Perspectives on Mumbai Real Estate Market

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  • Mr Market
  • 29-Jul-2015

In the recent past, various reports have argued that Mumbai property prices will crash by 25%-50%. It has been followed by a lot of similar news in the news TV and social media space. We do not want to challenge anyone's view but through this short report, we want to give our perspectives on Mumbai Real Estate market.

Similar to any other commodity, the price of real estate is also mainly determined by demand-supply factors of that market. Additionally, the real estate price of any location is also influenced by its local dynamics like social structure, community in the area, amenities, space, infrastructure near the location, access to markets, education and hospitals. Therefore, the local factors of each part of the city can never be ignored.

Below are some of the pointers that will help you build a perspective on Mumbai Real Estate Market:

1. Mumbai Consists of many Suburbs: Mumbai is divided into many suburbs with varying population and area in each suburb. Each suburb has a different demand / supply situation which means that no one can predict the price trend for the entire Mumbai region. At the same time, the local regulations for construction area (FSI and TDR) are also quite different for different parts of city which affect the cost of production of real estate.

2. High Priced areas will see Correction: It is very clear that property prices are not likely to rise in near future for most areas of Mumbai. However, areas having prices more than Rs. 40,000-45,000 per sqft may see time-wise correction or price-wise correction.

3. Rent to Property Price Ratio: Historically, rent yields in Mumbai have been in the range of 5-6% per year. However at current market prices, the rent yield has fallen to around 3-4% per year. Most real estate investors do not invest to generate the rent income but invest for capital appreciation; however, current yield acts as one of the deterrents for inducing the investors into buying real estate. At the same time, higher property prices and availability of cheap rent property makes a prospective buyer prefer a rented property than owning a property.

4. Investment of Black Money: It is said that the proportion of black money in purchasing a Mumbai based property has reduced to just 10-30%. Some analysts argue that this is one of the main reasons for decrease in property prices. However, we think that there has been substantial increase in the base rates of ready reckoner in the last 3-5 years. This leaves very less chance of large black money investments in real estate. Moreover, most new buyers avail home loans and therefore prefer to make full payment by cheques to avail the higher amount of loan. So the reduction in component of black money is not a strong reason for the fall in property prices of Mumbai.

5. Over Supply in Certain Areas: Mumbai is the city of Islands and there are certain areas that have large oversupply. Some of the areas where there is an oversupply situation include Navi Mumbai, Thane, and Dahisar onwards where the land is available freely. Whereas, most of the development in Central and Proper Mumbai region is coming in the form of redevelopment. In a nutshell, supply is limited in Central and Proper Mumbai; however, over supply situation is witnessed in outskirts of Mumbai. In such areas, this may lead to a price correction of 10%-20%.

6. Higher Construction Costs: After the land cost, the second largest cost of the real estate is construction cost. The average construction cost in Mumbai is Rs. 2,500-3,000 per square feet for normal height building but high rise buildings’ average construction cost is in the range of Rs. 4,000-5,000. Unless the construction cost does not reduce, the real estate price cannot reduce substantially.

7. Correction of Price will Increase the Demand substantially: In all areas, there are many prospective buyers waiting for the price correction of 10% to 20%. Even a small correction of price 10-20% will generate a very strong demand for real estate. Whenever it happens, it will sharply bring down the inventory levels in Mumbai.

8. Correlation of Mumbai Real Estate with Other Cities: It has been widely discussed that the prices have dropped in certain other cities where new projects are launched. However, we believe that real estate market is more of a local one and a general trend cannot be painted across India. Whatever the national trends are with regard to real estate - whether they are booming or busting - what really matters is what the market conditions are in your region, town, or neighborhood. It is wrong to conclude that Mumbai property prices will crash only because it has reduced in other areas of India where launch of new projects have happened.

In the near term, the Mumbai Real Estate Market can be concluded as below:

  • High inventory will lead to price correction (not crash) of 10-20% from current levels
  • Slowdown in launch of new real estate projects
  • However, price correction will sharply increase the demand leading to absorption of inventory

At we are closely watching the Mumbai real estate market and are looking at few listed companies that provide us good opportunity to invest and reap returns over a period of 3-5 years. Keep checking out Investing section for the same.

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