At a time when the demand for real estate across the globe is rising, the opposite seems to be happening here in India. After the peak in global realty transactions to the tune US$ 680 bn in 2007, volumes had declined sharply thereafter. However, they have slowly started to make comeback. The volume of transactions is expected to touch US$ 500 bn in 2013.
As for India, the trend seems to have reversed. A host of factors are the reasons for this. These include unaffordability, rising interest rates, low yields, sellers holding on to prices, and economic & political uncertainty.
As per Colin Dyer, President and Chief Executive Officer of global real estate services firm Jones Lang LaSalle Inc., who was recently interviewed by the Mint, institutions are not investing in India because of political, regulatory and taxation uncertainties. This happens at a time when investors in global markets have moved on from the Euro crisis and are spending on real estate. In short, confidence levels are moving up worldwide.
As for India, the current year has been slow in both aspects, commercial as well as retail properties. While demand has been there, it is the supply that has been increasing at a faster pace. Mr. Dyer stated that prices in the residential segments in all cities have moved higher than the peaks of 2008. This is the problem area as prices have increased at a faster pace as compared to the rise in salaries, eventually leading to unaffordable properties.
He also added that globally the investments back into real estate are occurring as the institutions are seeing attractive yields from real estate as compared to yields on other alternate asset classes.
What to make of all this?
Considering the higher risk appetites of investors at a time when the interest rates in developed markets are at their multiyear lows, coupled with increased liquidity, we only scratch our heads to guess whether these are genuine investments. While Mr. Dyer states that the demand-supply situation is neutral in the major cities across the world, we cannot rule out the possibility of an artificially driven real estate demand globally, especially given the circumstances.
As for India, we agree with Mr Dyer; especially the comment on residential markets. Real estate unaffordability is an aspect that has driven down sales especially in select market such as the Mumbai Metropolitan Region (MMR). In usual situations, builders would not be able to hold on to prices when their properties are not selling. And so for the need of money, they would have to compromise on margins, lower prices and thereby free up the amounts blocked in inventory. But with that not happening, it brings in the aspect of the nexus and connections. Nevertheless, in the long run the supply-demand factors are bound to dictate prices.
Hopes are pinned high on eradicating corruption with a new government coming in, which would eventually pull in institutional investors as transparency would be expected to increase. As put my Mr. Dyer, 'Transparency covers the visibility of prices and returns, regulatory framework, legal protection and corruption. If you look at these four parameters and break them apart, India has got some challenges.' We couldn't agree more, there is very much a need for better transparency.