The real state of real estate

30 JULY 2009

There is no doubt that there is a huge demand for all kinds of real estate in India.
Unlike the situation in the developed countries like USA or UK, most people in India still need to buy their first home - their primary residence.
And, for many that do own their first home, there is a huge desire to buy a larger or better home.

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And what passes off for office buildings is mostly concrete junk. Office buildings lack the simple facilities like wide staircases, parking spaces, and breathing areas.

There is little safety or comfort in residential or commercial buildings.
And, yet, the price of real estate in India is way above what most people can afford.

As Table 1 indicates a typical very decent quality building should cost anywhere between Rs 1,000 per square foot and Rs 1,500 per square foot to construct.
A very well-fitted building with high quality tiles or average quality of marble flooring may cost Rs 1,500 per square foot to construct. A more modest building may cost Rs 1,000 per square foot to construct.

Table 1: Typical cost of construction for a residential or commercial building
  Quantity needed per square foot Cost per square foot (Rs)
Steel 8 kilos 320
Cement 35 kilos 150
Labour   250
Other costs   280 to 780
Total materials   1,000 to 1,500

Then why do we pay Rs 5,000 per square foot for buying property in places like Bangalore, Gurgaon, Pune, or Thane? These are all circular cities with abundant land supplies around them. Every time land "runs out" the city can grow outward and create new city "centres" - like a ring of concentric circles.

South Bombay (like the Manhattan area in the southern end of New York City) is a problem because you cannot really create any new land - though it can be reclaimed from the sea. But the rest of India does not have the geography of south Bombay.

So why is constructed real estate so expensive in many parts of India?
Primarily, because of the cost of land.

Shortage of zoned land
Not that land is in short supply.
As Sam Zell, one of the most brilliant real estate investors of our times, explained to me on a trip to India a few years ago: There is no shortage of land, there is a shortage of zoned land.

Dwell on this statement.

For it is the foundation of a corrupt system which forces the price of developed real estate in most parts of India to be sold to users at prices which are a lot more than what the land is really worth.
Or, rather, what the price of the developed real estate could be worth if the conversion process of land into zoned, usable land was "freely" allowed.

I recognise that land can never be "freely" converted.

There will - and should - always be zoning rules and regulations to ensure that there is supporting infrastructure for all the newly constructed projects that come to fruition. If there are hundreds of acres of development in Powai or Pune or Gurgaon, those areas should have sufficient roads, buses, power, water, schools, colleges, and hospitals to support the human activity around that new development.

But, as buyers of property in these newly developed areas will vouch for, the price they paid for their island of prosperity does not give them access to any necessities. In fact, the few skeletal infrastructure facilities that these projects come with are greeted with sheer joy and ecstasy by the duped buyers.

Land is not expensive in most parts of India.
The powerful and well connected buy land for maybe between Rs 20 per square foot to Rs 200 per square foot from ignorant farmers.
Then they use their political connections (of course, many times the land grabber is a politician!) to convert what was classified as agricultural land into zoned, "sale-able" land.
Some municipalities have development charges (which can be Rs 500 per square foot) for the amenities that they are supposed to provide. Much of that money, needless to say, does not find its way into the purpose it was raised for.

Table 2: The abnormal, super-profits of a residential property in the rising cities
  Rs per sq ft
Cost of construction 1,500
Land cost 200
Land development cost 500
Total cost of project 2,200
Selling price to buyer 5,000
Profit before financing costs 2,800

Developers can also "creep" their way into low priced land banks.
They do this by first buying lands where there is a development charge and then buying the neighbouring lands - just outside the area in which they have these developing charges. In the example in Table 2, they would save Rs 500 per square foot and also get the land a bit cheaper. But their selling price would change by maybe Rs 250 per square foot. This ensures that the developer's average cost of land declines and profits surge. The buyer, on the other hand, ends up paying a high price and gets the same pathetic infrastructure.

Falling over their own greed?
We have no doubt that there is a huge demand for real estate in India.
But my negative view on real estate is based on one known fact: there is a significant amount of corruption in the land acquisition process.
Left to a more "free" market and an improved zoning process, the cost of real estate would decline.

