| Over the last three-four years, real estate prices, both housing and commercial, have gone up all over the country. To be sure, this rise had been preceded by a few years of relative stagnancy, but the central bank is also concerned about the issue and has taken various regulatory and monetary measures. |
| Equity prices of companies in the real estate business had earlier gone to sky-high levels, but many of these have since dropped by up to 50-60 per cent. Is this an indication that the market is cooling down? For, make no mistake, share markets are often the first to react to the possibility of bad times in business. (When I was on the board and rating committee of CRISIL, we often found that the share market often "downgraded" a company, before our own rating actions. The situation is not much different even in the United States ""a couple of years back, Moody's acquired a firm specialising in predicting rating downgrades on the basis of equity market prices!) |
| To come back to real estate prices, clearly, in places like Mumbai, they are absurdly high "" and may well threaten our comparative advantage in services. Some time back, in an article written after a visit to Thailand, I had speculated about how the Thai tailor can stitch a suit at a cheaper price than the Mumbai tailor, even while enjoying a higher standard of living. My analysis was that this could well be because of the difference in real estate prices "" after all you need a place to do tailoring business from! Bangalore's rise as the IT capital was helped by more reasonable real estate prices as compared to say Mumbai's. Now, as HDFC Chairman Deepak Parekh who knows more about the subject than practically anybody else, said in a recent interview, urban commercial real estate prices are becoming fast unaffordable even to the best brands "" in other words, the real estate cost will eat up the competitive advantages of organised retailing. And, to my mind, organised retailing has a major role to play in paying better prices to farmers, reducing agriculture produce waste, and giving cheaper prices to the urban consumer. Clearly, real estate prices do need to come down "" it is absurd that one of the poorest countries in the world should have some of the costliest real estate. As far as Mumbai is concerned, the solution lies much more on the supply side "" principally, in amending/scrapping the Urban Land Ceiling Act, which the state government is stubbornly delaying, despite pressure from the central government. Almost two years back, it was announced that this would be done in "one month"; the latest statement is that this would happen within the next twelve months. Clearly, there are very major vested interests (the netas? the babus? the builders?) in perpetuation of the Act. |
| The other side of the real estate market is the huge amount of foreign money that has already come in, and is waiting to come, subject to some regulatory issues. The reason does not seem to be merely expectation of further sharp increases in real estate prices "" but real estate, like commodities, has become a part of the alternative investment market globally. Even conservative investors like pension funds and university endowments are investing in real estate, commodities, hedge funds and private equity. As for the regulatory side, presently foreign direct investment in real estate development is freely permitted subject to the development project satisfying conditions prescribed in Press Note 2 of 2005. (Incidentally, press notes as the definitive, quasi-legal regulatory prescriptions, seem to be a peculiarly Indian innovation.) Regulatory questions arise when FIIs, who are portfolio investors, are given preferential allotments at the pre-IPO stage. In principle, portfolio investment has to be done at market prices, that is in quoted companies. Pre-IPO, there is no "market" price for the share "" therefore, the RBI insists on treating such investments as FDI and, hence, subject to the prescribed conditions in Press Note 2. There are also some indications that the convertible bond route is being used to get around regulatory restrictions. |
| But this apart, given the importance of real estate, both housing and commercial, to the country's development and growth, I find the recent change in ownership of development companies very welcome. For too long, the "competitive advantage" of many developers/builders came out of their familiarity with the political/administrative setup involved in issuance of building permits, and the skill and resources they brought to get these. With an increasing number of real estate companies getting listed in India and abroad, and the number of institutional investors coming in, surely governance practices will have to change dramatically, and this will be all to the good. Perhaps many real estate tycoons are realising that there is far bigger money to be made by increasing valuations on the stock market through proper governance and disclosed profitability of operations than they could ever have made in unaccounted money so closely associated with the real estate market. |
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