FUTURE CONTRACTS IN INDIAN REAL ESTATE MARKET A GAME CHANGER?

Curtains up! Imagine you deciding on buying a house six months down the line and already have arrested the purchase price thereby slaying the ghosts of cost escalations! Seems a fancy thought, but what if it actually happened?

- Siddharth Mahanty

The insinuation is at incorporating derivatives like futures contracts in Real Estate wherein a buyer can lock in the future purchase price based on his or her view of the real estate market. The seller by all means will offer a contrarian view of the market for the transaction to take place. Futures would be more apt for the simple reason that unlike forwards they are standardized and in a nascent market, it would be more suitable.

The implication of such a price discovery mechanism in an illiquid asset class as real estate is untested and may lead to regulatory intervention. The process of price discovery may become speculative in nature as an investment in real estate stokes the basic societal requirement. As our country comprises an aspirational mass, owning a house is looked at as a necessity than an investment. The buyers in all likelihood may not have the know-how and information to venture into a futures contract. This in turn will offer newer avenues for banks to book futures contracts in addition to extending the usual home loans. The real estate market in India is roughly INR 14000 crores, with a CAGR of 13%. It is being predicted that by 2040 it will grow to a mammoth size of INR 65000 crores. This could be the breakthrough to revive the economy. A lip-smacking opportunity for the banks, albeit with a pinch of salt!