And, unless the governments want to deal with a national Naxalite problem, they would deliver on:

  1. providing housing at lower prices,
  2. providing the infrastructure around it,
  3. controlling the amount of profits that real estate companies make from "arranged" deals of zoning land.
Not that it will happen in a hurry.
Prime Minister Manmohan Singh has shown no courage so far in rooting out the corrupt - or corruption - from his government.
Armed with a wax smile and a mild manner, he is still busy building macro economic policies when the detail is in the micro-corruption.

But greed has played an important role in holding real estate prices down for the past 12 months.
Driven by their own frenzy to get rich quick, the real estate developers have started to build too much property.
The projects under construction are probably 5x what the actual demand will be at the price points being currently quoted.
Drop the price by 20%, and the demand could jump by 100%: still leaving an oversupply of 2.5x.
But drop the price by 40%, and probably every square foot available will be sold out.

The "problem", though, is that all the developers will be bust.

A game of chess
So, rather than let this happen (as suggested in a previous Honest Truth), the government arranged for the Indian banks to bail out many of these debt-laden developers. The arrangement must have been like what transpires when two friendly brothers meet over the dining table.

The surge in the Indian stock markets gave the developers a further respite: some of them were able to sell their overpriced shares and pay off some of their debt.
But they are still leveraged.
And they are still playing "survivor": they are hoping that you will read the trash in the media that makes it sound like real estate is in short supply. It is not.
The ability of the developer to wait out the slow down and tolerate lower volumes at lower prices is in short supply.
This is a game of chess. Of patience.
There is a limit to what banks can lend to the real estate sector.
There is a limit to what people will tolerate.
There is no limit to the attractiveness of the disenchanted towards a Naxalite kind of movement.
Or a genuine uprising.

Companies and businesses built on government favours can disappear pretty quickly.
Companies with no public sympathy can disappear pretty quickly when the monopoly over zoned land is challenged.
And if you happen to be around as a shareholder, remember it took Satyam a few minutes to lose -70% of its value.
If you are an investor in the real estate stocks dancing to this music, stay close to the door.

If you are looking to buy real estate - start asking your local politicians what they are doing about giving you quality houses at prices you can afford.
A flood of letters will not be ignored.
Any break in support from politicians, will cause a collapse in many real estate markets.

Never underestimate the power of the written question.
Or the politicians' desire to stay around for the next elections.
But never estimate the power of corruption to keep you from owning your own home.

It is, indeed, a game of chess.

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Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years
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Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited. To write to Ajit, please click here.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Savings Fund Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF, 10% in Q ESG and 75% in QEFOF 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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28 Responses to "The real state of real estate"

pratul haria

Jul 31, 2014

The problem starts with land titles. it is so complicated and filled with so many loopholes that a common man is reluctant to buy raw land and construct his own house.we need to demat land records and deeds as in stocks. this will bring about the following benefits.
1)all disputes related to land payments, titles, etc will be cleared. a person buys land ,deposits the complete money in a nominated bank in a fixed time frame and it will automatically get converted in his name after the requisite govt taxes,duties etc are paid.
2) there will be no black or white component . land investments account for ninety percent of black money in will be a major step to curb black money circulation.
(3)lesser the disputes, it will deload the number of legal cases pending in india.3 crore pending court cases in india of which 50%are property related.
(4)demat system will exactly give us the information of all categories of land agricultural, na forest etc.
(5) govt can moniter the land holding pattern and restrict land hoarding big companies, builders, politicians, beaurocrats etc.
these are only a few benefits which i have enumerated but its effects will be far reaching and lead india to a goal of developed nation. house is a basic need of every human bieng. india is a huge country with no shortage of land. only what we lack is a will to change and bring in more transparency in the system.thanks for your reading. god bless.

Like (12)


Oct 6, 2009

the Developers have taken huge advances and instead of building buildings have invested them in more cheap land, for which they now cannot pay. their balls are in a twist and should you want to buy property wait out, they will come to you with great offers.

Please do spread the written question to hasten the process

PS- the only ones who can wait out are the Psydeu NRI meaning those who stashed their blac money abroad and have now got it back because Indian economy promises the best (I say Poetic justice )

Like (12)

Anurag Jain

Oct 2, 2009

I don't agree with you on the point that real estate prices will come down over a couple of years even if there is more land available in indian cities.

Like (13)


Sep 30, 2009


you are absolutely right, however most of the software companies work at approx 30% margins, but un-real estate companies want a minimum of 100-*200% profit.

