Tagged: Real Estate

Real Estate Economics


I have always been puzzled by the intractability of the real estate economic theory.

While the applicability of the demand supply elasticity theory of economics is highly questionable when it comes to real estate dynamics, any buyer would hope that a low demand would bring down prices. And, any seller would hope that a high demand would boost up prices. The latter expectation works well in a supply-constrained city such as Singapore or Mumbai. Even in such cities, low levels of demand could occur, as are being witnessed currently.

But are the prices going down ?

Not at all.

While all stakeholders (except the seller of course), especially the buyers and the government, expect that prices would correct significantly in the near term (meaning, at least a 5 to 10% reduction in market prices), that does not happen. There is a correction of 1.3% for example. How is that when it comes to a significant price reduction ?

But the good thing is that the buyers keep away from the market. Here, I am referring to the median range of regular buyers, not those at the upper fringes for whom price elasticity of demand does not mean anything. At the upper end, price is inelastic to presence or absence of demand. The high end buyer is always prepared to part with the right prices for the right kind of property, irrespective of the market situation. But that high end market is less than 2% of the total volumes of the overall market.

As long as the bigger slice of the volume market decides to stay away from the market, there will be inevitable pressure created on the sellers at the fringe first – I mean, the sellers who cannot afford to wait for long to download their properties. There could be several reasons for their anxiety to sell off, but the point is that they might easily drop their prices to the “significant range” of 10% or more to sell, without considering what the market “was” willing to pay only a couple of months ago.

The bigger slice of the sellers will wait without getting impacted by this fringe sellers. However, the time that they are willing to wait will be proportional partially to the tenancy that they have on their properties which potentially could be yielding 3% or more when the interest rates are below 2%. Their ability to wait could, however, be impacted negatively by the anticipated drop in real estate prices in their surrounding areas or in the overall city market.

While a collapse of the real estate market is not a possibility in the absence of big external economic or political factors, a serious correction becomes inevitable after a duration when the transaction level reaches less than 50% of the peak month of the previous 12-months duration. When sellers become convinced that there will be no buyers at all, irrespective of the marketing efforts that have been undertaken, and the market volumes are heading seriously down, then a correction of 15 to 25% is entirely possible.

This is the situation that we are entering in the Singapore real estate market. While Mumbai is not that much different in terms of price in-elasticity and the ability of the sellers to hold on, apparently there are other economic factors in play which seem to be keeping the prices at the current stratospheric levels.

The conclusion is that the market is headed downwards, given that the interest rates are also going to eventually go up very soon, apart from other control measures that have been put in place in the Singapore real estate market. It would be wise to keep your liquidity in ready condition, and keep a tight watch on the market, if you are a buyer. If you are a seller, this is about the right time to download and make close to the profit that you had imagined you would get.

Cheers,

Vijay Srinivasan
03 August 2014

Advertisements

From Second World to First World


Singapore is now clearly ensconced as one of the top ten wealthiest nations on planet earth.

This has not been achieved easily.

Lots of sweat and thinking has gone on into making a marshy land one of the world’s top financial centres today. Earlier, it was one of the top electronics manufacturing centres as well, which it has ceded to Malaysia and some other countries. Singapore still has the world’s busiest container seaport, the best airport, and a crime-free city which is still to be rivalled anywhere in the world. There are many other firsts for this tiny “red-dot” of a city state, but the purpose of this post is not to list all of them.

The challenge facing the country today is cost competitiveness.

While larger developed countries have the sustainability due to their larger population and long-standing core country competencies which have been in-built into their economies, Singapore has always been a small city state with core trading skills. As countries around develop their systems and people, Singapore needs to find its feet, while competing on costs.

Which is not entirely possible, with a population aspiring for the best things in life.

Costs have been on the rise over the past four years in Singapore, despite multiple measures taken by the Government to check the rise. Real estate and car prices have risen at breakneck speeds, and are still rising. This has frustrated the local people, who often tend to blame the foreigners for the price rise.

While that may be partially true, there is no substantive rationale for the real estate prices more than doubling in less than four years. Lack of land space is not the reason, as there are probably more than 30,000 apartments lying vacant even now.

I can understand the rise in car prices, but these have again become just untenable. Cars are not really needed to go around the city, but then people have aspirations which cannot be controlled purely by policy-making.

