Tuesday, January 27, 2009
The Real Estate Bubble
By Harish Bijoor
Q: Developers of Real Estate properties are in a bit of a fix now, with rentals going down and sale prices coming down. How is this panning out? And what are the reasons for this?
-Parag Mehta, Mumbai
A: Parag-bhai, yes, retail rentals are taking a dip. Real end sale prices of both residential and commercial properties is on the down-swing. The reasons are all in the commercial and financial environment all around us.
What has happened is simply this. The prosperity indices of the last three years, led by the robust growth rates in the Services segment of the Indian economy, new wealth in the hands of young people with incomes from segments such as the IT, ITES, Biotech, Banking and Retail, the young demographics of the country itself (54% of the population below the age of 25 and 72% below the age of 35) and a yen to spend which was hot, created a forever-prosperity bubble all around.
This bubble has been responsible for a lot. Overt spending, overt consumption, rise of the branded product and branded retail, investing ahead of the curve as a mentality and much more. This caused for the realty market to go on a boom mode.
In return, the realtor saw this trend and invested ahead of the curve. Invested in both residential and commercial properties in a big manner. Without necessarily looking at the plans of others in similar space as well.
A kind of herd mentality prevailed. Mall developments are a sign of this. There are a total of 423 projects in full steam adding millions of sq feet of Mall space. There has been a 'mallification' of India and the Indian at large.
Now, reality bites realty. International financial institutions have collapsed. The US is in a 700 B USD recovery plan mode. Jobs are at risk. There is plenty of uncertainty around. In such times, Singh is not King, but cash is!
Everyone divests. Plans get stuck. In such a market, ready spaces have no takers. Time to cut rentals for sure. The trend is down. And will continue to be so over the next 12-18 months.
Rentals are already down 15-18% in the big 8 cities. Flat sale rates are down by as much as 25% if you are able to show the cash.
There certainly is a glut in the markets. Commercial office spaces, Mall spaces, residential spaces and micro-office spaces are all glut territories.
The no-glut areas are theme resorts and theme destination malls. Not enough investments here. This is a niche growth area over the next decade.
Q: If there is a niche in Tourism that is yet un-exploited, what is it? I am interested in investing in this space.
-Raghuram Raja, Hyderabad
A: Raghu, there are many niches yet to be exploited. On of it is Commodity-tourism. It figures prominently as a sub-vertical of potential in India, along with other profitable verticals such as Medical and Sports tourism.
Commodity tourism is all about un-locking the true-blue potential of our coffee, tea and rubber estates alike.
Plantation owners and managements are sitting on a powder keg of opportunity. Our plantations are variegated plantations. It is not only about coffee, tea, rubber or the primary cash crop in question. It is about Teak and Silver-oak and pepper and rivers and animals of every kind. It is equally about paddy and vanilla.
These estates of ours are located in varied terrains, spanning from the North East of the country to the verdant South.
Commodity tourism is about unlocking our captive estates to tourists from all over the world who find it most unique and different
Home-stays in particular are and can be a big hit with foreign tourists, who are fed up of staying in man-made hotels with manicured lawns that look as artificial as they can!
Q: Sales volumes across categories are down, particularly durables. Why? And how long will this last?
-Shanthi E, Chennai
A: Shanthi, these are tough times. Different companies that operate in different verticals of commerce will find differing degrees of impact on their sales volumes.
Advertising elasticity is being tested thoroughly in these tough times. The first ones to be hit by a postponement-of-purchase syndrome is the durables category. Relatively mass use, but postpone-able decision categories such as refrigerators, kitchen gadgets, air-conditions, etc. will face the brunt of it.
The replacement market will also slow down due to the down-turn in the mother of all economies, the United States!
This is the primary reason for the slow pace of volume growth.
Companies will however have to continue to invest on advertising to remain in the popular mindset. Those that don’t will be myopic in their approach and will hurt their brands in the long term. Recession comes and goes. Brands have to live forever through times good and bad.
Q: What's the best way to make a brand stick in a person's mind today?
-Ravi SS, Trichy
A: Ravi, simply by merit of its product and service offer. By dint of its emotive content. By dint of its perennial utility and by dint of its repeat value to a consumer that is real and not frugal.
Q: What does 'Brand Mumbai' do for the city's economy?
-Shalini Goel, Mumbai
A: Shalini, Brand Mumbai is the defining palate of the city's economy. Every aspect of the city's economy is a sub-set of the brand template and image the city enjoys. Corporates park moneys in the city basis this. Builders invest in promoting new ventures, be it commercial or residential, basis this. People at large decide to settle in the city basis this. The brand is a bias factor in economic decision making on a city. In the case of some cities, it turns out to be a positive bias factor, and in the case of some cities it turns out to be a negative bias factor. Kolkata in the eighties and early nineties suffered from this negative factor. Mumbai today enjoys its prominence due to a positive bias. As of now. Despite all the chaos of last week.
To a large extent, the image of Brand Mumbai helps run the city smoothly on its positive all-round economic impact.
Harish Bijoor is a business strategy specialist and CEO, Harish Bijoor Consults Inc.