Unreal Estate

To anyone looking for a flat in Calcutta and surroundings it must seem that real estate prices in the city have gone through the roof over the last couple of years. Residex, the new real estate index confirms this. Rs. 100 invested in real estate in 2007 would have been Rs. 159 at the end of June, 2009, a bigger growth than in any other Indian city. In comparison, real estate worth Rs. 100 in 2007 would have been worth Rs. 58 in Bangalore, Rs. 71 in Jaipur, and Rs. 65 in Hyderabad.

The area-wise growth in real estate prices in is also quite instructive. Places like Alipur and Bhawanipur are always considered expensive to live in, and price increases there have stayed ahead of the average. On the other hand, far-flung places like Thakurpukur or Sonarpur show more than a 70% increase in prices, while the very thickly populated, almost slummy area of Jadavpur has seen a near doubling of prices in that year and a half. Not to mention the astounding trebling of real estate prices in Barrackpore, which is  a suburb of Calcutta more in principle than in practice.

So what is the explanation behind this extreme growth in real estate prices? Several big players entered the Calcutta real estate market around the year 2000, and they have been pushing the prices up all along. Not all the flats built by these builders get sold immediately. Half or more of the flats remain empty to begin with and are sold over time, either directly by the builders themselves or by real estate investors. I have met some of these `investors’, and thought they were proxies of the same builders or banks, helping to drive up real estate prices.

In any case, this helped keep prices high for branded real estate. But now small builders and their agents have started to raise prices to very high levels, about 60-70% of the prices demanded by the top builders. I doubt if they are selling all their flats either. So how are these prices sustained? My guess is the following. The big builders got in because the CPI-M acquired land through less than legal means and gave it away at rockbottom prices. Or because the government allowed various laws, including environmental ones, to be circumvented by the builders. Or allowed industrial land to be converted into residential land. All in return of fat bribes, one presumes. But in any case, the initial investments for the builders at that time were substantially less than what is normal for any city of this size. So the builders could take time to sell the flats and still make a profit. That was for the big builders. But more recently, small builders have started charging exorbitant rates. It is not clear if small builders can afford to leave unsold flats lying around, but medium sized builders certainly can. That suggests that they are probably getting similar `facilities’ as the big builders. Not only the CPI-M, which is trying to make as much cash as possible before it is inevitably ousted from power in another year or so, but also the TMC, some of whose area bosses are notorious for their corruption, are helping the landsharks.

And there is another reason for the price hike. Many flats are bought by people who do not intend to live there. Such buyers also include corporate houses and banks. Even in buildings as old as 30 years, about 10% of the flats are unoccupied, owned by corporate entities and banks. And in many cases, flats are a way to park unreported cash. With various economic bubbles bursting of late, banks and corporate houses can be expected to wake up to the fact that they have very large non-performing assets in the form of unoccupied flats. And if the government follows its own rules and demands a tax return of everyone who has a flat in the city, it will find a lot of hidden treasures. And then the real estate bubble of Calcutta will burst again, like in many other cities across the country.

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