News: Market frenzy grips Indian real estate firms

(TT 15/05/2006) Calcutta - Given the boom in the real estate market, the DLF IPO is almost certain to be a hot property. One recent indicator is the thumping success of the DS Kulkarni follow-on public issue, which was oversubscribed 32.73 times. Of course, the DLF offer is much bigger, and reports say that it will raise as much as $3.2 billion from the sale.

What’s significant is, this liquidity will be pumped into the real estate market. There are also other indicators of the flood of liquidity that is poised to flow into real estate. Reports suggest that Reliance’s Urban Infrastructure Opportunities Fund is planning to raise Rs 5000 crore, more than a billion dollars, for investments in real estate and retailing. Investors like Calpers and Morgan Stanley have started investing in Indian real estate. It’s the right time, therefore, to bring out a report on the Indian real estate sector. Deutsche Bank has done precisely that — the report is called Building Up India.

It points out how the changing Indian economy will enhance the growth of the real estate sector. But while there is no doubt about the potential of the sector, it’s also true that the money flowing into real estate, including investment in malls and multiplexes, will drive values higher. Markets always overshoot and the real estate market is no exception.

According to Deutsche Bank, around $850 million additional capital was invested into Indian real estate in 2005, much of it as lending by commercial banks to the sector. Private property companies and individuals’ holdings of real estate also grew by 40 per cent year-on-year. With huge amounts being raised this year, it’s very likely that 2006 too will see a high growth. Growth in the housing market too should continue despite higher interest rates, because mortgage debt as a percentage of the GDP is only 5 per cent, very low by international standards.

Deutsche Bank estimates that only 27 per cent of the real estate stock can be classified as investment grade. That means supply is limited, which is why prices are rising so fast. Promoters like DLF will add to the investible stock, which in turn will lead to more funds coming in. The virtuous cycle has started in real estate.

Industrial production

The macro numbers are completely in sync with the excellent quarterly results of corporate India. The latest IIP data shows that Indian industry continues to walk on two legs with both investment and consumption demand contributing to the growth. Consumer durables growth for 2005-06 was 14.6 per cent per cent compared with 14.4 per cent in the previous year. Consumer non-durables too saw a growth of 11 per cent compared with 10.8 per cent in the previous year. The rise in the capital goods index was higher at 15.5 per cent for 2005-06 against 13.9 per cent for 2004-05. The numbers for March, however, show a marked deceleration in growth for capital goods, although consumption still has plenty of steam left.

The category “Machinery and equipment other than transport equipment”, an indicator of investment demand, grew by 8 per cent in March. However, much capital equipment is imported, so this figure does not give an overall picture of the investment demand.

It’s also true that there are signs of a slowing down. IIP growth for March was 7.7 per cent, lower than the 2005-06 growth of 8.8 per cent and well below March 2005’s growth of 7.7 per cent. Similarly, manufacturing growth of 8.9 per cent last March was below the scorching 10.9 pr cent pace notched up in March 2005. But by global standards 8.9 per cent manufacturing growth is not bad at all.