Globonomics!

Bangalore’s real estate boom and the subsequent bubble have already been mentioned on one of my earlier posts – http://ecofin.wordpress.com/2007/05/03/real-estate-in-bangalore-costbenefit-analysis/

We recently had a chance to lookup apartments from reputed and lesser known builders in various areas of Bangalore and it has to be said that flats are really going and selling at a premium.

Think about the costs.

The price of a reputed builder’s 3 BHK is about Rs. 90 lacs to a crore for about a 1900 sq. ft. house!

The price of most flats in localities in South Bangalore is about Rs. 4000 – Rs. 4500 per sq. ft. Extrapolate this to about an average of 1500 sq. ft. and you end up with an average flat cost of Rs. 70-80 lacs including the basement car park+water/electricity ameneties etc and the registration cost.

What is the markup of the builder?

I would think builders are marking up prices by almost 100-150% of their flat cost and this is a pessimistic estimate. This means they incur no more than Rs. 30 – Rs. 40 lacs per flat cost to the builder factoring the price they paid for the land etc. Think about their economies of scale too because they are usually going for a large volume of flats/units in a single complex that typically houses 200 flats. All costs for them in terms of raw materials are incremental in nature.

Land prices are no different. We had recently been to Devanahalli in Bangalore North and land prices there are at about Rs. 4000 per sq. ft. – Rs. 6000 per sq. ft. and most people have become millionnaires by selling land due to the boom of the Bangalore International airport that is coming up  at Devanahalli.

When will this bubble burst?

The RBI’s directives and banks directions to cut interest rates have led to a minor fall in demand but I expect this demand to fall further. Once that happens, land prices have to see a correction in the next 6 months to 1-year. The current pace is simply not sustainable – this is my opinion.

Any takers?