Is a 55 crore flat the sign of the next bust?

By Alok Rodinhood Kejriwal on August 4, 2011 5 Comments / 2808 views

Sometimes, the smallest signals can be the beacon for the next BIG BUST.

For me personally, an e-mail proposing that I buy a flat for 55 crores in Pot Hole ridden, crammed and jammed, scam tainted, politically bankrupt Mumbai – is one sure signal.

I mean this is 12 MILLION US$…..

So, why is it a sign of a bust?

– Even if I assume that the builder is earning a 20% profit margin, that means that the apartment has cost 45 crores to that construction firm. Now the building has at least 15-20 such apartments, and there are at least 10-15 such properties coming up on that stretch of Napeansea Road (I see it almost every other day). That means that 15,000 CRORES is invested by Banks (yeah) to build and finance these CASTLES in the air ON JUST a 1-2 kms stretch??

South Mumbai has 100+ such developments coming up – so you can calculate the value of the capital locked in.

– Now, lets assume that these flats get sold. Obviously these will be Bank Financed also – so that’s another 20,000 CRORES injected into these assets. (Note that the builders who will get paid from these buyers will move on to the next project and hence keep their original bank loans in rotation).

– What happens if there is a massive stock market slump or a job market re haul or a massive political instability or god forbid even large communal tensions in India? If the dollar collapses and the India Rupee becomes so strong that it bankrupts exports? The folks who have bought these apartments will not be able to pay their installments (calculate the monthly outgoing on a 55 crore flat) – the flat as collateral will never be able to sell at the same price; builders will be unable to sell new properties and HUMPTY DUMPTY will come crashing down into the Arabian Sea….

(PS – If this sounds fictional, just read up the reasons that led to the crash of Lehman Bros in 2008)

Having said so, please go ahead and buy some of the flats listed below and do mention my name to the agent – I wouldn’t mind earning a couple of BMW’s as pure commissions!!!

Forwarded message

From: <homes@terraahomes.com>
Date: Thu, Aug 4, 2011 at 2:59 PM
Subject: Premium Apartments for Sale in South Mumbai
To: alok@c2wgroup.com

Hi,

With our commitment to bring you the latest and the best offerings in Mumbai real estate, we present to you some premium apartments for sale in South Mumbai

Anupam CHS, Manav Mandir Road, Walkeshwar
- 2920 Sq ft Carpet
- 5 BHK
- Lower floor
- Asking Price: Rs. 24 CR

Vaibhav CHS, Breach Candy
- 1600 odd Sq ft Carpet
- 3 BHK
- Higher floor, full sea view
- Asking Price: Rs. 18.50 CR

Urvashi, Nepeansea Road
- 2650 Sq ft Carpet
- 3 BHK converted to 4 BHK.
- Higher floor
- Asking Price: Rs. 27 CR

Rajat Apartments, Mount Pleasant Road
- 1420 Sq ft Carpet
- 2.5 BHK
- Middle Floor

Lodha Costeria, Nepeansea Road
- 7600 Sq ft Built up
- Higher Floor, Sea View
- Bare shell Apartment
- Asking Price: Rs. 55 CR

If the above property interests you then request you to please call me on +91 98210 06331 or email on ritesh@terraa.com with all your contact coordinates and your preferred day and time for inspection. Incase the property is not to your choice then we request you to share with us your requirement and accordingly we will get back to you with suitable options.

If you are looking to SALE any residential / commercial property in Mumbai, then request you to please send us an email with your property details on ritesh@terraa.com.

Awaiting your reply at your earliest convenience. Looking forward to long-term mutually beneficial business association.

Best Regards,
Ritesh Juthani – Associate Vice President

Terraa Propex Pvt. Ltd.

Comments

Alok Rodinhood Kejriwal

5 Comments

Aditya Babbar August 4, 2011, 1:40 pm

BUST is a bad word in Real Estate 🙂

Its called Softening of Prices (I picked it up from a lot of the IPCs – International Property Consultants)

Its not about just BUYING the property, its about servicing the DEBT/Home Loan(if you take a loan) and hoping that the capital appreciation comes to you.

Now as far as the flat not being able to pay for itself(just incase Humpty comes tumbling down), it all lies in the numbers and there you see what everyone’s on about.

For Eg,

Flat 1, works out to 82191 per sq ft

Flat 2, works out to 115625 per sq ft

Flat 3, works out to 101887 per sq ft

Flat 5, works out to 72368 per sq ft

You want to venture a guess as to what is the average prices in Napean Sea Road-Peddar Road belt .. Rs 60000-65000 sq ft.(I’m going what Times Property rate chart states every Sat)

– So in flat 1,2,3 the present owner has already taking 30% appreciation on his asset, which was due to YOU(as part of your capital appreciation) a year later. Again I say this since residential prices in a good economy double every 3 years.

– God forbid, the market tumbles, the rate would at best remain at 60-65K(since general thumb rule, residential real estate as an asset would hold its price but not dip) but not get to 80K.

– Your EMI is on the cost @ 80K per sq ft, which means the pressure has already started to build on the Buyer on his outgoings, as you’d end up paying about Rs 200-Rs 300 per Lac, more than what the Market Rate was.

– The only people who might make money in all of this is the Broker (who quite frankly is only concerned about his commission. The higher the price, the higher the commission – 2% I’m told), AND the present owner.

This sort of deal making and emails is what will ruin the market and also drive the prices higher than the market rate. Thus, making owning a tad unaffordable to the citizens.
Pranay Gupta August 7, 2011, 3:08 pm

I also find the schemes in these high valued properties quite interesting –

“pay 5-10% upfront. and the installments start only post possession two years later & you are permitted to sell the property right after possession.”

So basically, people (who are not able to afford such properties) are being convinced to buy them with the hope of a future sale at higher value – while they are committing only 5-10% !!
rahpar August 8, 2011, 7:40 am

Its cheaper to buy in places with much better infrastructure etc like Spain, Portugal and Dubai. The quality of construction is better too.

Unfortunately you don’t live there
Aditya Babbar August 8, 2011, 10:27 am

I don’t see anything wrong with that.

After all its putting only 10% of the total value of the property as a downpayment. The capital appreciation is maximum for properties/projects that are bought at the under construction phase. You have the flexibility to exit at the point of possession and can stand to make 100% of your investment.

Ofcourse the most important things which would make all this go your way are

1. Locational factors – like the actual location, will there be enough economic activity to support such supply, what is the current supply in that location, what sort of infrastructure is in place already/envisaged

2. The Builder/Developer – who is she, what has she done, what has been the Delivery capability

3. Asking Price – is the price in tune with the location and its surroundings.
Pranay Gupta August 8, 2011, 11:56 am

I agree that maximum appreciation is in cases of properties bought during the under construction phase.

But in most of the cases, the payments happen as and when the construction progresses.

In these cases (which I claim to be “more artificially inflated”), your payments start post possession.