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Mapping The Realty Bubble

What investors in real estate can do is to stop reading the ads, or media/analyst reports. Instead they should do some research of their own and as see where things stand

Of all the bubbles that were floating around back in the heady days of 2007 and 2008, the one that was the biggest is still hanging around, being maintained by a determined (or perhaps desperate) set of people. 

At that time, it was clear to most of us that India’s real estate sector was a massive bubble. The froth was equally visible in the prices of real estate itself as well as the way real estate scrips were doing on the stock markets. And then came the crash and everything collapsed around the world. This is a crash that is still continuing — Dubai’s real estate disaster is still said to be only half done. And without a doubt, there are many more zombie developers around the world who are still staggering around in the hope that one day things will turn around.

In India, we now seem to have entered a phase where many of these zombies are now planning to try and revive themselves with IPOs. The coming months will see a spate of issues from real estate developers. 

Currently, we are seeing an elaborate PR and advertising exercise that is aimed at convincing investors that there is a real estate ‘revival’ on the way. The reality is that nothing could be further from the truth. It is true that at the ground level, people are buying more houses than they were a year ago. Companies too are renting and buying more offices. However, there is a complete disconnect between the supply that exists and the actual demand. There is an even bigger disconnect between the prices which these consumers are willing to pay and the prices that the developers need to realise to make their projections justified. 

As a potential investor in the real estate sector, you shouldn’t be reading any broker or analyst reports, nor should you be reading ads or articles in the media. Instead, you should be doing some research yourself. Just find out the officially-quoted prices for some of these IPOing (or about to be IPOing) developers’ properties. And then, try and make some enquiries about the same properties pretending to be an actual buyer. Generally, you will discover that the real prices are a fraction of what is claimed publicly. Or in some cases, you may also discover that there are no real price quotes because no one is even pretending to sell properties because no one has any expectations of the underlying projects being executed in any realistic time frame. 

Almost without exception, the coming realty IPOs are desperate rescue missions, which seek to use the collected funds to replace some of the masses of debt that they’ve taken on. And almost without exception, the IPO funds will do nothing for the basic commercial viability of the products that these companies are supposed to produce and sell. 

For historical reasons, there is now a fundamental design flaw in the real estate sector in India and this will take a long time to work itself out. For the active trader, there may be opportunities in riding realty stocks up and down the news cycles in the secondary markets. But for the serious investor, realty IPOs do not even begin to make sense.