Commercial real estate bubble

In simple words a real estate bubble is a run up or upward trend in the pricing that is fuelled by demand, speculation and exuberant spending to the point of collapse. Here the position is exploited by speculators who create a fake demand in the market and make profits.

This is the current scenario in Kashmir. In last five years the commercial real estate has grown many fold but the problem is that it is not backed up by demand. Real estate prices are high, shops are sold at good prices, but when we look at the business scenario the picture is different. Post 2016 business in Kashmir is on decline. 2016 unrest followed by demonatization, GST, and 2019 lockdown. Now covid 19 is the final nail in the coffin of business.

Kashmir’s economy is a consumer economy as we don’t have revenue generating industries here. The only revenue generating industry was of tourism and at this time that is in shambles. The economy of the UT now has declined sharply. Financial institutions are in distress and the biggest institution of J&K, J&K Bank is facing huge problems.

As someone who is into research, and also into business, from last three years I have seen startups either winding up, or barely surviving. Businessman who have decades of experience are finding it difficult to deal with the slump, forget about startups or people who are thinking of starting some ventures.

The commercial property prices are not fuelled by demand and the fundamentals of the business are not strong. Mostly these commercial projects are financed by these distressed banks. From even a investment point of view the commercial property in this business scenario will show no appreciation rather chances are more of depreciation. My apprehensions are that this is a bubble and it will burst soon in the manner there was housing bubble in America in 2000’s.

So my advise to startups would be to wait and watch, and go for projects that require less investments. We Kashmiris have a habit of following a trend without due diligence. We should venture into diversified businesses after doing a thorough market research. At the same time we hope government to take some corrective actions so that the economy could be revived.

Sheikh Aamir Ali, MBA finance,  is an entrepreneur with Ms Alico