There are other price rises in retail – while food seems to be still OK, clothing and other stuff have become pricier. One of my European friends mentioned to me that he now gets his clothing and suits from Germany (!), which is some 30% cheaper than the same quality commands in Singapore – and he still felt that even the European materials when purchased in Germany are of better quality.

Goes to show that profit-making seems to be the motive rather than catering to a wider population in retail business. While that is fine, Singaporeans also travel all over the world, and so are not immune from learning of prices elsewhere. A high-quality suit can be ordered in Bangkok for USD 500 or in Hong Kong for USD 800, while that would cost not less than USD 1,200 in Singapore. How do you explain that – we are talking of same textile material here, and one cannot explain it saying that the Hong Kong tailors are more efficient with less turnaround time, or that the Bangkok tailors use fake material.

Many examples can be given. In my opinion, Singapore is at least some 25 to 30% more expensive than the neighbouring countries, and some 10 to 15% more expensive than the developed countries.

A strategy to contain inflationary trends in retail does not work due to the variability of the market, but it does work for major elements such as real estate and automotives, etc. It only takes longer – some six to nine months, to take full effect.

It is critical for Singapore not to make it to the list of the top 10 most expensive destinations in the world. Or, to the top 10 most expensive real estate locations in the world. That ranking is not needed to be successful.

Cheers,

Vijay Srinivasan
15th February 2014

From Second World to First World


Singapore is now clearly ensconced as one of the top ten wealthiest nations on planet earth.

This has not been achieved easily.

Lots of sweat and thinking has gone on into making a marshy land one of the world’s top financial centres today. Earlier, it was one of the top electronics manufacturing centres as well, which it has ceded to Malaysia and some other countries. Singapore still has the world’s busiest container seaport, the best airport, and a crime-free city which is still to be rivalled anywhere in the world. There are many other firsts for this tiny “red-dot” of a city state, but the purpose of this post is not to list all of them.

The challenge facing the country today is cost competitiveness.

While larger developed countries have the sustainability due to their larger population and long-standing core country competencies which have been in-built into their economies, Singapore has always been a small city state with core trading skills. As countries around develop their systems and people, Singapore needs to find its feet, while competing on costs.

Which is not entirely possible, with a population aspiring for the best things in life.

Costs have been on the rise over the past four years in Singapore, despite multiple measures taken by the Government to check the rise. Real estate and car prices have risen at breakneck speeds, and are still rising. This has frustrated the local people, who often tend to blame the foreigners for the price rise.

While that may be partially true, there is no substantive rationale for the real estate prices more than doubling in less than four years. Lack of land space is not the reason, as there are probably more than 30,000 apartments lying vacant even now.

I can understand the rise in car prices, but these have again become just untenable. Cars are not really needed to go around the city, but then people have aspirations which cannot be controlled purely by policy-making.

There are other price rises in retail – while food seems to be still OK, clothing and other stuff have become pricier. One of my European friends mentioned to me that he now gets his clothing and suits from Germany (!), which is some 30% cheaper than the same quality commands in Singapore – and he still felt that even the European materials when purchased in Germany are of better quality.

Goes to show that profit-making seems to be the motive rather than catering to a wider population in retail business. While that is fine, Singaporeans also travel all over the world, and so are not immune from learning of prices elsewhere. A high-quality suit can be ordered in Bangkok for USD 500 or in Hong Kong for USD 800, while that would cost not less than USD 1,200 in Singapore. How do you explain that – we are talking of same textile material here, and one cannot explain it saying that the Hong Kong tailors are more efficient with less turnaround time, or that the Bangkok tailors use fake material.

Many examples can be given. In my opinion, Singapore is at least some 25 to 30% more expensive than the neighbouring countries, and some 10 to 15% more expensive than the developed countries.

A strategy to contain inflationary trends in retail does not work due to the variability of the market, but it does work for major elements such as real estate and automotives, etc. It only takes longer – some six to nine months, to take full effect.

It is critical for Singapore not to make it to the list of the top 10 most expensive destinations in the world. Or, to the top 10 most expensive real estate locations in the world. That ranking is not needed to be successful.

Cheers,

Vijay Srinivasan
22nd Sept 2013

A Comparison with Michigan


I met one of my classmates from old times yesterday.

We spent sometime discussing the current economic situation in India and what is happening in the U.S. My friend runs a specialized software company in Michigan, U.S.A.

