Mumbai apartment prices are too high

Old rating: (negative)

New ratng: (avoid strongly)

July 26, 2007
Analyst: Matthew Pollock
Tel: 632 750 0560
matthew@globalpropertyguide.com

BRIEF SUMMARY
Apartments in Mumbai, India, are very overpriced, due to outdated planning and rent controls, bottlenecks, and India’s rapid economic growth. The Global Property Guide does not believe this can last, and has downgraded its residential property investment rating to “avoid strongly”.

ARTICLE
Apartments in South Mumbai cost around US$9,000 to US$10,200 per square metre. “Such stellar prices can only be found in the world’s leading cities,” says Yasmin Rahman, yields and valuation analyst at the Global Property Guide.

Property prices in other cities in India are significantly cheaper than in Mumbai. In New Delhi, the administrative capital, used apartments cost around US$2,000 to US$3,000 per sq. m. In Bangalore, India’s Silicon Valley, prices are around US$950 to US$2,000 per sq. m.

These prices are exceptionally high for a country with a GDP per person of only US$770 in 2006. Even for highly paid call centre agents with annual income of around US$3,000 to US$4,500, these condominiums are still unaffordable.

Remarkable growth

Residential property prices in India have been rising remarkably during the past years, boosted by the IT industry's expansion and by rapid economic growth. IT and IT enabled services (ITES) firms have gobbled up new property offerings in several cities. There has also been a continuing move toward suburban business districts (SBD) in Mumbai, Delhi, Bangalore and Chennai.

Indian cities are have struggled to accommodate the influx of people from rural areas. Public infrastructure such as roads, bridges and trains are filled to the brim. Congestion and traffic jams are part of business-as-usual environment.

Demand for quality accommodation of expatriates and “mass affluent” individuals outstrips supply. The government is encouraging the development of new residential complexes with world class amenities and facilities.

Low yields because of rent control

India’s rental market is still hindered by socialist laws protecting tenants. Although these laws are slowly being replaced by more market oriented laws, the rental market's full potential has yet to be realized.

Rents in Mumbai are frozen at their 1947 level, due to the Maharashtra Rent Act of 1999. This law, which extended the Bombay Rent Control Act of 1947, is slightly more pro landlord than the earlier law, but it does not still sufficiently protect landlords’ rights.

Ironically, these rent control laws help create a housing shortage which pushes up prices. Monthly rents in Mumbai are expensive at US$8,000 to US$10,000. Nonetheless, yields are low, at 3 to 4.7%.

Nevertheless, we do not believe this situation and these prices can last, and we are consequently downgrading Mumbai.