As returns plummet, Mumbai investors fan out to the suburbs

As prices in the real estate sector remain in the stratosphere, property investors (who buy property only for investment purposes) have suffered a 50% hit in their returns.

The fall in Mumbai has been as high as 100% in the last three years, and investors have started looking at peripheral areas such as Panvel, Navi Mumbai and Kalyan.

“Returns have diminished even in the suburbs where it was really healthy till about two years ago,” said an investor who recently bought five apartments in a new development in the outskirts of Kalyan. “You cannot expect prices to jump from Rs 12,000 in Borivali (west) to Rs 24,000 even in next seven years.”

At that rate, the returns on investment are less than capital markets and commodity markets.

According to a recent report by a real estate consultancy about 55% of the total houses sold in the city are bought by investors. “Investors have been investing maximum in the affordable housing projects,” said Pankaj Kapoor, managing director of Liases Foras.

Typically, investors pay for apartments in unaccountable cash (black money) immediately after a project is announced — in many cases at the time when there is mere land and no construction. The contract between the developer and such investors is normally only oral. So when the developer sells the property in the market, the returns on investment too is in unaccountable cash.

Industry experts say that earlier, investors were capable of influencing the prices of the projects, but with private equity players (PE) entering the scene that is no longer possible. “A PE fund that has invested in a project will not allow that,” said Ramesh T Jogani, managing director, Indiareit Fund, a PE fund based out of Mumbai. “Also the sheer size of the real estate companies has become quite big to be dominated by investors.”

With less investors around in Mumbai, developers will find it difficult to maintain high prices, and a correction is around the corner, feel industry watchers.

“Developers are somehow holding on to the high price but sales are not happening and huge debt on their balance sheet would force them to slash the prices in 2012, there is no alternative,” said Jogani.

However, as one analyst pointed out, if investors move to other areas, speculation and price rise would follow them there.


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