News: Decoding the Indian realty boom

(DNA 20/05/2006) Mumbai - A decade ago, when consumer products company Procter & Gamble (P&G) wanted to relocate its prime central Mumbai office as part of its expansion plans, it turned its back on a marshy, undeveloped land in suburban Malad. Today, the 5 million sq ft stretch, christened Mindspace, is a swank $1.4 billion commercial hub developed by Raheja builders, and home to a host of IT enabled services (ITes) outfits and retail offices.

It is not a missed opportunity for P&G, say real estate consultants, who claim the company’s current property value has since escalated four-fold.

Or look at how 5 acres of an upmarket Banjara Hill property was recently grabbed for a jaw dropping Rs 140 crore, while the 8,000 sq ft residence owned by the Nusli Wadia group scions in Mumbai was disposed of for Rs 36 crore. Or the way property vultures swooped down on 17.5 acres of Bombay Textile Mills land in Mumbai last September, which Delhi developer DLF Universal bagged for Rs 720 crore.

Now isn’t this old hat? Sure. But what’s intriguing is that the $12 billion frenzied real estate arena is showing no signs of letting up. Prices continue to soar anywhere from 30-150%, and developers and builders are working overtime to satiate the demand for all breeds of property — residential, commercial and retail. Triggered by a robust economy, middle class disposable income, credit friendly environment, and sunrise sectors like retail, favourable income tax treatment of home loans and the government’s infrastructure friendly policies, they all want to leverage the current property boom.

Even big and small investors are lusting for anything that spells land. At last count, capturing the land fetish were around 15 Indian companies who set up realty funds. And with the government slackening foreign direct investment rules last year and a promising rental yield income, more than 30 overseas venture capital and private equity funds are following the property trail. The yields in India are more than 12%, compared to 8% in the developed markets and 5% in China.

So do we have a bubble waiting to burst? For a while, Deepak Parkeh, chairman of the country’s largest mortgage company Housing

Development Finance Corporation, has been referring to the real estate market as a bubble. The industry is also talking about a possibility of a scam in the property market, what with developers gravitating towards the newly proposed special economic zones (SEZ). “They all think it is a backyard activity and want to do it only for the tax benefits,” says a bureaucrat.

But consultants and developers think otherwise. “The demand is not a red herring. It is buoyant and the correction will hold as demand percolates to secondary and tertiary towns,” says Chanakya Chakravarti, joint managing director of real estate consulting firm Cushman & Wakefield C&W). Adds Rajeev Mehrotra, executive vice president at Edelweiss Capital, “It is not a bubble, as what is fuelling the heat is the quite substantive 25-30% year-on-year growth.”

A PricewaterhouseCooper’s report says the venture capital fund flow in the sector could touch $7-8 billion over the next 18-30 months. The US alone is said to have committed $2 billion for Indian real estate. And analysts say that if the economy continues its robust run, the figures could reach humungous levels.

Just look at the real estate stocks, viewed with trepidation until two years ago, going through the roof. At Rs 454 last May, Delhi-based Unitech Ltd closed yesterday at Rs 9,639.55 despite Thursday’s blood bath. In the same period, Mahindra Gesco surged from Rs 140.70 to close at Rs 848.20, despite a 17.7% drop from the previous day’s close.

With such scorching valuations, half a dozen developers are in queue to go public, with DLF leading the sweepstakes with an approximate Rs 13,000 crore issue for only a 12% float. Analysts say that in the next three months, prospective market debutantes will marshal nearly Rs 30,000 core in the sector.

In the seven active property markets, residential demand is over 70% followed by commercial, retail and hospitality. Dominating the sectoral landscape is the IT/ITes companies, with retail likely to munch much of the land in the coming years. According to C&W research, the current cumulative demand for real estate ranges from 120 - 151 million sq ft, and is likely to touch around 1,055 million sq ft by 2010. By then, the capital requirement will have bloated to $68 billion. “Just sustaining the market will require $30-40 billion, with most companies tying up their expansion plans,” says Chakravarti.

In fact, last year, analysts claim that 23 million sq ft of new space came into the market, with an additional 50 million sq ft expected by 2009.

The C&W study says that urban India alone requires 12 million housing units with scope for 400 townships in 5 years across 30-35 cities, each with a 5 lakh population. Property consultants say that last year, around 24 million sq ft of new commercial land was absorbed nationally, accounting for almost Rs 6,600 crore of capitalisation.

In the same period, 25 million sq ft of commercial property and 200 million sq ft of residential space was built in the Chinese capital of Beijing. And experts believe that India has the potential to grow to those levels as FDI flows into more land-intensive sectors like retail and manufacturing. As it is, there is a shortfall of 20 million housing units till 2010, say analysts.

But the hotspots continue to be Bangalore, Hyderabad, Pune and Gurgaon, riding on the IT and ITes enterprises, feels Rajesh Choudhury, partner Prestige Development.

C&W’s Chakravarti says that smaller towns such as Surat, Coimbatore, Lucknow, Patna, Bhubaneshwar, Vijaywada have immense potential.

By 2015, there will be 45 such cities up from 25-odd now. Their growth will be fuelled by the infrastructure development, particularly airports and roads and retail. “This demand percolating to newer and smaller locations is for real,” he adds.

What is encouraging is the mortgage credit which is only 6% of India’s gross domestic product (GDP). Compare this with 18-25% in Hong Kong and Malaysia and 65% in the US. Also, the average age of the Indian home owner has slid from 45 years to 27 years. And the mortgage has gone up from 10 to 20 years. Even so, 50-60% of this demand in the residential segment is speculative compared to 40% in commercial.

All this is making land acquisition even tougher as both corporates and developers are consolidating their land banks. “Land supply is shrinking while demand is only growing. Today, real estate is giving 20-50% returns, up from 15-20% a few months ago. So, anyone who can afford it, is parking his money in this asset class,” says Ashok Narang, partner at property consultants L Lachmandas & Co.

There are challenges too. Disputed land titles, archaic laws stipulated by the Urban Land Ceiling Act in Mumbai, do pose hurdles for developers. “Real estate laws too have been opaque with a need to rationalise stamp duty and property tax norms,” says a developer.

But the entry of established players and developers from both corporate India and overseas is expected to infuse large doses of transparency, bringing some method to the construction business. And as the market develops, the players are hoping that by setting up new financial instruments like real estate investment trusts (REIT) could bring in more money into the system.

That’s possible only if real estate remains a compelling growth story for long.