Maybe, this should have been the very first topic I should have addressed on this blog. Better late than never. Over the last 6 months, the media has written a lot about the high RE prices across major metros in India. Infact, there have been several people in the media and industry who have described the Indian RE market as a bubble. I will try and examine this assertion through this writing. I will focus on the NCR for the purposes of this blog.
There may be some truth to the assertion that the NCR RE market is overpriced. However, it would be unfair to characterize the entire market (which is infact a summation of several micro markets) with one broad brush. Having said that, I guess the question I may have raised in your mind is -which micro markets in the NCR are overpriced? This is a difficult question to answer but I will try and attempt it. I am going to begin by examining some micro markets:
1. Apartments in Delhi suburbs (Noida and Gurgaon in particular) where the aptts. are priced over Rs.5500 psf, are still under construction and more than 12 months from handing over possession, I feel, are overpriced eg. Unitech Grande (Noida), Jaypee Greens (Noida), Karma Lakelands (Gurgaon), Magnolias (Gurgaon), Palm Springs (Gurgaon). Use this criteria to determine if the project of your interest is priced right.
2. As I have already indicated in one of my earlier blogs, I believe, there is limited absorption capacity for aptts. which are larger than average (see my first blog). Ofcourse, there is room for a few such projects but I feel the current supply far exceeds demand. Aptts. where the TCO (total cost of ownership) is more than Rs.1.50 crores (in Delhi suburbs such as Noida and Gurgaon) will have limited absorption capacity. TCO for an aptt. can go up either because of high PSF rate or because the apartment size is too large -eg. 4000, 5000 and even 10,000 sq ft apartments !!
3. It may come as a surprise to some of you reading this blog, but I feel that the Delhi market, in most parts, is not overpriced. However, I feel aptt. sizes will need to get smaller to maintain affordability in Delhi. With increasing nuclearisation of families, I feel, there is a demand for studio, 1BR and 2BR aptts. This, however, is not happening as of now. If this doesn't happen, the TCO will have a negative bearing on demand for large aptts eg. a 2000 sq ft 3BR in Vasant Vihat can cost you Rs.5 cr ($1.25 Mi)! As an investor, it is important to "emotionally disassociate" yourself from the buying decision. Just because you can afford to buy a Rs.5 cr aptt. does not suddenly mean that the markets buying power as a whole has moved up. In other words, resist the temptation of extrapolating your riches to that of the market!
In summary, I feel, NCR prices have risen very fast over the last 4 years and that is what gives the impression of an all around bubble. However, if one looks closely, there are enough affordable investment opportunities still available (Gurgaon, Faridabad and even Delhi-read my previous blogs). I feel the pent up demand (built up over several decades!) has been met in the short term through the significant supply that has been created. From here onwards, the price rise will be more orderly and much in line with other economic indicators such as GDP growth rates and inflation. In addition, developers need to address the need for smaller, functional apartments at high end addresses (if you find one at the right price.....just grab it!).
In my next blog, I will write about how new supply in Delhi (is there land still available in Delhi !?!) will impact the RE map of the city.
Later,
Ashish
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6 comments:
Hi Ashish, Great blog, very informative and helpful.
I wanted to get your thoughts on something. I'm in the middle of making an investment decision for purchase of a property in Gurgaon. After reading your most recent blog, a red flag went up in my head considering my aptt. is costing me Rs.2.10 cr for a 4BR. Do you think it is overpriced?
Thank you.
Ajay
Hi Ajay,
I'm glad you enjoyed reading the blog. To address your question, I would like to make a distinction between purchase for "self use" v/s purchase for "investment". I'm not sure how you would define your purchase criteria. Having said that, this is how I would approach the analysis:
Self use: If the aptt. is for self use, your decision should not be governed ONLY by price. Your decision will be influenced by other things that are imortant to you such as the neighborhood, size of aptt., amenities, etc. Therefore, if an aptt. is for Rs.2.10 cr because it is bigger than normal size or if the building is significantly superior to others in the neighborhood (and these criteria are important for you) I would go for it. The Rs.1.50 cr benchmark I provided is to be used as a guide and should not be considered sacrosanct for all decisions.
For investment: If you are purchasing the aptt. for investment, the Rs.1.50 cr benchmark becomes more relevant. My point was that aptts. which are priced under Rs.1.50 cr (in todays prices) have a better chance of appreciation compared with those that are priced higher. Having said that, please be careful that the psf rates are competitive and you don't end up paying Rs.1.5 cr for a 1500 sq ft aptt !
Hope that helps.
Ashish
Ashish
Excellent analysis...do you have any project recommendations in the Gurgaon area
-Saurabh
Saurabh, I'm glad you liked the analysis. Let me try and answer your question.
In the current scenario, I would recommend projects on Sohna Road in Gurgaon. Further, my recommendation would be influenced by whether you want to buy the aptt. for self use or as an investment. As an investment, I prefer average sized aptts (see my very first blog). However, for self use, the decision influencers can be quite different and you may prefer buying a bigger than average aptt.
If you are not in a hurry to get possession, try to buy an aptt. whose possession time is as far out as possible-eg. Vatika City on Sohna Road you can get aptts. ranging between Rs.2900-Rs.3500 depending on time to possession. I would buy the cheapest one (but farthest to possession) since in 18 months prices on all aptts. will converge with, maybe, 5% differential.
Hope this helps.
Later,
Ashish
Ashish,
I think your analysis is flawed and it seems you are clueless of what you are talking. If you have a degree in finance, please return it back to your institution.
How can you say prices in Delhi are ok but not in Gurgaon? You are right when you say Gurgaon is overpriced but Delhi is too.
Just tell me how much would a 2 crore house/flat rent for in Delhi? It'll clear your supply demand fundamentals.
Secondly don't fool people by saying there is no land in Delhi and people will be priced out forever. Read what happened in Japan in 1980s. That bubble is still deflating even after 20 years.
You are entitled to your opinion just as you are to your degree in finance.
I have tried to give a logical explanation as to why I feel Delhi is not overpriced. I wonder if you will be resting your argument on logic or fear mongering? Since you are asking me how much an apt worth Rs.2 cr would rent in Delhi it appears you are not from Delhi. I am. I have a substantial personal portfolio of properties and I'll be happy to share details of rental yields with you. However, I request you to use age old techniques such as logic and intelligence to base your arguments rather than the Japanese bubble of 80's.
More later,
Ashish
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