Booming stock market gives +ve sentiment which inturn triggers boom in real estate prices. Same applies to bearish trend in stock market.

I mentioned in my privious post that -

If you feel that realty prices will appreciate, that means you feel that market will get better than what it is right now. If you so strongly feel market will go up, invest in stock markets! Risk is lesser as you can diversify your investments!

According to me, the scenario is such an uncertain one that putting money in either stock-market or property is very risky. But still, if you are ready to put money in property then I feel that compared to that, putting money in stock-market is relatively lot-less risky.

Let’s analyse why you should put money in stocks instead of property (only if you are puting money in properties) -

1. Puting money in property is a not-so-sensible financial decision in current scenario. Read my previous post which explains it with stats.

2. In Stock-market, you can have strict and quick stop loss. Property is a BIG and bulky elephant! Not easy to sell and hence tougher stop loss. 

3. If market goes down and your job is at risk, you can not immidiately and easily sell property compared to stocks. Especially, as we are seeing many builder flats (fresh-flats) being available even at this time in the market. Moreover, many new schemes are being announced which may generate more supply of fresh flats. Your flat will be a second hand flat, however new it may be!

3. While investing in stocks, you can diversify your invetment (and reduce risk) in stocks of different companies, MF etc. Whereas property is a single element…. means BIG risk.

4. If market goes up, the rise in property prices will be compensated by the gains you make in stocks. so you wont be loosing anything.

Of course, I do not claim that this is an ideal solution (there is none!) but closer to ideal one. It is always about reducing the risk…. you can not completely get rid of the risk.

Still, as I said earlier, I feel this is time to neither buy stocks, nor  property. Turbulant time is still in pipeline for US. By all the stimulus packages and all, we have simply applied a patch to world (US) economy. The bottom line is, US has lost trillions of dollars in subprime… and it’s a BIG Loss. It will be interesting to see how US will be able to combat (if at all!) the currency crisis of the USD that is looming ahead!

I will take example of Aundh/Aundh annex area.

A – Min price of a 2BHK house in Aundh Annex: 30 lacs

B – Average rent of a 2BHK in same flat in Aundh annex: 9000 Rs per month – 1,08,000 Rs per annum => round it off to 1.2 lacs [rent agent charges ]

By simple calculation, even if you invest 30 lacs in a bank FD at 8/8.5% rate, you will get approx 2.5 lacs as interest every year! [You can always diversify your investments to earn at least 12-15% avg return]

Thus, Renting is absolutely a +ve cash flow!

You migth want to add your homeloan tax saving as a potential benefit but then on the other hand you will end up paying huge interest to the banks!

At the same time, the tax saving you make on HRA (rent), you won’t get anymore. If you are renting a good property at Rs 12k/month and your basic salary is high enough, you can save almost 1.5L on HRA…. the sme amount that you save on home loan interest payment. Mind it…. this 1.5L is apart from the 1L investment you can make under 80c… same as homeloan interest exemption. The only catch is that you Basic+DA should be high enough. But even if it is not too high, you might end up saving tax on at least 50k per annum.

So, in practicle financial sense, it is a BAD decision to purchase a home at this rates.

Infact, one can rent a 2BHK in Aundh – a much much better area, for 12k per month, grossing approx 1.5L and still save money while leaving in better location!

If you feel that realty prices will appreciate, that means you feel that market will get better than what it is right now. If you so strongly feel market will go up, invest in stock markets! Risk is lesser as you can diversify your investments!

This calculation is only from financial point of view, not considering the emotional point of view of dream (if you call it) of owning a home.

The surge in realty during 2003-2004-2005 was because the rental and EMI difference was tiny. The surge in realty following these yrs was simply due to the momentum created during these years.

As I mentioned in my previous post, there will be huge demand for 1000sqft 2BHK for about 20 lacs as that will more or less fit in this equations.

I do not possess completely -ve view on real estate sector but certainly there are some concerns regarding how this sector operates in India.

I have seen many people cribbing that builders are too greedy and they enjoy very high profit margins etc. To be honest, I don’t find anything wrong if builders are enjoying very high profit margins. They are simply doing business and business is done for profit. They will not NOT take high profit because it is too much of profit As long as they are able to sell it, they will.

India is a free market and all free markets are purely driven by demand and supply. If demand is much much more than supply and hence prices are sky high, definitely profit margins will be roaring in such businesses. Real estate has been such a biz in India in last 3-4 years, between 2004 and 2008.

The problem for customers in such a market will be that they will end up paying very high prices for their purchase and in return they may not get best of the quality.

My above comments exactly match with the current real estate market scenario in India.

