‘Developers will stop building for investors’

Patrick Ramsay, head of residential division at Knight Frank, one of the world’s largest real estate consultancies, was in Mumbai recently, looking at prime properties across the city. London-based Ramsay and Anand Narayanan, director-residential at Knight Frank India, talk about the realty market in India and abroad. Excerpts:

What’s happening across the world? How does the Indian market compare with its peers?
Across the world, most markets are starting to stabilise and show signs of recovery. So there are small price movements, of around 1-2%, upwards in quite a lot of markets. Some parts of America are still having a difficult time. Dubai hasn’t witnessed a return of confidence, although the market has been heavily overbuilt. The confidence is much higher in India, as the economy is more stable than a lot of the western economies.

Are Indians investing in other countries?
I think Indians investing in other countries are basically doing it amid the Indian communities. They are not investing in the same way as people from Hong Kong, China or Korea. I think Indian people are more cautious. They want to go and see what they are getting into, whereas a lot of the Asians are happy to invest as long as they get the returns that they want. Indians would rather buy where there is a strong hold of the Indian community. Is that right, Anand?

Anand: Lately, we are seeing a large increase in outbound enquiries from resident Indians who are looking outside. These are mainly people from business houses who have business operations, specifically in London, New York, Bay Area, Dubai, Singapore — these are the places where interest is very high, while non-resident Indians in London or America are also buying homes.

As compared to other countries, how is India faring?
The recovery seems to be slightly slower than in the countries where prices plummeted.
Anand: In Mumbai, prices came down by 30%, but corrected viciously. They are almost back to where they were eight months ago. People did not see property prices hugely overvalued; they actually realised that in areas of restricted supply, where you are limited to what you can build, prices will be pushed up due to supply and demand factor because people were going mad and throwing money at properties. So the value of property in places like Mumbai, New York etc are run by that factor as it is very difficult to develop any more property.

Suddenly developers are able to sell the thousands of apartments they could not sell in last one year… how is that possible?
Anand: From the developer’s point of view, the colour of the money is same whether it comes from the end-buyer or the investor. May be not all of them are end-users, but a substantial share of it is actually buyer-based demand. And you will see that all these are not very high-end products, they are in the so-called affordability levels. In India, for every land, there are 10 tenants and that’s why we have tenancy protection laws. As long as that equation continues, there is always going to be demand for housing.

What is the attitudinal change in developers for building residential properties to pull buyers?
I think there are a number of changes… one is their finances. In western countries they have been hit extremely hard, so they have no resources to build new projects at the moment. Banks are also not in a position to support that building… last thing the banks want to do is to have greater exposure to property. So the rebuilding will take time. One of the problems in some countries like the UK is that there already exists a shortage of property and it is probably the same here for good quality property. There is a real need for that to be built. If banks don’t support such construction, the development would take longer, which will increase the pressure on demand.

A lot of the plans that were ready to be constructed and were not built are now being changed because what they were building a year ago is not going to work out now. So that could delay fresh supply for another year. So there will be a period in most countries — a year or two — where virtually no development would start. New properties would not be available in the market and mostly, what has been available would be served. That will cause pressure.

When do you see new supply coming in?
It will start next year, but it will be slow. It will gather pace in one-and-a-half to 2 years.
Do you see any change in building specifications?
I think developers will now look carefully at who is going to buy the property and they will avoid pure investor markets. Around the world, developers were building developments for people to buy from another countries purely for investment purposes, that is a very dangerous market because investor sentiment changes. You can’t sell them to the end-user because end-users wanted a family home and communities and not just a high-rise development. So it will be more family-oriented developments that will come up and developers would not be building it the way investors require.

How do you see the Indian residential market panning out this year?
Anand, what do you think?
Anand: Fundamentally, the Indian residential market is pretty sound because of the basic demand-supply situation. There is an expected supply-shortage of 25 million sq ft in the residential segment. The supply is one-eighth of demand, which can narrow down only if affordable projects are available. The affordability segment will drive the volumes for the next decade or so. And there will constantly be new benchmark projects — those better than the projects launched five years back.

Are net asset values of the land banks up again? Are Mumbai’s NAVs rising the fastest?
In Mumbai, the NAVs are going up. NAVs are largely driven by transactions happening in that area. When transactions happen, that becomes the benchmark for NAVs to reset. There aren’t as many land acquisitions by the developers for the purpose of development in places outside Mumbai. It’s the existing land banks that are being developed. Some transactions have happened in the island city, which is resetting NAVs there and in places like Bandra, it would continue to look north and in other places for the next two-three quarters until substantial land banks are acquired, movement would be stable. Mumbai NAVs are running the highest.

Do you see a price fall? Don’t you think demand will be impacted because of the renewed price hike?
I think it depends on where prices are going up. Prices are going up in the prime areas where there is restricted supply. These are basically the capital cities where there is a limited supply and where everybody wants to go. I think generally, across the world, prices will go up particularly fast, but they will be fragile for some years. I still think there are enormous fiscal problems in a lot of the western countries and they are going to take a long time to recover. Also, the West has a large portion of people who are already homeowners as compared to the East, where many people still want to own their homes.

Do you see private equity guys coming in?
There is an enormous amount of money waiting to be invested in property. Property is still considered a safe asset and a good long-term hedge against inflation. I see those funds that are global investing in any opportunity where they can see solid long-term growth. And there is a greater potential in places like India, China and perhaps in the
West, too.