Real Estate Bubble Or Bubbly

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: The real estate sector has been featuring on the Reserve Bank of India’s radar for a long time. The central bank has been concerned about inordinately high prices of properties, both commercial and residential and has been issuing diktats aimed at easing them.

Rising interest rates, increasing risk weights for banks lending to real estate and now the clamp down on real estate companies borrowing abroad, all these measures suggest that the real estate price climb will be arrested. Reports of a price ease are doing the rounds, especially in metro suburbs.

Does it mean that the gains from real estate investing would disappear and that investors with extensive exposure to property should wait for another surge to happen? Or is it just a simple correction, witnessed in most upward moving markets, a small recess before the next surge?

Still fizzy

Going by both fundamentals and technical dynamics, it would be a wrong move to write real estate investing off your portfolio, say analysts. Girish Nadkarni, COO, Institutional Equity Business and Investment, IL&FS, says, “The real estate market is fairly nascent. And opportunities are fairly large. I would say that the prices of real estate (depending on locations and other parameters) are temporarily high, mostly due to interest rates. While they will rationalise in some pockets, the market is far from being overheated. “

In fact, taking into account the way dynamics have changed in the sector, the optimism, Nadkarni says, could even be justified, the reason being the presence and emergence of cogent factors in the sector. One of the significant factors is the amount of money following real estate projects.

PE presence

If one has to go by the estimates, over 100 private equity (PE) investors have lined up to invest in the Indian real estate sector. And add to this the money involved (About $7 billion - or Rs 30,800 crore - was raised in 2006), speaks volumes about the confidence PE players have been demonstrating in the real estate sector. And this is despite the fact that the RBI has also clamped down on external commercial borrowings (ECBs).

With property prices rising nearly 100% in the past 12 months, it’s no surprise that players are still lining up to enter the sector. Sample this: an additional $12 billion (Rs 52,800 crore) is forecast to come into the sector this year - an increase of 70%.