Mumbai saw a steep rise in property prices during the boom period of 2008. However, the economic slowdown in 2009 led to a property market crash which made itself very tangible in Mumbai in the first quarter of 2009, stabilizing by the middle of year and rising again between the 3rd and 4th quarters. The rate of price ascent picked up during 2010, hitting high notes of between 30-60%.
By the 4th quarter of 2010, residential property developers who had returned to the safety their home markets from their earlier national forays were building large land inventories, spending close to Rs. 20,000 crore in Delhi, Mumbai and Bangalore. Significantly , Rs. 12000 crore were spent in Mumbai alone. This naturally resulted in extremely high land valuations, demanding higher average residential property sale prices based on the new appreciated capital values.
These land acquisitions were predominantly funded by NBFCs at 15%+ interest rates in an already volatile real estate environment, where sales volumes had plummeted by close to 50%. Measures implemented by the RBI to curb inflation further aggravated the pain as interest rates went up. Clear directions issued by the large financial institutions and the Central Government led to a marked depletion of liquidity on the market, and this put considerable pressure on the developers.
The challenges of low volumes, the increased cost of debt and higher land valuations left them with no choice but to introduce ‘soft’ schemes (promotions and incentives) to woo buyers with. When this route did not yield the desired volumes, they began to solicit HNI-led investments at discounts of 10-15%, in addition to raising further capital at interest rates of between 21-25% from NBFCs.
After surpassing the peak valuations of 2008 by 20% in 2010, Mumbai’s residential property rates today are back on par with the 2008 benchmarks. This could be considered a correction, and it has come about as a result of an increasingly urgent need for capital by the city’s developers. It is fairly certain that this correction phase will continue for the next 3 months and inevitably extend into the traditionally slower monsoon / vacation period.
As of now, prices have dropped in areas such as Parel, Lower Parel, Mahalaxmi, Bandra East, Andheri East, Goreagon East and Mulund and Kurla. There are several other locations within Mumbai and Thane district that may not have seen a correction of more than 5-10%. The overall sentiments of the market and the consistent rate of new project launches in Mumbai projects give a very clear indication of an impending oversupply by 2012, and a lot of developers in the most severely affected locations are currently open to closing sales at lower rates.
That said, the market has already begun responding positively to this correction. Given the continued job confidence, high salary increments / bonuses, the steady growth of the economy and potentially a good monsoon, Mumbai’s residential property market will bounce back by August and surge past the 2010 peak. The first to benefit from the coming upsurge will be strategically located and designed projects by reputed developer who have consistently shown construction progress at site.
The author, Sanjay Dutt, is CEO Business at JLLM
