I spent the last few days meeting, among others, a small group of investment bankers employed with a large American firm. Most of them have recently come to India and are getting a grip on their jobs and of course Mumbai city.
At least two are still living out of south Mumbai hotels with their families visiting off and on. Another just found a place to live in the suburbs. The other two don't exactly love staying in hotels. They've been hunting for accommodation for more than a month now. All three say they are amazed at Mumbai's realty market.
Why, I ask. To which they said they were aghast at the monthly damages. "It's absolutely ridiculous," one said, adding, "Forget the rentals, which are totally out of sync with anything. Look at the houses. Every apartment I've checked out has at least one wall that's got water seeping through. And none of the buildings is even painted from
outside."
A young Chennai-based industrialist had this to say. His company has been wanting to expand capacity for their auto component business. "But land prices in interior Andhra Pradesh, where we want to set up a new factory, have shot up drastically. It's not just cities where prices have zoomed. This is affecting our growth plans," he said.
A Delhi-based garment manufacturer told me he had a harrowing time in the last few months running around the corners of the city looking for an empty shed to install some additional stitching machines. It's not that sheds or plots of land were not available, just that the prices were astronomical. He finally did a deal, at a price that was much
higher than what he set out to pay.
And the final story. A south-based capital goods manufacturer told me business was booming but capacity expansion was difficult, given rising costs, particularly land. "We have the money but it's difficult. We even thought of buying a European firm, which is in the same business as us. It's easier to buy the plant there than in India! The only thing is what we do with the 2,000 workers there!" he asked.
Industry is not exactly screaming from the rooftop but there clearly are niggling concerns. These are of two types. First, the rising costs of doing business and staying competitive as outlined above. Second, more fundamentally, if this is indeed the case and there is no real change elsewhere (like physical infrastructure), isn't it bad for business? "I am happy because the orders are flowing in but it looks like it will hit a wall somewhere soon," the capital goods manufacturer told me in a sombre manner.
The Chennai component manufacturer put it best. "In the 1990s, we had to worry about high interest costs and other barriers like high telecom costs to doing business. Today, telecom costs are down, interest rates are also down but land costs are zooming and so are hotel rates."
Speaking of hotels, the same Mumbai investment bankers told me that their bank's negotiated, corporate hotel rates for India (particularly Bangalore) were the highest in the world. For any city.
It struck me that the last time I heard a foreign investment banker complain bitterly about skyrocketing real estate prices in Mumbai was around ten years ago. And that's roughly about the time property markets began their slide. Of course at that time, everyone thought the only way property prices could go was north. The stock markets had already
descended into general inertia though for other reasons.
Whether bought, leased or paid in the form of a bill for a single night in a hotel, land is an important component of the cost of doing business. Stories of visitors to Bangalore flying to Hyderabad to spend the night are legion, as are the grumblings of business visitors to Mumbai and Delhi.
Ask anyone who checked into a five-star hotel in these cities in recent weeks and they will tell you how they were shocked to see another, new, rate card.
Whether people admit it openly or not, it's hurting. Interest rates are on the rise. So where is the competitive advantage, or more appropriately, how long will it last? Worse, what if firms are constrained from expansion and thus growth, as in the examples quoted earlier. Even special economic zone (SEZ) land prices have shot up, as more and more land owners shop for the best price.
The good news is that unlike in the US, where fears of a real estate crash are now real, in India, it is early days. In the US, incidentally, new home prices seen the biggest fall in 35 years. Paul Krugman in his column (New York Times, October 30) says, "Most good US economic news in recent years has been the result of soaring home prices."
According to him, spending on new houses created jobs and poured cash into the economy. Consumers borrowed against the rising values of existing homes and went on a buying spree, spending more than they earned for the first time since the great depression.
My investment banker friends see opportunity in India. But such costs, creaky infrastructure and the slow change bother them. If that is so, then India is not the best or most ideal investment destination. Most of the present expansionary zeal stems from production and labour cost disadvantages. Not to mention the sheer entrepreneurial energy. And yet, the success of these investments depends on investors finding value in the domestic market.
That won't happen till someone does something about Mumbai's houses. I mean the prices.
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