It was very surprising when he pointed out that he pays a real estate rental cost of just USD 1,600 per month for some 6,000 Sq Ft of decent office space in the U.S. That works out to something like INR 15 per Sq Ft per month, which is an incredibly low figure, compared to anywhere between INR 60 and INR 125 in Mumbai or Chennai. Even if I take a figure of INR 25 for the Michigan real estate, India is more than twice that figure for comparable buildings with good facilities.

My friend did say that while the costs in the U.S. are going up by some 2 to 3% per annum (I thought it would be higher), the reason for the big difference is that the Indian costs have risen rapidly over the past few years. I know for sure that high quality real estate for office buildings in Mumbai cost around INR 200 or more per Sq Ft per month. So things do seem to be out of control in terms of costing in India.

The reasons could be manifold, but it is really the matter of supply and demand. Demand for high quality real estate in India has far outstripped the supply for quite a long time now, though the supply is catching up. But costs should have come down by now. Though the market is really “soft” now, the costs are not coming down. This shows the artificial nature of real estate market in India.

I was further surprised when my friend said that he hardly purchases anything in India these days, despite the fact that the USD is ruling high at more than INR 52 per dollar. I asked him why, as I thought it would be the most appropriate time for non-resident Indians to spend their dollars in India.

But he said that even a simple good quality office shirt costs something like USD 40 in India (from Zodiac), whereas he can get a decent one in the U.S. for somewhere between USD 10 to 15. Even a better quality shirt in the U.S. costs half of what unsuspecting folks pay in a “poor” country like India.

He felt that prices of most items in shopping malls in India are ridiculously high, and he would not spend his money here but rather reserve the same for spending in the U.S.

That is not encouraging for India.

We should look at the U.S. for buying our textiles (!) but we can do nothing about real estate !!

Wishing You all a Merry Christmas (we are approaching 25th December in just about an hour from now in India),

Cheers,

Vijay Srinivasan
24th December 2011
Mumbai

Embedded Non-Transparency


India is full of transactions spawned at higher valuations by strongly embedded non-transparency.

What could have costed someone X is sold at 1.5X to him because the market operators and intermediaries are well versed in the art of moving the valuations upwards and ensuring that the market participant gains when he is a seller and loses when he is a buyer. They create artificial demand/supply gap by manipulating the market mechanisms. They create an illusion of high demand and limited supply of a particular variety which you are looking for as a buyer.

As a result, the buyer gets a sense there is an increased level of activity in the market place when the reality is actually different. The buyer tends to “price” up his offer in anticipation of closing the hard-sought deal, when the deal is rarely having a competitive offer from another buyer.

The seller gets emboldened by the broker as he really is not at the venue of the transaction and depends on the broker to assess the demand and ascertain the quoted price. He makes a wrong judgement that indeed the market is thriving and there are many buyers asking for his property or asset, so he tends to raise the asking price.

This leads to an artificially created inflation of prices when the prices should actually be tending downwards in an ideal market place. So, this is how the market operates in most interest areas of buying/selling in India.

The Indian market place is totally and clearly non-transparent, especially in property transactions, and is aided and controlled mostly by brokers. The market intermediaries become market makers, and so the prices are entirely artificial. There is no such thing as a transparent property market in India, they will never allow transparency and ideal markets to succeed.

Given this kind of environment, is it surprising that the Mumbai real estate prices maintain their very high valuations though the number of market transactions has crashed ? No, it should not be a surprise at all. That is how the hottest real estate market in the country operated for the past hundred years and that is how it will operate for the next hundred as well.

This non-transparency mostly affects the buyers, but sometimes it could also affect the sellers and the financial institutions which provide funding to the buyer. The true value of the property becomes difficult to establish and so it is possible that the seller also could lose money sometimes, though it rarely happens as the prices would have usually doubled in approximately 4 years for the seller, and so he will be “in the money” right from year 2 in a serious way.

The economics of selling and buying is a different blog topic on which I will write soon. But what I am concerned now is this complete lack of transparency which I have encountered personally and have heard it mentioned many a time in social discussions on the topic.

