Property Oversupply can Lead to another Real Estate Bubble

With India’s real estate market brimming with new launches, investors need to exercise caution while choosing projects. Leading private equity investor Gaurav Dalmia , founder chairman of realty-focussed Landmark Holdings that is investing $225 million in specific projects, feels speculative buying can act as a downtrend. In an interview Dalmia tells why he feels some pockets of real estate market may tumble in the coming months.


Developers continue with new projects even as prices remain high. Do you see demand taking a dip?
Demand is not low though speculative sales made earlier reflect a big downtrend. I think demand continues to be strong, but the situation of oversupply has restarted. As to where this will lead within the next year, I can only say ‘Bubble 2.0’. The market is doing well, but it will not stay healthy because of oversupply.

While the government is planning a housing start-up index (HSUI), are there any indicators for oversupply?
Many good projects are not getting mortgages because speculative buyers are not borrowing. With this disconnect, there is oversupply. Looking at certain markets, I’m not surprised there has been a correction, not in terms of price… but sales velocity has slowed down. Sales velocity is not low, but is less than earlier. My hunch is that over 60 per cent sales are speculative.

Does oversupply translate into price corrections?
There was a 25-30 per cent correction (in prices from two years ago). Funds are investing, but more selectively. Investors are also paying attention to existing investments. Prices in Delhi-NCR are too high for the average buyer. There is a mismatch between purchasing power (which is more real) and asset prices. The millions of buyers with their purchase price will affect asset prices in the long term.

What are the key parameters you consider when making an investment?
We look at the demand-supply situation. Demand is easy to forecast. Oversupply is what we worry about. In smaller cities, one or two sectors drive the market. If those go down, demand can suffer even though long-term trends may be very healthy. A developer’s project may have good location, good valuation… but not implementation. In the end it’s an implementation game, not an investment game…. (however) compared to one year ago we are not finding better deals now. We cannot measure (the amount of money we have put in) as we continually rotate our investments. We have invested in 22 projects where (returns) range from 15-35 per cent.

What about your investors (those who have invested in your fund), what kind of expectation do they have?
They still have expectations of at least 20 per cent returns that one can make in emerging economies. While no market that is comparable to India, Brazil, China, and even Vietnam have similar trends. In India, suburbs may struggle until infrastructure is created.

Do you think a real estate Regulator Bill will benefit the industry?
The licencing process in India is not transparent… it is dirty and cumbersome. You can’t have a (national) policy that will correct it. The problem is state-level legislation. A real estate regulator will ensure what (a developer) has promised in a contract is delivered to a consumer, nothing more… If you are running a gambling den, you won’t want to have cops around.

As an institutional investor, do you have a say in the timely execution of projects?
We certainly do. The developer is also trying to (complete a project) quickly because his money is locked in. It’s just a question of if he is lifting his eye off the ball to play something else. I don’t think developers deliberately delay projects.

Just a year ago, developers were struggling to find buyers. What do you think their position is now?
A lot of the inventory is cleared. Debt position of many developers has improved because of sales and because they raised equity. I don’t see the kind of pressure that was there one year ago. The better developers are doing alright, the bad developers we won’t work with no matter what.