Second half of 2003 was the start of the boom cycle all over the world. The boom gave tremendous employment opportunities in India as well, especially in Indian IT sector. On an average, top three Indian IT companies – TCS, Infosys and Wipro – each added about 75,000 to 1,00,000 employees in their work force during 2003 and 2008. Apart from these top 3 IT companies, next league of Indian IT companies like HCL, Satyam, TechMahindra as well as many many MNCs in IT sector also hired furiously during these years. The offshore pay packages of MNCs and onsite opportunities in Indian IT companies were majorly generating good liquidity.

On the other hand, the real estate sector in India at this time was mainly unorganised, especially residential real estate. The capacity of relatively unorganised RE players was limited in terms of securing funds and hence the supply was limited!

The scenario is certainly different from what it was earlier.
With the RE sector becoming organised, they have good availability of funds (baring the slowdown) and hence supply has increased. Demand has reduced since then, at least for very high end homes. With huge supply of IT folks available in market due to layoffs as well as un-placed fresh pool of IT graduates, IT pay packages have rationalised a lot in last one year or so.
Heavy increases in pay packages is unlikely in IT now.

With protectionist approach of US, onsite has drastically reduced. Also, due to slowdown in US and Europe, many local IT folks are available in these countries at reasonable rates. Indian IT firms have already announced their plans of hiring local talent as opposed to sending their Indian employees to these countries.

Keeping all these factors in mind, sooner or later, rationalisation in property prices is inevitabel. The RE firm will have to come down to rational profit margins – down from more than 100%-200% margins to around 25%-30% margins.
Of course, they will and they should sustain current margins as much as possible, but I don’t think it will be possible for too long.

I am seeing many flats up for sale in Pune with no buyers at the price they quote.
For example, recently I saw an advertisement for resale of a 2BHK of about 850sqft, the owner quoting 28 Lacs ion a little bit interiour part of Pimple Saudagar. The price might be fair on owner’s part as he may have bought it for almost the same price last year! But will anyone buy the resale flat at this price? Not really. Most buyers will quote something around 21-22Lacs for this flat, simple reason being availability of brand new flats at around 27-28L range from the builders.
This will certainly discorage investors from entering RE market but even the genuine home buyers will think twice as once they purchase the property, if they find any problems with their job, they can’t simply come out by selling the property… they won’t find any buyers at their price!

I still feel there is huge scope for heavy demand in RealEstate sector but at a different level of the pyramid. Until the shift in the pyramid band takes place, materialised selling will remain limited in Real Estate sector. A 1000 sqft home with price range of 20-22 Lacs is the potential area of explosive demand!

Still, I strongly feel that if the builders are getting customers at the existing prices, they will not and they should not reduce prices. And it is obvious for any business – The prices reduce when the vendors have no option but to cut the prices…. to lure customers.

The builders will not reduce price because they should reduce it, they will reduce when they have to reduce it.

This is one of the artifact from about a couple of months back -

Pune, along with other parts of India, has seen tremendous growth of real-estate in last 3-4 years.
In fact, it has been a bit more than most of the other parts of India.

But again, the slump of last couple of quarters has started hitting Pune and I feel the hit will also be a bit higher than rest of the country.

There are certain reasons why I think so -
I have mostly stayed and worked in North Eastern part of Pune – the stretch between Pune University and Hinjewadi (IT Park).
Same is the case for most of the IT folks in Pune.
Infact, IT population has presence mostly in this area or in area around Hadapsar (eastern Pune) in the city; unlike Bangalore where whole city has scatterred presence of IT folks.

These two areas – Aundh + surroundings and Hadapsar + surroundings has seen major boom in property prices and rental prices.
The mad rush in buying properties had been such that there would be no tomorrow.
I feel people who made there purchase in first half of this ‘golden’ period of 4 years are the real beneficiaries.

I will comment more about Aundh and surroundings as I have been familiar with this locality.
I remember prices in Aundh were around Rs 1500 – 2000 per sqft in early 2004 compared to 4500-5500 in late 2008.
Aundh being realtively smaller area (compared to residential areas like Jayanagar, J.P. Naga, Koramangala in Bangalore), it is almost saturated and that will ensure little affect on selling prices in this part but other upcoming areas in surroundings will feel major heat of the slow down.

Real Estate developers in areas like Baner, Balewadi, Pashan, Sus road, Pimple Saudagar, Wakad may have to face real challenge in terms of generating cashflow in the period of next half a decade.
Primary reason being, the real estate development in these areas has been concentated only on IT developments in Hinjewadi.
Top Indian IT companies have huge presence of employees in this region – 10,000+ employees for couple of the organisations.
Apart from these some more companies have presence in 1000 to 5000 employees range.

The considerable growth in salaries of the IT employees in India during last few years and considerable amount of onsite opportunities for these employees generated good enough cash rich people in this region during last 5 years.

Then where is the catch? Why can’t they infuse money into buying properties here?

As per my understanding, most of these IT folks have already purchased property for themselves.
Out of the total population of IT folks in Hinjewadi, more than 60% were hired as freshers in last two year.

