The real estate market may be floundering on the rocks of downturn and unaffordability, but there is a niche segment that appears largely invulnerable to the ebb and flow of economic fortunes.
This is the market driven not by demand and supply, but snob value, emotion and oneupmanship. Buying old houses in exclusive locations and tearing them down for gleaming new residences is one thing the rich love to do, as movie stars, business promoters and the super-rich converge on favoured zip codes.
The Economic Times reported today (31 october0 that HCL chairman Shiv Nadar has bought a bungalow for his daughter Roshni Nadar in the Friends Colony East area of Delhi for Rs 115 crore, making it one of the largest recent transactions outside the Lutyens Bungalow Zone (LBZ). The 1,930-sq yard plot will be re-built into a sprawling mansion, fulfilling the requirements of Nadar's daughter and his son-in law, the paper reported.
A Times of India report last week hadreported yet another record deal in South Bombay's Mahalaxmi locality. HSBC Bank had reportedly bought a luxury duplex apartment for around Rs 60 crore, making it one of the most expensive such purchases in the country. "On the basis of built-up area, the deal is valued at Rs 75,000 per sq ft. Going by carpet area-5,000 sq ft - it's almost Rs 1.10 lakh per sq ft. The deal is in the list of costliest transactions on a per sq ft basis on both these measures," the report said.
However, it would be wrong to conclude from these deals that the real estate market is alive and kicking. Front page headlineslike these should be taken with a pinch of salt since these deals are based on snob value, and hence cannot be considered as benchmarks for real estate pricing.
"Homes in such locations are bought by the extremely rich for the sake of address value and easy access to the CBD (central business district), even if they lack the superior amenities of newer, more modern buildings in further-flung areas. In such cases, the luxury factor is vested almost exclusively in the snob appeal of the location," says Om Ahuja of real estate consultancy firm Jones Lang Lasalle.
So pincodes in old South Bombay orin Lutyen's Bungalow Zone in New Delhi have become established addresses over the years, and have a "snob value" that makes them desirable forthe country's super-rich. In other words, the luxury market can be explained by the simple economic theory of Giffen goodS whereindemand increases as the price increases, and falls when the price decreases sincethe good in question does nothave easily available substitutes. Lutyens Bungalow has no substitute, and hence the income effect dominates the substitution effect.
So when prices of such goods plummet, their demand too follows. This is because they lose exclusivity. This is why the dearth of such homes make the uber rich pay astronomical sums for tony addresses even during an economic slump.
And pandering to this snob appeal, realtors are even using names as a marketing tactic to lure the nouveau riche or wannabes. For example, realtors have tried to rebrand Lower Parel as "Upper Worli and Wadala as 'New Cuffe Parade." The logic: It's easier to attract NRI interestby using the name of a much-sought-after neighborhood with a better name.
As one Sobo (South Bombay) resident told me, "South Mumbai is home to 'old money' as opposed to new money that may be in abundance in the suburbs, similar to the mindset/culture in addresses such as Park Avenue or The Hamptons."
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Updated Date: Oct 31, 2014 11:36:19 IST