I have just returned from a rather nice holiday abroad and am in depression. I visited relatives and friends in the US, UK, Switzerland and Germany and was just spellbound by the size and quality of their houses. What was most galling was that the cost of their houses was less than what we might pay in Mumbai. Almost uniformly, Mumbai is more expensive and the quality of real estate is worse. Given that India has a per capita of $1,000 and these other countries are many multiple of that, it is not clear why this makes sense.
In fact the entire market, every aspect of it?leasing or purchasing, retail or commercial?is a nightmare with no signs of improving. The market lacks transparency, is rather illiquid, and completing a transaction requires guts, fortitude and luck.
Driving down Marine Drive or the Oval reveals beautiful buildings which are in decay?akin to Praveen Babi before she died, impossible by looking at her to conceive of the beauty of her youth. Infirm policies around tenancy have led landlords to abandon any incentive to maintain these buildings and tenants demonstrated the fate of the commons?the common facilities of these buildings?which simply crumbled out of neglect. Further, due to the contestation around property rights of such buildings, a significant part of the property market becomes illiquid.
Buying into a new constructions being put up by builder groups is not easy, either. The concept of mis-selling was invented here. The legal agreement will be the most one-sided agreement that you have ever signed. The payments are so structured that the builder has obtained 90% of the payment 18 months before you get the building. With reputed builders, buildings run 12 to 18 months late if you are lucky, while with others the building may not get completed at all. The final building will have variations from what was agreed in fittings, in common areas and the conveyance of the title will be long in coming. Litigation, given the backlogged courts, is not a real option.
I come to the pricing nightmare last. Builders initiate a new construction with an attractive entry price for the first 5% or so of customers, typically their bankers. Thereafter the building will be launched amid much fanfare at a price 20% over this price. After that, they will keep raising the quoted price with a monthly, if not weekly rate! They will try and limit selling of flats before the building is completely sold out in order to keep up an artificially high price. In fact, in almost all buildings, secondary sales take place at a much lower price than what the builders offer.
Interestingly enough, despite the 30% correction in the Sensex, an almost doubling of mortgage rates since 2006 and all the talk about sluggishness in mortgage loan by bankers, builders still have the gall to ask for over Rs 30,000 a square feet in premium properties in Parel!
Why is this so? Property transactions in India are very costly because of the uncertainty around ownership and backlogged courts. The absence of enforceable property rights takes a significant part of the property stock out of the market. New investments play to builder cartels which can only be offset by much more supply. This requires the metropolis to have well-connected suburbs on the mainland. Manhattan has Mamaroneck, San Francisco has Berkeley but the infrastructure or connectivity in Vashi or Khargar just don?t do it for Mumbai. Why can we not build a few bridges between the mainland and the island rather than waste money on a sea link between Bandra and Worli? I imagine builder groups would not want that to happen after paying fancy sums to buy out the mill lands. So, I guess we better get ready for the builders? next price rise and continue to live the decay in Mumbai.
The author is managing director, The Boston Consulting Group. These are his personal views