The Realty Bubble - Fact or Fiction

Since 2002, we have seen a bull run. A similar trend was seen in 1992. From the year 2002, this is the 5th bullish year. In 2001, if we would have talked of such rates, people might have laughed. But now we have seen such prices in reality.

We shall try to look at all the factors, which have contributed to such tremendous growth

* Demand for residential property is still prevalent in India and it will remain the same even for the next decade. So, there is no real problem with demand.

* Bank's credit policy is still investor friendly, the interest rates have gone a little northward. Like ICICI currently raised the interest rates by 0.1 per cent. So, housing finance is not as favorable a factor now as it used to be.

* IT & ITES industry is still booming and with the last quarter results we can see no problem with IT & ITES industry in the coming years. In fact, IT companies are making huge investments in their infrastructure and that is good for real estate industry. The industry is moving towards owning the office space rather than leasing them.* Big cities have reached their saturation. We can see state government developing the smaller towns like Karnataka, Hubli and Mysore as next IT hubs.

* All the other sectors are still doing well but price increase in cement and steel with very limited supply is a worry for the real estate market. * Increase in first time home buyers and decrease in the average age to buy the first home has bought more residential demand.* Changing lifestyle and the raising standard to living has provided condominium living a preferred choice, which has given a boom to the realty investment.

CASE STUDY: Market Trends- Delhi NCR Real Estate Market

* Commercial and residential real estate market

Commercial Real Estate Market

With NCR becoming a preferred destination for MNCs for their requirement of Office spaces, the demand for Commercial Real Estate is escalating every quarter. Statistics reveal the positive growths of the demand in the commercial real estate office. Hence, this has attracted the attentions of the all major developers. They are coming up with commercial complexes to cope up with the ever increasing demand for offices spaces in NCR.
Delhi National Capital Region in India has seen commercial Grade A space absorption increase by 42% in the first seven months of the year Close to 5.1 million sq ft. Gurgaon, in the first six months of the year, accounted for about 63% of the total absorption of commercial space with a total of 3.2 million sq ft. Rentals for legal commercial properties in New Delhi and its suburbs have risen following the drive by the Delhi Municipal Corporation to seal illegal constructions and is list is unending.
The real estate industry analysis for NCR especially by Cushman & Wakefield and other sources show that 75% of commercial space taken in Gurgaon in the past 2 years have been by IT and ITES companies. Analysis clearly shows that IT and ITES companies are the major drivers of commercial upsurge in the region. This can be further substantiated by the report in ' The Economic Times' dated 04 Dec 06.

Residential Real Estate Market

NCR Real estate markets are one of the most high activity markets in India and has seen highest ever capital values. The residential investment market for the first time in the last two years has seen reasonable growths. Thus the residential markets are going to sustain in future and demand is going to rise. Tier II cities including Jaipur, Kochi, Pune, Nagpur, and Chandigarh have become the most promising investment destination as well.
The commercial markets are showing a great upsurge and the residential are stable for the last 4 months or so. I recommend a commercial proposition for a short to mid term duration which would further put back pressure on residential front in the NCR Realty markets. So for a long term proposition both commercial and residential would give a similar kind of return and hence both throw an equal opportunity for reasonable growths over a period of time.

* Primary and secondary market

Primary Market

The trend of short term traders booking profits within a span of 4-6 months has weakened considerably. This has been replaced by more informed and healthy transactions led primarily by investors who are seeking long term positions or end users.

Secondary Market

Resale market has been adversely hit in Delhi with major areas showing no growth or decelerating growth figuring it out to approx 10% as against 40% last time Suburban Gurgaon has shown a 30% growth in residential capital values this quarter. Due to high prices resale deals have come down by 30%.Though this trend has not had any significant impact on prices yet, it may have implications in the long run. The major reason for this drop in property sale transactions is because of the initial investors ¡X those who booked apartments by paying 10 to 15% of the total cost. They comprise, in most cases, cash-rich financiers, who make up 30 to 50% investor in any real estate project.

Rentals

Have risen marginally varying from by 20-25 per cent depending on region to region.