What’s driving the rise in property prices in Mumbai? Knight Frank’s Gulam Zia weighs in

Real estate prices in Mumbai have seen a sharp rise, largely due to an increase in wealth creation rather than a shortage of supply, according to Gulam Zia, senior managing director at Knight Frank India.

Zia attributes the boom in the luxury real estate market to the growing purchasing power of buyers, both in India and globally, who are eagerly investing in premium residential properties.

In an interview with CNBC-TV18, Zia discussed a recent Knight Frank report which noted that Mumbai recorded the second-highest annual growth in prime residential property prices globally in the second quarter of 2024.

The report, which surveyed 44 cities around the world, showed that Manila in the Philippines topped the list with a year-on-year increase of 26%.

These are verbatim excerpts from the interview.

Q: It is no surprise that Mumbai tops the list when it comes to price increases. What is driving this significant increase in land prices? Is it demand or rather a lack of supply?

A: Let us look at this phenomenal increase, 13% in one year, which is a huge number if we are talking about Mumbai, or even if we are talking about Delhi, 10.5%. Your question is how do you justify this? Well, I would not talk about lack of supply, but abundance of wealth creation. The ability of buyers to go out and buy these luxury properties keeps the luxury market or the prime residential market bubbling, not just in India but across the world; everyone is there to buy. So, on net, the reason is simple: it is not so much a lack of supply, but an abundance of wealth that drives the prices so high.

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Q: As you mentioned in your survey, the premium pricing category has been the one driving this price growth. Do you think that premium pricing trend will continue to drive sales going forward? What is the pecking order in terms of sales momentum, whether it’s premium, then mid-price, and then entry-level, or has entry-level seen any improvement compared to the last time we spoke?

A: Let’s get things straight. The index we’re talking about is just the Prime Property Index, and of the 44 cities in the world that we mapped, we only took the luxury projects in each of them and measured their performance. And the index we’re talking about is just that.

Since your question is broader, you are referring to the entire market (the middle and lower segment), which is not part of the study. But, since the question is that, how are they performing? Let me tell you that there is not much growth in the lower end of the market. The cheapest and most affordable housing has been suffering consecutively for the last four years and that fatigue, unfortunately, seems to be spreading even to the middle segment, which is worrying.

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And since we are talking about global prime real estate, let us also look at the last quarter, the 13.5% or 10.5% that we are talking about as far as Mumbai and Delhi are concerned, which are second and third respectively, just after Manila, which is 26%, which also, if you look at just the last quarter, not just in Mumbai, Delhi, but globally, the previous quarter has been a drag. It has been very low; 2.5 to 2.3% is roughly the growth of those 44 cities, and even Mumbai and Delhi are no different.

In the last quarter, Mumbai has barely seen a growth of 2.6%, compared to the annual growth of 13.5%, which means that there is a slowdown. On the other hand, Delhi is registering a growth of 0.1% and Bengaluru -0.1% in the last quarter, which shows that even the super-luxury, the premium segment, the prime properties, are also suffering some drawbacks, some fatigue is setting in.

But as for the lower part, it is not improving at all. The middle part is also showing signs of fatigue and that is a big concern.

Q: Give us a sense, especially if we were to forecast demand going forward in the context of likely rate cuts, how exactly do you think demand will evolve? Is it elastic or is it largely inelastic, especially at the higher end of the market?

A: At least the premium segment has not yet shown any signs of slowing down in the speed of sales or in the number of transactions that are taking place month on month for almost two and a half to three years and a bit. And that is something that gives us some confidence, because even in the short term, we do not expect this to change so drastically so soon.

As I said, even the mid-term market, the mid-range market, was also doing very well during the same period, but it is now showing some signs of fatigue. But as far as super-luxury, the high-end market is concerned, the number of transactions that we see, for example, in Mumbai, or in some projects in Delhi, Gurugram or Bengaluru, are places where transactions at the higher end of the market are not showing any signs of abating yet. So, it gives us comfort to say that, if I have to talk about some amount of guesswork, at least in a quarter or two, at least the higher end of the market is not going to change so drastically.

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The middle segment is a point of concern, while the lower segment remains a major cause for concern. The reason is simple: central banks now have to consider, if the real estate sector is their priority, cutting interest rates, otherwise this will be reflected in the real estate sector as well.

Q: You know, we talked about exhaustion and I wanted to ask you that, as you said, for a quarter or two, at least the prime market will continue to grow as it is doing, even if there is a slight slowdown. But there will come a time when, if prices continue to rise as they are doing, there will be buyers who will raise their hands and say, “Well, even if we can buy this, we are not going to buy it because the prices are too high,” and whether there are divergent opinions on that. But, still, for most Indians, real estate is seen as an investment opportunity and not just something to live in and things like that. So, do you see that little bit of exhaustion or a little bit of a decline at the top end of the market because the lower end is already suffering? But do you see that happening at the top end as well, if prices continue to rise?

A: The continued rise in prices will be a problem whether it is considered as an investment class or not. In that case, the point has gone beyond anyone’s understanding and it will be a critical point, which is true for the entire market, not just for the premium segment, but also for the mid- and low-end segment. And of course, the lower end is the most susceptible to a continued rise in prices. That is where the price increase is not so big. At the higher end, the price goes up a lot.

Let me also mention another aspect as far as the high end is concerned: buying a property is not so much about investment as it is about return on investment as well as investment of passion. So when you buy a high-end property, like for example if you buy something in Gurugram, these days you see a lot of such projects where more than ₹100,000 per square foot of the product you are buying, or in Mumbai where it is ₹150,000 per square foot of product. These prices are not expected to double in the next four to five years, or even ten years. So the growth rate at the top end of the market is not expected to be that high, but you are right that if prices keep increasing as much as they are, say 13.5%, it is strange that we have seen that last year in Mumbai. It is a big sign of concern.

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