, over the next decade, a smaller number of high quality developers, a more gradual increase in property prices, and a more consistent quality in product and buying process. For the industry itself, unfortunately things are more bleak - prices are not expected to rise anytime soon, interest rates will begin to rise again over the next three quarters, the cost of capital has hardly come down, and the underlying government-related approvals chaos continues to persist. As costs rise, prices remain stagnant and unpredictability continues, developers are seeing significant margin contraction even if and when sales velocity is healthy, and this spells continued stress for all but the most well-capitalized players.
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