Real estate prices and mispricing services
It is very difficult to understand product pricing in Mumbai. One doctor in a Mumbai suburb recently sold off his practice – well he actually sold off his shop. It is not a very big shop…and now an ice-cream parlor has been set up there.
Got chatting….with a couple of friends and found that the rent there is Rs. 88,000 per month. The ice-cream business is quite competitive and may not have too much of a margin – let us assume that the GROSS margins are about 20%? Now a shop with a rent of 88k..let us assume other expenses (electricity should be a bomb)will have total expenses of Rs. 130,000 pm. To earn this he will have to sell icecream worth Rs. 650,000 per month or about Rs. 26,000 a day. Now assuming each person who comes into the shop consumes Rs. 100 worth of ice-cream about 260 people will have to walk in every day. Looks tough if it has to happen every day.
Now look at this business from a doctor’s point of view. To earn Rs. 130,000 per month + equipment emi+….let us say he has to gross at the minimum Rs. 200,000 per month. Ignoring taxes is just a matter of convenience- many doctors do pay Income tax!
To earn Rs. 200,000 a month he has to earn about Rs. 8k a day IN HIS GENERAL PRACTICE -at Rs. 200 per patient it means he needs 40 patients to break even. Assuming each patient takes 20 minutes…it is 800 minutes a day to break even. Or it has to be priced better..
Either way both businesses cannot afford this kind of rent…neither does the location deserve it. If these are the rents in Ghatkopar…Santacruz can only be MORE. So doctors who are already there…can charge whatever they want and be as incompetent as they want to be – no new comer can threaten them. Simple locational advantage in a mad booming market where rents have no co-relation to the business that is being conducted there.
Dr Mohammed Ali Khan
Subra
If rents have no correlation to the business, does it not mean that the Mumbai real estate market is in a “Irrational exuberance” phase.. AKA “Bubble”.. Unfortunately, this is a bubble that never seems to burst!
subra
the problem with a bubble is you have no clue where is its head nor its tail – it is a monster and the day it bursts…banks will be hit, and hit real bad.
just taking the above example just imagine what a doc will have to charge to earn a decent living? Or how many businesses can afford to run from a shop paying a rent of 80k per month..it is stunning!
Sanjay
I understand real estate rents are becoming entry barriers for many professionals to work in mumbai. However, I will point out following point :
Assuming rent to be 88K/month and annual rental yield to be 4% on real estate in mumbai, the price of the shop comes to be 264 Lacs. Assuming sq.ft. rate of 15K/sq.ft. (which is on higher end of prices in ghatkopar), the size of shop is around 1760 sq.ft. which is too big to run a clinic. A small restaraunt or ice cream parlour makes sense for such shop.
I think ice cream parlour, where people can sit, chat and eat ice-cream, charge way more than the price of ice-cream. It is business on the lines of Cafe-Coffee-Day where people dont pay for coffee but for ambience.
The more I dig deep, the more I see that market forces at work. It was obvious that the shop was too big for a clinic but perfect to run a ice cream parlour.
What is you opinion, Subra?
Mahesh
Sanjay
Just a comment on your point: in the commercial rental the yield expectation is between 10% to 12 % ROI ( it is 4-6 % on residential space). hence the area at 15 k will be between 500-700 sq ft depending on the yield. The shops in Mumbai suburbs at good locations have stopped being quoted in Rs per sq ft and are quoted in absolute ( and ridiculous) price.This is what I guess , Subra’s point. There is a market force , yes, which will get corrected as the returns from buisiness start diminishing.
Over to you Shyam
Marshal
from my experience, real state in mumbai is way different from other cities.. here people are ready to pay higher for rents and appartments. like i wanted to give my flat on rent and from internet within a day i got 10-15 queries. out of these 50% were ready with token money.
my neighbor sold his flat in weeks time. too many buyers popped up
so there is demand and supply is less
p.s. am talking about andheri east 🙂
subra
a high tide takes everything up Marshal..I know of people earning Rs. 1.5L a month (gross) committing to a Rs. 1.25 crore house (if you consider interest also as cost, then the total repayment is Rs. 2.5 crore+ furnishing say Rs. 30L = Rs. 2.8cr). 3 crores is 200 months gross. 200/12 = 16 years. If 16 years of my life is ONE HOUSE..reminds me of RamaKrishna paramhansa story. One man comes and says ‘In 20 years I have learnt how to walk on water’…RP tells him ‘what a waste of time..you pay 2 paise and the boatman will take you across the full river !! To me Mumbai prices are a joke, I rent.
caveat: I own an office, but bought it outright.
