Steady Growth - 30th Dec, 2006. Times Property (Times of India)

The market will remain stable in the new year, and overheated locations will see a plateau on the graph, says Chetan Narain.

The inspiration for this write-up on the year end comes from the astrologers who are often asked at the end of the year to predict the future of the next year (2007 and beyond). I thought I would make a similar attempt in predicting the future of our property market in Mumbai with the help of leading and renowned developer `Vikas Oberoi'.

I asked `Vikas Oberoi' what is his take on the future on property prices and market and this is what he had to say: "With buyers getting more and more conscious of quality construction and amenities we are seeing supply of high quality homes, office and retail spaces being built to cater to their respective needs. At the same time buyers are willing to pay a premium for such quality property, which sets it apart from the regular."

He quickly adds: "The land supply is slow and rare to come in today's scenario. Approvals from the authorities are extremely slow and few such factors delay project time lines and planning, due to which in certain locations you see a crunch of availability."

With regard to the future he says, "I think there is a great demand for high quality properties and prices are looking firm and I expect a steady growth. Also, with the economy looking up, non-stop flow of MNCs into the country and income levels rising there is almost a constant demand which is our driving force to deliver high quality properties, which the people of our city and country deserve."

My take on Vikas Oberoi's comments: I am in total agreement with what he says about highend properties. People are very conscious of quality and are willing to pay. It is almost as if we were deprived of such properties before. Luxury homes or office and retail buildings are there in every city across the globe but our definition of "luxury and lifestyle" was limited to what we were offered as ready products.

Developers like Oberois and few others have redefined "Luxury and Lifestyle" and such finished products have been gracefully accepted and absorbed by the market. For example, in almost all his residential developments the penthouses have a private pool on the terrace. In one such project at Lokhandwala Complex the duplex penthouse measures 12,000 sq.ft., where the terraces are approximately 5000 sq.ft. While to some it may seem as waste of space or money, to the discerning few who are looking for similar "lifestyle" it is a dream come true to find a home like that in Mumbai.

With regard to growth and prediction on which way are the prices going, I am not too sure further "Growth" would apply to all locations. I strongly feel that overheated locations like Cuffe Parade, Malabar Hill or properties (read: Buildings like Maker Towers or NCPA etc.) will see a plateau on the graph soon. The seller's expectation keeps going up and the buyer's capacity to buy keeps reducing. The reason is simple; "Resistance." Resistance to what you will ask? To illogical expectation based on one-off high value sales. Whichever market you observe, wherever there is resistance, the prices start to flatten out. But with regard to Mumbai this may apply to only the overheated locations as mentioned above.

For the rest of the locations there is a lot left to cheer and rejoice depending on which side of the fence you are sitting on (read: buyer or seller). In various locations from Worli to Kandivali (east and west), no matter how much supply comes in, the appetite to absorb any amount of area in both residential and commercial is huge. These locations look promising in terms of "steady growth". In central and eastern suburbs locations like Vikhroli, Ghatkopar and Mulund seem promising too. They are getting support through infrastructure of road and metro connectivity and prices will remain steady and will grow gradually for sure.

In conclusion, the market will remain steady and stable. Once, the existing supply or the supply in the making is exhausted we will see another spurt in prices in select locations. There is no fall or drop expected. But folks who are quoting ridiculous prices farfar away from the reality have no reason to cheer. You will have to correct your prices. The rental market will see serious revision in prices and move up keeping in sync with capital values. Although no logic or formula applies to rental yields as there is a major resistance at higher levels in all segments due to budget restrictions or limitations from tenant side. A classic example would be Maker Towers and other premium properties in South Mumbai, Bandra and Juhu where the prices have soared in capital value but the rentals are still where they were. The new agreements or renewals we will see a spurt of upto 25% .

For illustration: A 2100 sq.ft. fully furnished four bedroom apartment with sea view in Maker Tower 'A' at Cuffe Parade has been given on rent two years ago on a three year leave and license basis. The value of the apartment then was approximately six crores and effective rent achieved was 2.25 lakhs before tax. The rental yield is approximately 4.5%. Today the price of the same apartment is between 10 and 11 crores bringing down the return to 2 odd percent. The revision on rental properties is overdue and is next on the charts. Rejoice landlords and watch out tenants.