Reduced Biz in IT:
With overseas markets facing the worst recession (depression?) since 1930s, the growth of these IT companies has almost completely dried up.
The meagre demand has trigerred lower billing rates and hence lower margins for these IT orgs.

Realistic view of IT:
Doesn’t matter how bigger an organiasation is, they will have to start trimming their work force from next quarter onwards. We may like to believe that the situation will improve overseas after a couple of quarters but if we be honest with ourselves, we know that the tough time is going to hang around for years and not just for months or quarters. I am not being pessimistic, I am being realistic…. It is good to be optimistic but it is better to be realistic.

Salary cuts – just a matter of a month or so:
In this situation, companies have already started cost cutting measures. The 2nd best option to reduce cost for these organisations will be to reduce salaries of the employees. They may directly cut the salaries by 15-20% or so but beyond that, the new pay package for the coming financial year is likely to have much higher variable component in the salary which may mean considerable amouint of reduction in take-home salary.

Pink Slips – Inevitable:
This is the best option (and only option!!!) to reduce cost drastically. And in my opinion, it is inevitable….

No hope of hike in salaries:
One more reason why the IT folks used to spend heavily before a year or so was their confidence in future. All the IT folks who started career in last 5 years had only seen market going upwards.
They never would even have thought their salaries can even reduce. Coming to terms with current market condition, they know that even if market comes back to normalcy after say 2 years (to be optimistic), the rise in salaries again is not going to be same.

Onsite??? :
As I mentioned, over 60% of the population working in Hinjewadi IT park are the freshers hired during last 2 years.
Until a year or two ago, the norm in IT Industry had been that normally people used to travel onsite after about 2 years of experience.
It has definitely changed now. I am seeing many many persons around me having 3+ experience and haven’t got onsite. With the gloomy outlook, they are unlikely to get it in next year or two. Infact clients of these IT companies are drastically reducing onsite-offshore ratio to bring down their cost.

Local Market – not an option for these IT Co.s:
I am quite confident that Indian market will start coming back on track in a couple of years but certainly that will not help these IT companies.
If at all, IT companies start heavily working for Indian clients, they will have to further reduce their cost as they do not have currency advantage with Indian clients and profit margins will not be possible if they continue with current pay packages to their employees.

Housing bubble (Subprime) in India? – No, I don’t think so.
I have seen many persons around me – with hardly 2-3 years of experience, they have taken home loans to the tune of 20-25 lakhs paying EMI of 20,000-25,000!!!
The main hope for these big home loans certainly was secure IT job and onsite.
As I wrote above, onsite is definitely to be ruled out. Job security…. we will come to know in next quarter or so.
If heavy layoffs start in India, these ppl may have to surrender their homes to bank loosing all the payments they would have made by then.
I DO NOT think this will happen but then no one thought about subprime’s possibility in US as well.
Of course, India is a different game altogether and hence I personally rule this out.

Rental prices downward?:
There are chances of rental prices coming down. Many persons have bought flats in last 3-4 years around this area and of these persons, bachelors and onsite folks are gonna rent out there property.
Certainly number of employees in IT are not going to grow for next few years, if they don’t reduce.
Hence demand is going to be constant, if it is not going to reduce…. with relatively more supply for rental properties.

Well, Let’s see how it pans out in next year or so….. Personally, my outlook is negetive for real estate in IT cities of India, especially Pune.

Comment here if you disagree with any of the points or you have any new points to make.

I am an IT professional working in Pune for more than a year. I have been keeping an eye on Pune Real Estate market with an intention of purchasing a home.

Thought of scribbling down my experiences of house-hunt in Pune along with my generic views on the Real Estate sector.

I had been contemplating the idea of starting a blog on Pune Real-Estate for some time. I am a regular reader of some of the blogs, articles on real estate – one such blog specific to Pune being Ravi Karandeekar’s blog.

Ravi recently posted about a blog, Pune Realty, started by one of the IT proffessional – http://ravikarandeekarsblog.blogspot.com/2009/06/visit-pune-realty-blog-by-it.html.

At the risk of sounding plagiaristic, I have chosen same name for my blog as the one I mentioned above – PuneRealty, albeit on wordpress. PuneRealty is the name I had though of when I thought about starting the real estate blog. However, I tried to find out some other name on seeing that PuneRealty already exists on Blogspot but couldn’t think of anything as catchy and crisp. Anyways… not a big thing

Also, I have used Blogspot actively and had tried out wordpress briefly but didn’t have an active blog on wordpress. Hence wordpress was the obvious choice. After all, wordpress is arguably the most famous blogging platform!

Eventhough name ‘PuneRealty’ countinues to be my first choice for my blog, I am choosing ‘PuneEstate’ – just to avoid confusion with PuneRealty.blogspot.com!