Sunday, November 18, 2007

Real Estate: Where are we "real"ly?

Urbanisation of India has baffled me. Indian cities are a picture of most shoddy infrastructure and yet command more price than any other city in the world. Unlike Singapore, India has large land mass and there is no dearth of land supply. Also unlike other high cost cities, India’s per capita income does substantiate the prices in India. Therefore, what is happening and where will this lead?

Why prices are increasing?

The prominent reasons for increasing prices are said to be:

  • Income and demographics
  • NRI purchases
  • Constrained urban infrastructure and hence higher pricing for currently available infrastructure
  • Constrained low cost land supply
  • Higher migration into established urban centers

Income and Demographics point to a different reality
This is the most abused story of all. If only people started looking at incomes and demographics, they will realize how outrageously prices have moved. The current incomes and spending patterns cannot support these residential prices or create enough spending to justify retail real estate prices.

NRI investments may not have an exit!
At current levels, housing is only affordable to NRIs with higher per capita income in relation to local population. However, if these purchases are investments then there has to be an exit route at higher prices for encashing the gains. Ultimate sustainable exit must be through selling to the local population. Crude calculations show the un-sustainability of this logic. In essence, the NRI investment theory may not find and exit route!

Constrained supply of low cost land is a cock and bull story!
Developers looking to acquire lands in or near the traditional CBDs are driving up the cost land. This is totally artificially created bottleneck and can be resolved using regulatory measures as seen in China.

Infrastructure constraints are government created
Lack of urban infrastructure is completely artificial, created by successive governments’ lack of vision. It has been years since government opened any new public schools, municipal offices, and water and sewage treatment facilities. The accumulated impact of this has reached a critical threshold where it has started affecting the cost of living and doing business in the city.

Higher migration into established urban centers is a key concern
Of all the reasons this represents the most critical and believable reasons. The job creation outside of the current urban centers is abysmally low. This is leading to in-bound migration across income classes.
At higher income level, it is raising prices in high-end localities. Therefore, we have the posh areas appreciating higher and faster than rationally acceptable rate. This phenomenon also brings in lower transactions leading to lower supply assimilation.
At the lower income side, slum population is increasing. Government is letting the migrant population encroach upon and absorb government and private land leading to artificially reducing the cost of living and doing business for current urban centers. This is a negative spiral as it reduced the incentives for economic activity to move out of the city. Thus, new investments in upcoming urban centers do not yield returns whereas old urban centers continue to become more congested. Consequently, emerging cities are missing the potential growth.

In sum
Governments lack of concern for living conditions, lack of foreseeing infrastructure requirements and lack of respect of property and assets is leading us down a dangerous spiral. Globalization has created ample infrastructure to let global cities compete against each other at a level playing field. Cities in Philippines, Malaysia and other south-east Asian countries are taking a lead and Indian cities will soon be left behind cursing the lost opportunity.