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An unreal scenario - Views on News from Equitymaster
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  • Oct 20, 1996

    An unreal scenario

    Property prices in Bombay may soon face the same fate of Dalal Street. True, there has already been a correction in property prices from the highs of 1995 but, baby, you ain't seen nothin'yet! Although rates in Nariman Point have performed as poorly as an investment in many of the blue-chip shares ( a loss of 40 per cent from their peaks), property prices have done much better than most B-group shares which have lost anywhere between 75 per cent and 90 per cent in value. So what's keeping this collapse in the inflated property market from taking place?

    The government and a lack of will. As long as the nexus between the builders, the bureaucrats, and the politicians is not broken, real estate in Bombay will continue to remain at abnormally high rates. Estimates suggest that over 30 per cent of Nariman Point real estae is held by the government or by quasi-government institutions. Assuming that an average building has 12 floors of 10,000 square feet per floor and that there are 30 buildings in Nariman Point, a few punches on the calculator suggests that the overall availability of office space in Nariman Point is 36 lakh sq.ft. Government ownership of 30 per cent of that and with a wastage factor of 50 per cent (on the assumption that many jobs could be relocated from South Bombay to northern areas), suggests that there could be 540,000 sq ft of office space available for sale in Nariman Point. At Rs.20,000 per sq ft that works out to an outstanding Rs.1,080 crore. But such a large offering would bring prices down immediately ( as any share broker trying to push BPCL shares will tell you) probably to a level of Rs.10,000 per sq ft still giving the government Rs.540 crore and kill this property bubble once and for all.

    The parallels between the property markets and Dalal Street are amazing. Just as Indian companies were busy using the assistance and money of the likes of UTI to prop up their share prices, the property builders (or should that be destroyers) were busy using the 37(I) and government ownership to keep a continuously rising floor on prices. Systematic acquisitions by the Income-Tax department between 1994 and 1995 kept this illusion of ever-rising prices and gave the property business windfall profits. Now, newspaper reports suggest that the Income-Tax department is holding over 100 properties in inventory - all of which were acquired at peak prices - and wondering what to do. Sounds similar to this placement deal that Reliance had with UTI, doesn't it?

    And consider all those projects that were offered in the suburbs based on the boom in Nariman Point. Their fall is probably a bit like B1 group shares. Basically, as the secondary market boomed (like in Dalal Street), the primary market (like Dalal Street, again) took off and these new projects (fancifully titled as gardens, hills, resorts) were offered at prices derived from the unrealistically high prevailing prices in the secondary market. And that secondary market price was maintained by a government institution using your money and my money.

    But there is one big difference between the property market and the share bazaar. And that is a desire to change. While the share market has gone out of its way to be more transparent (inspired a bit by the onslaught of foreigners), the property market continues to be, well, shady. And while the government has adopted a no-nonsense attitude of "we don't care about Dalal Street," there is only election-time noises of bringing property prices down to affordable levels.

    Witness finance minister chidambaran's reported reaction to the fall in share prices after his budget. He pretty much told the bourses: "Do what you want to, I don't care; Dalal Street is not India and India is not Dalal Street." Have you heard any such statement from any minister (Central or state) about property prices? Imagine what would happen if a senior person was to announce: It is the aim of this government to bring property prices down by selling properties we own in south Bombay and relocating to the suburbs - closer to people's homes - so that they save commuting time. The reaction will be similar to what happens in the stockmarket each time an SBI, BPCL, or VSNL announces or even thinks of doing a share issue: prices will fall.

    Even today a 2,000 sq ft apartment in Bombay costs over Rs3 crore: you can buy a house in many civilised parts of the US for less than Rs.50 lakh. Keep the balance US$ 700,000 in bank deposits and earn 6 per cent interest in US dollars and like, in a fairy tale, you live happily ever after. A mis-statement in the press suggested that the finance minister was speeding up full convertibility on the capital account. Well, he denied it the next day but, if he was, there would be a queue of sellers of property in Bombay and the government, as usual, would be left holding worthless property in south Bombay and still making lakhs of people suffer every day a torturous commute to work.

    But typical to form, the nexus is still trying to battle this natural fall in property prices to battle this natural fall in property prices and is now talking of spending Rs.16,000 crore on building a subway system to connect VT with Churchgage and Nariman Point. Guess who's money they plan to use? And guess who has to endure a longer commute? Oh, well, its time to call my share broker: at least he has the right attitude and is learning from his mistakes!



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