Can we do something about this lack of transparency ? I haven’t seen any change or improvement, so I tend to think that there can be no action against it. Or, any effort at improvement will be squarely defeated. One way we can tackle the issue is by going online and creating an online market place. Such online efforts are growing in India driven mostly by this lack of transparency, but the results have not gone beyond identification of an asset and then going physical…….I guess it would take another 2 to 3 years of frustrations before a truly transparent online market place would develop in India.

Let us wait (or one of us have to make it happen !).

Cheers,

Vijay Srinivasan
27th November 2011
Mumbai

Straddling two Booms


I spent the last few days in Singapore.

It was just amazing to note how irrational exuberance has affected both India (specifically Mumbai) and Singapore. I mean the real estate market run-up, despite the hard fact that the global economy is still not completely out of the woods.

Singapore is more globalized than Mumbai for many years, and so is well acclimatized to rapidly changing economic cycles of boom and bust. Mumbai has always been an aspiring city of dreams with the long-standing title of India’s Financial and Entertainment HQ. Comparable in many ways. Ambitious people in both cities. Commercially driven.

However, it appears that both places are given into the reckless climb in real estate prices. Between May 2009 and March 2010, the suburban realty prices in Mumbai climbed well over 50%. It appears that Singapore real estate price growth is not far behind. Not just in terms of growth in prices, but in terms of pricing for new condominiums in the core city area, Singapore is approaching Mumbai prices (over S$ 1,500 per Sq Ft, in some cases well over S$ 2,000). These appear to be South Mumbai prices !

Can Singapore take this rapid rise ? I doubt it very much. It has signs of a “bubble”, waiting to burst soon. Mumbai is a larger economy with strong hinterland of a large country, and is at the epicentre of an economy growing at 8.5%. Singapore might have grown faster last quarter on an annualized basis, but the steady state economic growth is unlikely to exceed 5%. Plus it is mostly export dependent, whereas the Indian economy depends on internal consumption, which is growing rapidly with a young population.

One of my friends in Singapore told me that the local demand is now outstripping the foreign demand for Singapore properties. Many individuals appear to be over-stretching their finances, and a bubble burst would ruin their livelihood. Caution has been thrown to the winds. I am not surprised. Free market people have a way of handling risks which is not imaginable in a closed society which has not fully opened up. The “risk assessment” process has not stepped into the personal domain as well as it has gotten into the corporate domains.

Well, I live in Mumbai and call Singapore my own. So, really speaking I am involved in both economies and closely monitoring both. I admire both cities for their free spirit, but not their recklessness. Governments cannot interfere in what is essentially a “private” free market (meaning not the Government-owned or leased properties such as the HDB of Singapore). So, it would take some time before Singapore Government gets to take some harsher measures through the banking system. While in Mumbai, there will hardly be any intervention, except may be a credit squeeze.

All the best for those who happen to sell or buy properties in either city at this time !

Cheers

Vijay Srinivasan
22nd April 2010
Singapore Changi Airport
Terminal 3

Kharghar and Panvel – Developmental Success


I took a ride towards Kharghar today to meet a friend and an ex-colleague.

The plan was to meet him and then to drive towards Panvel, before returning to my home in the Western Suburbs.

Was I amazed ? Yes, I should say…..coming right after my Kolkata trip, this drive was an eye-opener of sorts. Clearly, Maharashtra is the state to be in – the industrialization all along the way shows that despite all kinds of infrastructural issues and challenges, Maharashtra continues to plod along, albeit successfully, and makes its mark as the #1 Industrialized State in India.

Apart from the employment benefit to people, the drive towards rapid industrialization helps enormously in uplifting semi-rural population by the development of the ancillaries market, as well as enhancing the industrial economy of the country. All this has led successfully to the local economic successes – one can witness the mushrooming of apartments, parks, cineplexes, malls, etc.,

Kharghar is in the middle of this boom, while Panvel has some distance to go. With the new International Airport coming up, hopefully in the next 4 to 5 years, the developmental activities will reach a crescendo in the next few years, establishing Navi Mumbai as distinctly separate from Mumbai itself – a city of its own. Also, the industrial city of Pune is just 90 minutes away on the expressway. And, last but not the least, the road quality is far superior to what we encounter in Mumbai !

Navi Mumbai seems to be well on its way to become the new industrial and economic success story of India. If only other states could learn, and do that in double quick time, India can catch up with China in less than a decade.

Cheers,

Vijay Srinivasan
14th Mar 2010
Mumbai