The Pitfalls of Overconfidence in Mumbai Real Estate
No one told me the truth, otherwise I would have behaved more cautiously,” lamented a struggling builder at a private event a few months ago. He has undertaken multiple projects in the redevelopment frenzy underway in Mumbai real estate.
Prior to 2020, he was a small builder with a short track record. In the past three years, however, he has taken up more projects than his family has delivered in the past 24 years. And it’s not working according to plan.
Sales are slower than expected. Buyers are unwilling to pay the high price he had hoped to get. Meanwhile, the price at which he purchased land in most locations is now appearing inflated. Moreover, an environmental regulation had blocked the launches of several of his projects last year.
Unsurprisingly his sentiment is in disarray. His judgment about the market had been proven incorrect. But his comment got me thinking about a phenomenon that is unique to builders. They get misguided and misguided easily. And ironically, they do so because they are made to feel as if they are Kings. That’s because real estate is a business that contains an ecosystem of over 150 industries. Be it brokers, contractors, architects to sellers of concrete, glass, tiles, paint, etc. The builder is the nucleus that binds everyone together. He is the customer to numerous stakeholders. In a way, a builder is like a prime minister of the industry. He sits on top of the chain allocating money to various departments and heads. He is the Master of that Universe. Everyone gains only when the engine is in motion – even if it is in the wrong direction.
Hence the ecosystem pushes the builder to acquire land at expensive rates citing growth conditions, easy liquidity, or the transformation of the location. Similarly, there is a push that raises the expectations on the price that a home buyer will pay given the anticipated product quality or builder brand or vision. The ego is massaged to a degree that after a point, even the most level-headed developer falls victim. When the phenomenon is repeated enough times, the power / delusion reaches the head.
Thereafter, he often gets accustomed to a phase wherein most stakeholders are only validating the optimistic assumptions and views. Everyone becomes a yes-man or a neutral counterparty. No one prefers to provide the much-needed reality check that competition may be intensifying, or market conditions are becoming weak. Those who provide the bad news are termed “conservative” or “out of touch”. The cycle is complete. The builder then hears only what he wants to hear. That is the beginning of the end.
I suspect that is precisely what happened to the young builder. In the euphoria, he got carried away with unrealistic expectations. The majority joined his bandwagon of delusion. The ones who didn’t were left off at the next station. While others may be up for blame, the lion’s share must be placed at the door of the builder itself. They must be able to separate the flood of optimism with the waves of reality. Just like you can’t blame the bartender for the alcohol consumption, similarly you can’t blame an ecosystem for offering options for consumption.
In a way it’s a reminder that builders also need to have their old, trusted people in the business who can tell them the unvarnished truth without fear of damage. That’s because the truth may be silenced temporarily but eventually the market does speak. And you can’t shut down the market even if you are king.
