The prices…..in the wake of terrorism

Most of us consider the interest rate as the key factor affecting real estate prices. While a combination of factors can affect the demand and consequently prices, terrorism can be the most lethal market buster.

Commenting on the terrorist attack on Hotel Taj, Trident-Oberoi and Nariman House, the Singapore Prime Minister expressed the view that investment in India can be adversely affected by the developments. The then Finance Minister, P.Chidambaram, admitted that the Mumbai siege may mar the mood of the investors and could have negative impact on investor sentiments at least in the short run, but the Indian economy has the strength to overcome it fast. The rating agency, Standard and Poor, however, does not expect any negative impact on India’s macro economy. The terror strikes, they say, are isolated incidents. Percy Mistry, economist and head of an expert committee on making Mumbai an international financial centre, which recently submitted a road map for the same, is reported to have stated that the terrorist attack can erode investor confidence. What is the factual position relating to property prices?
Risk perception

Investment in real estate mainly depends on the risk perception. Risks are from many angles. First and foremost is the safety of one’s investments and the return for it. Next, the class of investor/s who contribute a good percentage of the investments in property. In the case of Indian real estate, individuals form only 10-15 per cent of the transactions, especially from the volume point of view. Surveys have shown that the institutional investors form around 40-45 per cent of the value of deals done in the last 3-5 years. Banks, finance companies and software firms own office premises in major cities as they plan for medium to long-term benefits. If this is true, risk perception will be high in the short term. Yet, the global financial meltdown does not give many alternatives for funds and trusts to get reasonable returns for their investments in liquid assets and they have to turn to the property market. Some may even use the slump to buy property in risky metros.

If terror attacks are dampeners, the 9/11 World Trade Centre attack in New York did not affect property prices in New York city. Even in the Philippines, the killings of tourists did not stop further property development. Nearer home, the 2001 terror attack on Parliament in Delhi did not have any adverse effect of property prices in the metropolis. The risk perception is a wholesome feeling and again comparative in nature. In fact, terrorism is now a global phenomenon and there is no place which can be considered insulated against it. This means among the risk Factors such as fire, flood, earthquake, and now terror all have pivotal role in risk perception.

In this background, Indian property prices cannot be considered high as compared to the ‘street specific’ top few cases as reported recently. For example, the most expensive sq.ft. prices at Rs 8.45 lakh on Avenue Princes Street in Monaco, Rs. 5.40 lakh in Seven Road, Hong Kong, Rs 3.60 lakh in Fifth Avenue, New York, etc are not comparable to any area in Mumbai or Delhi or Kolkata . At best, the price of Rs. 52,000 reportedly paid by a foreign bank in Mumbai last year for securing an office space could well be the highest in India. In such a situation, a reported slump of 10-15 per cent seen in Mumbai market overnight cannot be considered alarming.

Much needs to be done to protect properties from terror risk. Some important steps can be:

Insurance against risk of terror attacks.

Business Districts must spread its wings to interior locations.

International property exchanges covering property stocks, so that risk can be neutralised by investing in stocks of different countries.

Cities including Hyderabad, Bangalore and Chennai have lower property price rates as compared to Mumbai or Delhi. In such a situation, it is likely that investors may turn to these cities for taking the advantage of lower prices. This may perhaps help the sagging market too to look up. Let us wait and watch.