Praveen
Presently in India, Real Estate is the major asset which can accommodate/absorb Black Money. If I had 1 crore where can I invest/keep it? FD/Shares/MF or anywhere I will be caught. But in Real Estate I can simply buy a Land & can show its acquired cost as 10 lakhs 🙂 SO although Real Estate is a bubble its not bursting due to its more thickness of black money.
Leave Mumbai.,event in a Developing Town (like my home town) a 3BHK in good area is costing 30 lacs 🙂
Dr Mohammed Ali Khan
@ Pravin
Exactly..The balloon is black..But still,I think that its a balloon!
Because,if common sense people like Subra cannot make sense of the prices..It means only 3 things..
1. India is going to have double-digit growth due to our politicians and bureaucrats suddenly becoming honest
2. Rupee will rapidly lose its value due to “quantitative easing” AKA “printing money” by the Reserve Bank
3. Or, we are in an actual bubble…
Which of the 3 scenarios is likely, only time will tell…
Muthu
Really enjoyed the incisive analysis and some excellent comments. I’m getting hooked to this blog.
Kalyani
Mumbai prices are still a joke ! esp those of us who have ‘rented’ our lease papers to the home loan dept of ANY bank on a floating / fixed term :).. it looks that either one needs to be from the underworld or be a moneylender to keep afloat these astronomical prices.. perhaps the reason why there isnt ONE decent public library in the whole of chembur and probably 3-4 km radius ! .. too expensive real estate at the cost of kids not valuing the ‘atmosphere’ of a lbrary ! anyone listening???
Deepak
Subra,
Pune is also NOT a different story. Once upon a time it use to be a affordable place to live and now it goes hand-in-hand with Mumbai. I think, real estate prices will reach so high like a BIG monster that common man have to shout “Trahimam, Trahimam…” like the old “Satyug” or “Draparyug” time when God takes an Avatar on earth and kills those Monsters.
Please pardon my analogy…but no other words to describe as being a common man of this country!
Ajit Singh
Real estate prices in all the metros in India are a joke. I stay in Delhi and have seen people pushing the NCR. Now we have developments coming in god forsaken places (some as far as 50Kms from Delhi) and selling like hot cakes. And now more developments are coming in (20 KMs farther away). I know the real estate is overpriced but have no clue as to how much higher it can go. There are a few characteristics of Indian market to note though:
– One of the characteristics in India is that people pay a lot of down payment (sometimes as high as 40% and generally in black money)and the rest in EMIs. Due to this default is low (They will loose their entire black money in case of default) and hence lesser foreclosure.
– Since most of the transactions are essentially parking of black money, the holding power is also very high and people just refuse selling it at a loss, forming a base for the market
– Demographics: India’s demographic curve still has a positive slope and is not expected to go downwards anytime soon. I havent done any comparisons but i guessing real estate prices very rarely go down with an upward sloping demograhic curve. (Will research about it and come back to the group when get time)
Thoughts from the group are welcome.
Piyush
@ Dr. khan
Well said sir
If a well earning individual (or couple) earning, say, Rs. 1-1.5 lakhs gross salary per month, which as per my understanding qualifies as a handsome salary can’t afford to buy an average 700-750 sqft carpet area flat within 30 kms of his office area, only one of the below seem possible,
(a) Salaries grow at a rapid pace, (seems highly improbable given the macro picture)
(b) Prices come down rapidly and sharply
(c) Prices remain flat for a very long time, even 3-6 years possibly, causing a correction in real terms, if not nominal.
Frankly, I wouldn’t mind the first case either, but then I would rather wait for it to happen and reflect in my earnings to decide on buying a house. More likely either (b) or (c) will happen, depending on developers holding power. So till then, I will rent, like Subra. 🙂