Housing is a basic need, software is NOT
Cost of software and services have come down over the years, but housing prices keep jumping every year, month or even days. Read the greed of builders.

Out of all the comments out here, almost 99% would agree with the article, you have stood out. Maybe you are from the builder fraternity and hence you find it unjustifiable, but land prices increasing artificially is that justifiable?

The costing which Ajit has given is spot on. You will have to agree to it. But can you justify the prices of apartments. Does a builder hike employee salaries every day , NO. Does a builder hike land prices arbitrarily without any rhyme or reason, YES.

You are talking about unskilled workers getting employed an all, how much do you pay them buddy. Not more than 100-150 Rs a DAY. You were comparing with the software industry, companies spend a LOT on wages to their employees. A unskilled labor is at builders mercy and gets exploited everyday.

I could write on and on but I need to stop here, bottomline builders need to straighten up and start accepting realistic margins.

Like (13)

Kanu K Warriar

Sep 30, 2009

Wonderfull article giving perspective on an issue that affects billions.

Along with issues of corruption & greed which is actually part of all industries in varying degrees,changes suggested by you will bring in a sea of change.

Measures like making more zoned land available, single window clearance for approvals, drastic reduction of approval time, drastic reduction of registration cost, improving credit flow to the industry would help competing forces play on prices.

As you have suggested a regulator in place will surely help in streamlining activities, hopefully, it will also diseminate information as is available in countries like U.S. on the industry like monthly sales by region and price et cetera. Only independent information will enable buyers to decide better based on rental yeilds or other parameters that matter to them most.

Thank You Ajit for voicing a topic that concerns many !!!

Like (13)


Sep 29, 2009


Nice to see that it is so easy to get the break up of construction cost and so profitable to be a dveloper.

However have you ever bothered to get cost break up of a software developed by TCS/INfosys/Wipro/Microfost etc......

Has anybody bothered to measured the return on investment there?? Is there any issue on profit ,margins there???

You can keep feeling proud of having produced NANO but how much have TATA's invested in it. Is this project not being funded by honest ordinary Indian tax payer???

Why profits of real estate hurt and hurt always??

is it not good to have capital appreciation?

Is every stock market bull run is secular and based on fundamentals?

The manner in which the industry is painetd by so called intellectuals it hurts.

This is the only indutry which gives employment to unskilled labour.

Can you prodeuctively employ even 1 unskilled person in your company and create work for him???? The answer is no.

The simplicity with which the statistics are being presented are superficial.

Request you to show some respect to the industry.


Like (13)

krishnan bs

Aug 29, 2009

Please refer to the website of Lafarge cement where all the relevant information for building your home is given for people who are interested. (I am not able to post the Link here, sorry)

The cost varies from Rs. 450 to 1000/- depending on the quality of construction.

What building your home would cost you in year 2008?

Type of finish
Cost per square feet

Superior finish Rs 650 to Rs 1000 High quality flooring, electrical and sanitary fittings, paints, timber, kitchenware etc.
Medium finish Rs 450 to Rs 650 Medium quality flooring, electrical and sanitary fittings, paints, timber etc.
Basic finish Rs 350 to Rs 450 Ordinary quality of finishes such as a neat cement finish

Like (12)

Nitesh Sanghi

Aug 17, 2009

First of all many sincere regards to Mr Dayal. This is really a very paining issue of all middle class families contributing majority of population.

But further to it, I would like to ask Mr. Dayal what he predicts or expect in coming 10 months from now. Do really the real estate prices are going to calm and has government shown any signs of imposing the price justifation to builders. Further have they do any further step to stop Super Built up concept.

I strongly propose that there should be some act enacted for Real Estate friendly to customers.

Like (12)


Aug 16, 2009

This is indeed the real state of real estate in india. A middle class person has to pay high land costs, high stamp duty, faces delays in possession of property, gets shoddy infra. on top of it he takes a loan which he repays over 15-20 years. Those benefitted are builders, bureaucrats, politicans, exchequer and banks.

Like (14)


Aug 13, 2009

Good article. But, alongwith unrealistic high price, builders are charging Super-Built up % in tune of 30 - 40 % now. So, this should be addressed by Mr.Ajit Dayal. This is menace and it ought be curbed.

Like (12)
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