If it aint broke, dont fix it. And certainly not in bits and pieces. That is an adage that has been forgotten in the needless meddling that the countrys real estate sector has been witness to, of late. A week ago, restrictions were placed on the use of external commercial borrowings (ECBs) for the construction of integrated townships. Clarifications were also sought from six realtors on their proposals to raise ECBs. This was accompanied by a lowering of the ceiling on interest rates on such external debt, making it difficult for smaller players to access such funds. All this fits in with the RBIs firm belief that there is a latent bubble in the sector waiting to burstand so, it is best to slow the funds influx down. While prices in recent times have certainly taken a turn for the astronomical, whether the deflation of asset bubbles is the RBIs job is not obvious. Nor are its analytical abilities, here. This is a sector in which demand and supply often exert themselves in bursts (which explains the beta and gamma volatility calculations). So, assessing the scenario is always difficult. What is known is that real estate demand in India is up against a supply crunch in dozens of urban locationsa historical circumstance that foreign investors cannot resist. The current availability of usable office space even in the major metros, for instance, is very low when compared to, say, New York Citys 400 million sq ft. Premium space, especially so. As the Indian market emerges, you can expect offices to start converging with their international counterparts on design and comfort parameters. The IT/ITES sector alone is expected to create demand for 150 million sq ft across urban India by 2010.
Investments of some $3.5 billion are headed Indias way for real estate, which is said to promise annual returns of above 25%. Should the government or RBI be trying to cool the pace of activity down Tinkering with market dynamics on the specious plea that these inflows indirectly stoke asset inflation serves no purpose. If the opportunity is attractive, the funds will find their way here somehow, no matter how many gates and windows are shut.