Any talk in Mumbai on real estate, these days, centres around a price correction, and, more importantly, why it is not happening, despite poor sales and falling property registration numbers.

In the past one year, many realty experts have been repeatedly stating that the only way for sales to improve is for prices to correct as end-user affordability was just not there. Now, there in a general consensus that it would be a long-drawn time correction.

A Prabhudas Lilladher report said sales registrations for October, 2011, were down 25 per cent, to 4633 year-on-year. In September, it was 22 per cent, down to 4137.

Liases Foras, a real estate research firm, states that the weighted average for a flat in the entire Mumbai metropolitan region is Rs 1 crore.

However, contrary to expectations, residential property prices have gone up. Mr Anil Kothuri, Chief Executive Officer, Edelweiss Housing Finance, said prices have risen 8 to 10 per cent between April and October this year.

PRIVATE EQUITY

However, the key appears to be private equity (PE) investment and small investor holdings that has not only facilitated developers holding their price line but also emboldening them to raise prices.

PE funds, in general, are large-ticket investments, and stay invested till completion of the project. Their expectations are for 30 per cent cash generation. On the other hand, investors provide small-ticket funds that come in, based on relationships and mutually-agreed terms.

Developers have learnt their lessons after the 2008 fall, said Mr Pankaj Kapoor, Managing Director, Liases Foras.

Today, the risk has shifted to private equity and investors. Most developers have little to lose, as land has been purchased and a major portion of the property completed and sold. There have been recent instances of PE exits, with half their principal amount and quite a few agreeing to a mere two per cent internal rate of return after six years. Overall, developers used the money to their advantage, and it is the bulk investor who is saddled with the stock. They want their margins, and hence are holding on. Whatever, marginal correction is seen is in projects where developers have committed to a payment schedule.

Real estate is a capital-driven market. The channels of foreign direct investments have only resulted in pumping in money and ensuring that the value of the land made the end-product disproportionately priced and unaffordable.

Hence, when interest rates go up, the general tendency would be for prices to drop. Post-2009, when home loan interest rates hovered around 8.5 per cent and continued to go up approximately 12 per cent recently, realty prices too rose and outpaced them. If the intention of foreign direct investment was to create affordable housing stock, it has instead made housing exorbitantly expensive, he said.

CREDIT SUISSE

A Credit Suisse report said that analysis of the base statistical return reports on mortgage of Scheduled Commercial Banks across key metros showed that the pace of account additions (proxy for real housing demand) indicated signs of moderation since 2007.

The outstanding housing loan accounts of the banks in Mumbai were 3,86,536 in 2007, and 3,79,097 in 2010. PSU banks account for 60 per cent share of mortgage as of 2010. However, Credit Suisse said it was also important to note that not all investor activity was speculative, and could be viewed as a sign of emergence of real estate as an asset class.

Mr Sunil Mantri, Chairman, Sunil Mantri Realty, said government agencies such as the high-rise committee, environment ministry and the Brihanmumbai Municipal Corporation need to be thanked for the enormous delays in according clearances. They had choked supplies and indirectly helped in keeping prices stable, as price is a factor of demand and supply. On investor activity, he said a developer's priority was to sell, and it would not make much of a difference who the buyer was.

However, issues arise when investors pick up a significant portion of a project, as it opens up the possibility of them competing with the developer in crisis time.

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