After Elon Musk issued a warning that the commercial real estate market is “melting down fast”, Robert Kiyosaki, an American entrepreneur, businessman and author of Rich Dad Poor Dad – a personal finance book about investing in different asset classes – warned that the real estate market is on the verge of a crash that will be worse than the 2008 financial crisis.
Should the Indian real estate market be worried?
Real estate experts say that while the Indian real estate market has its own specific dynamics, the US does influence the uptake of Grade A commercial real estate in India and even the IT/ITeS jobs situation here, which has a direct bearing on residential sales in India.
Last month, Musk, CEO of Tesla and SpaceX, had taken to Twitter, a platform he owns, to express alarm. "Commercial real estate is rapidly deteriorating. Next up: home values," he had tweeted.
Musk also argued that the damage caused to real estate portfolios has been otherwise minor but can become a serious issue in the forthcoming months as customers cancel their leases, decline to renew them or go bankrupt. In addition, the billionaire also stated that the prices of houses were quite likely to decline given that some Americans were unable to afford to pay as much for homes due to higher mortgage costs.
Kiyosaki has been quoted by the American media as saying that 2023 will see a worse economic downturn than the global financial crisis (GFC) of 2008, because of an imploding commercial real estate market. “Greatest Real Estate crash ever. 2008 was the GFC. 2023 will make the 2008 GFC look like nothing. In 2019 Office Towers in San Francisco were hot. In 2023 same buildings have lost 70 percent of their value. What will… cities do with office buildings? Homes for the homeless. Get [gold, silver, Bitcoin].”
“Currently, the Indian economy is stronger than most developed nations. Real estate markets vary significantly across regions, and national or global predictions do not reflect the situation in every market. The concerns raised by Elon Musk and Robert Kiyosaki are about the US property market and doubtlessly reflect the situation there, given the dynamics of demand and supply in the US market. The Indian real estate market has its own specific dynamics,” said Prashant Thakur, Senior Director & Head, Research, at ANAROCK Group.
“The US does influence the uptake of Grade A commercial real estate in India, and the performance of its economy, which prompts monetary policies over there, does have a bearing on the Indian stock market and even the IT/ITeS jobs situation here. To that extent, what happens in the US can have some correlation to overall housing appetite in India,” he said.
India follows its own piper
However, there is no other correlation. In terms of both housing and commercial office, both countries have their own individualistic property markets, with their own unique demand and supply dynamics. Oversupply in one country has no ripple effect on the supply of another country. The Indian market follows its own piper, he said.
Housing developers here are carefully calibrating their supply, not only in terms of numbers but also configurations and quality. ANAROCK data indicates that Q1 2023-end saw housing inventory in India's top 7 cities reduced to 20 months from 42 months in 2018. This is the lowest inventory overhang in the last five years; in Q4 2020, it was the highest, at 55 months, across the top seven cities.
According to Samantak Das, chief economist and head of research and REIS or Real Estate Intelligence Service, India, JLL, residential real estate is driven by domestic demand and supply and has an indirect relationship with the global economy because of the dependence on earnings of those employed in the IT and ITeS sectors.
It should be noted that the contribution of the overall services sector is as high as 55 percent of the GDP. But that contribution is dependent on the volume of business from the US.
“In this respect, we may see some impact on overall volumes in residential sales. We may witness moderation in terms of sales growth if US challenges persist and there is a limited expansion in terms of employment in India. To that extent, the residential segment may get impacted. But having said that, domestic consumption for residential real estate remains strong,” he said.
As far as commercial leasing is concerned, there may be a further slowdown in this segment if the global headwinds persist. “Overall, we are cautiously optimistic about the Indian real estate market. But if we were to compare the present situation with that of the 2008 economic meltdown, the situation is very different today. We also have enough experience to handle such shocks,” said Das.
Commercial segment may see some impact
Experts agree that there may be a link between demand for residential and commercial in India and global headwinds. But residential demand is largely domestic.
“The rate pause may lead to a further boost in residential sales. It is the commercial real estate segment where the office occupier profile is largely IT/ITeS, with clients based in the Western markets. If these clients cut down on their budgets and reduce their space, there will be some impact,” said Vivek Rathi, Director of Research, Knight Frank India.
Having said that, the Indian office market continues to perform better. This can be gauged by the fact that REITS in the US had their worst year in 2022, with values going down by almost half; in India, REIT values have been largely steady and annuity income or yield continues to be around 6-7 percent per annum.
“That has been a comforting factor. Most organisations have also adopted a work-from-office or hybrid arrangement; some have increased their flex space take-up to maintain agility in their portfolio, giving them an opportunity to scale up or down, depending on the business,” he said.