The real estate market is actually quite strong in Cochin. One is that the fundamentals are improving. Metropolitan office vacancies, for example, have fallen from 16.8% during the first quarter of 2004 to 15.4% today. And improving occupancy levels mean higher income. That’s because as occupancy picks up you can boost your rents a little and you pick up more ancillary income from things such as parking and health clubs. The market does not suffer from excess construction.
Builders Cochin still has lots of projects on hand. Each year lots of tourist are attracted. The rise in IT market has also resulted in an increase in the real estate market. Banks have become more conservative in their lending, requiring developers to show that their buildings will be fully leased. While higher rates can dampen the real estate market by raising borrowing costs, rates remain at historic lows. The Federal Reserve has signaled its intention to increase rates gradually; about a quarter points per quarter, but this may not be enough to ward off buyers.
Many experts, investors should be asking how commercial real estate compares with other investments. And next to stocks and bonds, it remains attractive. If you do CAPM or other risk pricing models, you find that real estate remains 15 to 35% under priced based on its cash stream and its risk profile relative to other alternatives. Not only does real estate give investors a better current income than debt or equity, but it’s safer. None of this is to say that some real estate isn’t perilously overpriced. In particular, speculation appears to be driving the prices of many apartment buildings and condominiums to unsustainable levels. “There some people who are being wildly aggressive when it comes to pricing cash streams for apartment buildings,” says professor. “They are looking at a building with 45% vacancy and saying ‘I’m going to buy it as if it’s 90% occupied.’” Similarly, condominiums — which offer virtually no income stream since they are owned, not leased — are looking shaky. Between 50% and 60% are now being presales to investors who don’t plan to live in them. Once buyers stop showing up to the presales, the prices will tumble.
