Affordability

By Ramesh Akkineni

Deepak Parekh in an interview

You haven't been bullish on real estate. What do you think you've missed?

I'm still not bullish. Real estate in India has to do with affordability whether it's for residences, offices or even malls, and affordability is the key to viability. The boom in the commercial space is due to the demand from the IT and ITES sectors where most companies don't buy space. Almost 90 per cent of it is rented. Companies cannot afford to pay rents of Rs 30-35 per sq foot because the wage structure is increasing. If you don't want to lose business to China or Vietnam, rents have to stay in check.How many malls can afford to pay Rs 100-150 or Rs 200 per sq foot? Look what happened to Crossroads. Only restaurants are left because food sells and the Piramals have sold out. The same thing is going to happen to other malls. There are many international brands, but they too cannot afford to be present in every mall.

How do you view property prices today?

I was in Bangalore recently. Developers tell me they see a slowdown in sales and a dip in commercial and residential property prices varying between 10-30 per cent in Whitefield, which is a growing suburb. I would say this is the beginning, it's not a bubble. A correction is necessary and further increases are unlikely to happen. Even if your cost of construction goes up, you will not be able to pass it on because you have inflated land prices.

Home loan rates have risen 200-250 basis points from their lows 30 months back and asset prices are also up. Is affordability deteriorating?

Affordability is certainly at a stretch. But the shortage of housing is enormous, so we feel that a 200 basis point increase in home loan rates will not impact demand for housing. Normally, we either extend the term of the loan, or increase the EMI or ask people to make balloon payments. Sure, we don't want the loan period to extend. Some of the banks have started disbursing loans at 25-year periods at origination. These loans will easily stretch to 40-45 years. Can we afford this? We have to lend on cash flows of the family, not on the asset value.

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