Is it right time to buy property in Mumbai?

Jun 11, 2010

In this issue:
» Soros warns of the possibility of another recession
» Indian employers top list of hirers
» On time arrival of monsoons brings relief
» Is the new public shareholding rule executable?
» ...and more!

------------------------------------------ Equitymaster Webinar ------------------------------------------
Thank you for making the latest edition of the Equitymaster Webinar - "Global fears, India cheers?" a huge success! We would like to hear from you on how we can make this initiative more useful for you. Do share your feedback and suggestions with us.
Just in case you missed the Webinar, here are two excerpts from the same -
1. The Sensex could be heading to 31,000
2. Views on Real estate and gold
We look forward to bringing you many more Webinars in future and your active participation in them.

"Koi boond boond ko tarse, lekin sagar par jal barse," goes an old inspirational song. A situation like this seems to be cropping up in India's realty sector. Here, while middle class buyers find it difficult to get a hold on good affordable housing, the rich are facing a plenty of sorts. Take for instance the Mumbai luxury housing market.

Property experts are now talking about an oversupply of premium houses looming large on the island city's skyline. As per some estimates given in today's Business Standard, around 7,000 new luxury apartments are expected to be available in the city within a year. And these houses are priced at over Rs 47 m each! So, while someone is talking about building the largest luxury housing society in the city, there is another who is talking about the tallest!

In such a scenario, what's the way forward for the middle class guys looking to buy their first property in the metropolis? Is it the right time to buy a property in Mumbai?

Well, if one were to go by the views of Ajit Dayal, Director of Quantum Mutual Fund and founder of Equitymaster, "...if you have to live in Mumbai, then the answer is that there is no right time, because it is very difficult to forecast Mumbai property prices, because Mumbai is an island and within the island there are enough things happening that take property out of the ambit of most people who can't afford them. So, if you have to be in Mumbai and you want to own a property, it's never too early, it's never too late. You can't take it as an investment, it's a necessity."

 Chart of the day
The latest quarterly survey from Manpower, a global employment-services company, shows that as far as the employment outlook goes, India tops the world charts. At least relative to the rest of the world, employers in India seem to be quite a bullish lot. This is also a reflection perhaps of the growth prospects that the companies in the country see. After all, companies will only look to hire if the anticipate a higher growth in business going forward.

Data source: The Economist

There are a lot of good, structural reforms currently underway in the Indian capital markets. A case in point being the amendment in the minimum free float rule. The Government wants all the listed companies to have a minimum free float of at least 25%. In other words, the maximum that a promoter can hold in the company is 75%. This is indeed a step in the right direction. Deep and non-manipulable markets do call for diversified and large public shareholdings. But there is one big problem. An article in FT points out that at current valuations, investors may have to shell out in the region of US$ 50 bn to bring public shareholding in all listed companies to 25%.

It should be noted that the most Indian companies managed to raise in a given year so far was US$ 18 bn. Thus, even at this rate, it will take three years for all the companies to comply with the new rule. Furthermore, this fund raising will most likely crowd out companies seeking to raise capital for genuine investments like a new plant or a new project. Clearly, the Government does have a lot of soul searching to do on this.

There are a lot of prophesies circulating about the Chinese bubble popping. But so far, there are no signs of a slowdown in the dragon nation's single biggest driver - exports. As per a leading business daily, China's exports surged 48.5% YoY in May, which is the fastest pace in recent times. Some experts are shocked that Chinese exports are growing even while Europe is gripped by a sovereign debt crisis. Interestingly, more Chinese exports could worsen global balances even further. There is anecdotal evidence that cost-conscious consumers are switching to China. Some others point out that the growth is driven by a surge in steel, copper and zinc exports.

In our view, sooner or later, Chinese exports will feel the pinch of weak economic conditions in both its key markets - Europe and the US. Then there is the controversy over the valuation of Renminbi, wage hikes and labour unrest. Clearly, China's status of the world's factory is not as sure a thing as it once was.

A successful recovery from the financial crisis of 2008-09 is what stock prices seem to be factoring in. But the so called recovery may just have been an interval, and Act-II may still be left. At least if one goes by the opinion of ace investor George Soros. He is recently reported to have said that we have just entered Act-II of the crisis as Europe's fiscal woes worsen. His ominous assertion does not end there. Soros believes that the collapse of the financial system is a real possibility. And the crisis is far from over. That is because governments are under immense pressure to curb budget deficits at a time when the economic recovery is weak. This has the potential to push the global economy right back into recession. With the level of uncertainty prevailing currently, and the complexity of the problems involved, this is surely a possibility that cannot be ruled out.

Inflation has been the key low scorer for the incumbent UPA government. The RBI too has been trying its best to tackle it with little success. Food inflation has been hovering in double digits for quite a while now. But atleast now there is a flicker of hope. Almost in line with the Met department's predictions, the monsoons have checked in early this season. The rainfall predictions were 'normal' for last year as well. But they were proven wrong when India was hit with one of the worst droughts since 1972. The farmers and the government can ill afford yet another year of low rains. A good harvest is necessary to keep prices in check and sustain economic growth.

Normal monsoon would also encourage the government to allow export of foodgrains. The wheat and rice exports, which were banned in recent years because of tight supplies, could be resumed. It is also expected to lower food prices and make it easier for the government to ease controls on fuel prices. We sincerely hope the Met department gets it right this time!

Stockmarkets around the world are enthused about some positive data that has emerged during the week. The buoyancy in the Asian economies in particular is what seems to have made investors upbeat. For instance, the Japanese economy did better than expected and grew 5% in the first quarter of 2010. Exports from China surged in May. Further, there was an upward revision to the growth estimates of Europe for 2010. Despite the ongoing debt crisis in the region, the European Central Bank has revised the estimate from 0.8% to 1% for 2010. More importantly, the central bank also issued a statement saying that austerity plans adopted by several debt-laden euro zone nations were not likely to thwart growth. While growth in Asia is likely to remain buoyant, how the scenario in Europe plays out remains to be seen.

Meanwhile, the benchmark indices shed a significant portion of the gains recorded during the first half of the day in the afternoon session. The BSE-Sensex was trading higher by around 95 points at the time of writing this. Heavyweights like Reliance, HDFC and ICICI Bank were seen driving a major portion of the gains. All the other indices from Asia showed strong positive intent today while a majority of European markets opened in the green as well.

 Today's investing mantra
"Investment ideas, like women, are often more exciting than punctual." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Is it right time to buy property in Mumbai?". Click here!

2 Responses to "Is it right time to buy property in Mumbai?"


Jun 12, 2010

Am surprised at Ajit's comments on property - primarily because the view seems to be philosophical with defeatist undertones in nature. Ajit / your websites earlier views on property have been rational and structured - i.e. if the property market were left to market forces without intervention of the government through lending by PSUs to builders, the market would find a right price balance.

The views now seem to indicate that our socio-political environment is now so brazen that even a veneer of accountability does not exist.

What this means is that the builder lobby will be bailed out by the government every time it is in need with the publics money and hence prices will rarely be sane / sensible in this space.

Let me know what Ajit's thoughts are.


Dr P Mulay

Jun 12, 2010

why do you guys keep praising warren buffet? He is everything that a good honest man should not be.

Read this for confirmation;

got to marketoracle dot com and check out Article20124.html

Warren Buffet is rich billionaire and only he can make money through his contacts.

Equitymaster requests your view! Post a comment on "Is it right time to buy property in Mumbai?". Click here!