Indian Real Estate market has attracted investors in the past ten years, just like how a new sweet store attracts kids. In fact, it was one of my top three investment opportunities in the last decade.
As a simple example, an apartment that cost 20 Lakh Rupees (approximately 40K USD) ten years ago, would sell for anywhere around 1 Crore (approximately 200K USD). This kind of appreciation has never been seen anywhere and people were very happy about this because no one expected this.
Here is a simple incident…A friend of mine went to see a land in the morning and the land owner (who was just a farmer, selling his land) said it would cost 20 Lakhs per ground (2400Sq.ft.). We assured that we would come back in the evening with the advance with an intent to buy as soon as the verification is completed. He went in the evening and the land owner said it costs 30 Lakhs per ground as another party had come and agreed for that amount and promised to come back with the advance.
This kind of a market is called as ‘Open Unregulated Market’ and is not a healthy one – may be good for selling fish or vegetables, but definitely not long term assets.
Owning a home is the single largest universal dream and above responses would create frustration and disappointment anywhere in the world, but it happened quite a lot in India. Why? Here is a gist of this cycle:
- While the western world was going through a financial crisis, many organizations wanted to outsource and save money (it was ok to lose certain level of quality as a compromise – welcome to real world).
- As the inflow of foreign money increased, the demand for more commercial and residential places increased.
- With a booming middle class and more job openings than ever before, more homes were sold than ever before.
- As there were more jobs, more homes, more earning members in the society, every one was happy.
- The biggest player in the Indian Real Estate market space were many politicians who found this as a safe haven.
Fast forward 10 years and now here is the situation.
- The so called ‘Lock In’ period with the investments are now getting completed – which means foreign companies who are disappointed with the infrastructure as well as the other policies of the local Governments, can now withdraw their investment and take it out of the country.
- The advanced economies have stabilized and they have also realized that outsourcing need not be the only solution – moving jobs from New York to Austin could be an example of moving jobs, not necessarily out of the country and still achieve better results than moving out of the country.
- With the level of frustration of foreign investors being at its peak, even when the dollar was at its highest conversion rate against the Rupees (1USD = 69 INR), a consistent theme among the investors was not to invest in the ‘Open Unregulated’ Indian Real Estate market.
- With the Indian General Elections approaching in 2014, many politicians need cash flow and are ready to bail out of the housing market – even if it is at a lower cost – as winning the elections is a better investment than any other business for many politicians 🙂
Given these factors, we can expect a lot of empty buildings with the supply far exceeding the demand – obviously this is going to bring down the cost of real estate and along with it quite a few associated costs.
Once this correction is in place, then we can expect a more mature real estate market than it is now, where any one of the land owners could pull out a number out of thin air and that will be cost of their land they are planning to sell. Not any more people – get ready to face reality – because one day or the other reality will get to you – and the time for Real Estate in India is now.