Wednesday, June 27, 2007

How costly is Mumbai.??

Mumbai, India’s financial capital is one of the most expensive places in the world to buy a condominium unit, according to a Global Property Guide survey.

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.

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%.

In Delhi, the maximum annual rent is capped at 10% of the cost of construction and the market price of the land. However, the cost of construction and the price of land are both based on historical values and not the current market valuation. So the older your property, the smaller the rent you can charge.

Newer and smaller units in New Delhi fetch on average up to 8.4% rental yields yearly. But generally, yields are low to moderate in Delhi, at 4% to 5.8%.

Bangalore’s more laxly-regulated rental market has higher annual yields at 7% to 10%.

Urban housing problems
In a separate study, the Global Property Guide finds that high transactions costs and restrictive rental markets are conducive to the creation of urban slums. Roundtrip transaction costs for property purchases in India are moderate to high, ranging from 7.5% to 17% of property value, depending upon the city.

Registering property transactions in India is slow and cumbersome as many properties lack clear titles. Property valuation is not standardized. Such problems encourage the under-provision of housing and the growth of slums.

In 2001 about 55.5% of India’s urban population lived in slum areas. The number of slum dwellers in India exceeds 158 million, more than the population of the UK and Germany combined. Dharavi, Asia’s largest urban slum area with more than a million people, is located right next to Mumbai’s prime business districts, the Bandra-Kurla Complex.

As the Indian economy continues to rapidly expand, its cities will continue to attract investors, expatriates and migrants. The development of India’s real estate and rentals industry would greatly benefit from further liberalization of property ownership laws.

Friday, June 22, 2007

Lemonade in Mumbai.

This week, a young man in Mumbai lost his only productive assets -- a few glasses and some lemons placed on a tray -- in a raid by municipal authorities. The illegal lemonade hawker was punished, his property confiscated, in the few seconds it took for my car to pass the scene.

A front-page story in Indian newspapers the same day was about the city receiving a glowing endorsement from MasterCard Inc. The credit-card company's inaugural survey of worldwide centers of commerce puts Mumbai -- the only Indian city in the top 50 -- at a lowly 45th position.

However, one of the six subcategories of the survey is ``financial flow.'' On that metric, Mumbai was in 10th place, ahead of Shanghai, Hong Kong, Sydney, Singapore and Zurich.

The survey confirms something that millions of immigrants coming to Mumbai from the Indian hinterland, Afghanistan and Iran have known for centuries: There's money in the air here.

And yet, most people in this city of rich businessmen, famous movie stars and shadowy hit men are like the young lemonade seller. They can see the money, but never catch it.

How does one make the benefits of financial flows trickle down to those who are undereducated? How does one do it when the Indian state is fiscally and managerially too weak to transfer incomes to -- or create opportunities for -- the have-nots?

Here's a wacky plan: Turn Mumbai into a special administrative region like Hong Kong.

City of Traders

If Mumbai's economy could engage with the rest of India through a ``one country, two systems'' mechanism, similar to the arrangement Hong Kong has with China, it would lose the baggage of national policies and politics that hold it back.

Mumbai, like most ports, is an opportunistic city. In the 1860s, traders of Bombay, as the city was known then, made millions of dollars trading off the American Civil War.

The animal spirits, crushed by four decades of botched Soviet-style socialism, are rising once again. Now the city is exploiting the economic growth in its backyard.

The cash segment of the Indian equity market has traded $2.7 billion worth of shares daily over the past year, while futures and options averaged $8.4 billion a day last month.

Commodity derivatives generated business worth $6 billion a day in May, whereas bonds added another $3 billion. The currency markets are transacting about $16 billion daily, according to the latest data. That's a six-fold jump from five years ago.

$100 Billion Economy

Throw in the money market, and you're looking at a total daily financial flow of $37 billion.

MasterCard has followed a somewhat different methodology. It has looked at the number of transactions, rather than their value. Either way, if it were made legally impossible for state and federal governments to hijack through taxation the value added in Mumbai's financial trading, that could work wonders.

If the denizens and local government of Mumbai got to keep just 0.1 percent of the flow as their incomes, they would have well in excess of $10 billion a year.

Income from banking services, insurance, fund and wealth management and real estate should easily double that figure.

Then there are port activities, wholesale, retail, construction, hospitality, tourism, education, health care, entertainment, utilities and transportation. All of that together would, if Hong Kong is any guide, create five times the value added in the financial, insurance, real estate and business services. Mumbai would have a $100 billion economy.

The 19 million people who live in the city and its suburbs would have a per-capita income of $5,000 a year, or eight times India's average. The local government would get enough taxes to manage the city's staggering income inequality, against which it is currently powerless with its limited revenue sources.

Two Currencies

How would the rest of India manage without taxing Mumbai? The answer may once again come from Hong Kong and China: one country, two currencies.

Let there be a Mumbai dollar, set much higher than the rupee's exchange rate of 40.7 to the U.S. dollar. It would float freely and be fully convertible, removing one of the big hurdles in turning the city into a global financial center.

The rest of India would continue with the heavily managed rupee, which, I suspect, would then depreciate. That would be a boon for exporters, who are unhappy with the steep rise in the home currency this year. A weak rupee would lure foreign investments into labor-intensive, export-oriented industries.

By creating jobs for their swelling ranks of youth, the laggard states in northern India would reduce their considerable risk of crime and unrest.

This is all just a pipe dream, and a blatantly mercantilist one at that. The International Monetary Fund would never allow it. Nor would India, which is reluctant even to have multiple time zones, let alone currencies. If you have a workable suggestion that could be implemented by a weak coalition government, write to Prime Minister Manmohan Singh.

The challenge is to induce Mumbai's lemonade sellers to go back home to the hinterland and find work in modern factories, where they have access to a larger amount of capital that's also better protected by property rights than their drink stalls ever will.