The Commercial Property Bubble of Mumbai

Mumbai is in the middle of a "commercial property" bubble which is making residential properties unaffordable to even the "affluent salaried class" here. The government is making a Bandra-Kurla Complex (BKC) of the entire city.

It may be worthwhile to investigate if there is anything in the law that prevents commercial towers from coming up on lands meant for residential occupation. If there is, it can be the ultimate pinprick for this commercial property bubble of Mumbai.

The question many are asking, why is it that builders are still hanging on to their rates, when there is no marked demand from home buyers for the past 3 months, and when even brokers and developers admit that the sale of residential apartments have fallen 30-40%. What caused this immense maniacal rise of property prices up to 300% in 3 years. Why is it that in the same location, the cost for an apartment varies 100%, given the cost of land is the same?

The reason that every real estate expert and non-expert is ever so willing to dish out is the simplest: huge consumer demand. A pent-up demand for homes, further compounded by the High Court order on private forests lands. Sanctions on builders that have encroached on forest land, in areas such as Thane, Mulund, Bhandup, etc., they proffer has compounded the shortage in residential apartments, thus peaking rates further.

However, a cursory look will prove this incorrect.

A scan of advertisements, for homes in these areas, makes it clear that investors and home buyers have no interest. Instead of a pent-up demand, there is a simmering trepidation, that a home purchase may result in a confiscation of property. Brokers are actually advertising, "Not on Forest Land, "Clear Title Deed," etc in an effort to lure back buyers. So, the HC order creating a shortage does not hold water.

Given this scenario, what had taken and is keeping prices high in Mumbai?

The answer is simple: Excess money.

This overdose of cash is not the one that PE firms investing in SPVs for specific projects in Mumbai. This is one that builders are paying societies to vacate their old and dilapidated buildings, so that commercial towers can come up in their place.

Not a bad idea at all, except that allowing commercial property to come up on residential lands is actually the virus that has been hiding for too long. It is logical for builders and developers to focus on the most profitable areas of business, but it is up to the government to control and regulate excessive greed and exploitation.

The Maharashtra government is allowing builders and developers to buy out old residential buildings, and construct commercial towers on them. It is a well known fact that commercial property fetches up to 3-4 times the rate for a residential apartment, in peak times, and at least twice in stable times.

Quite obviously, builders are focusing on commercial property, paying up to 3 times the residential rate. The objective is simple: Pull down the old dilapidated structure and build a sky-high commercial property. Purchase cheap TDR from other slum redevelopment projects and add this on to this tower. Since the new structure is usually in the luxury segment, builders command at least twice prevailing commerical rate.

This has caused a unique situation. Slum dwellers, and those living in old one-room tenements, chawls etc., are being paid 3 times the residential rates and asked to vacate their properties. Now, these individuals, armed with excess cash do not mind paying twice the rate for a residential apartments in the same area,-- it's free money, in any case, said one such owner -- keeping 1/3rd of the new-found wealth in the bank.

An istriwala (one who irons clothes) was paid Rs 80 lakh to vacate his 100 sq ft hut in Bandra-Kurla Complex, where a new Tata project is under development. Another, who refused to budge was paid Rs 1 crore a few months later. Such is the mad rush for building commercial property.

This has set in to motion a vicious cycle, starting with every person claiming that his apartment is now worth the new rate paid by the builder, thus jacking up residential rates in the area. Seeing the neighbor with his millions, others are running up to banks, signing up mortgages, coughing up the premium and investing in properties, convinced it would either be picked up for commercial redevelopment, or at least see at 20% appreciation due to it. New builders come in, pay 3 times the new residential rate, thus taking rates up even further.

This vicious cycle has been responsible for the housing bubble in Mumbai. If left unchecked, we are not so far away from what happened in Tokyo in 1990's when the housing bubble of the 1980's was punctured, and Tokyo has never recovered till today.

It is a different story if new commercial areas are being developed, like Nariman Point and Bandra-Kurla Complex were built in the 1970's and 1990's respectively. But it makes no sense making a BKC out of an entire city.

It is time the Maharashtra government to step in , or risk being booted out.