Real Estate Boom in India is Fundamentals Driven!

Real Estate Boom in India is Fundamentals Driven! Now worries in the medium to short term. Spurred by IT growth and a shortage of real estate, property markets are among the hottest in India.

Everyone knew that the parcel of land in the heart of Bombay, India's business hub, would bring a high price. But when the bidding ended on June 20 for the now-defunct Bombay Textile Mills and its 17.5 acres, it shocked even seasoned property developers. New Delhi-based DLF Group took the prize for $160 million, one of the highest prices ever paid for a piece of land in India. DLF plans to redevelop the huge space into a retail and commercial center. Had DLF's management gone balmy? Apparently not: The next day, the adjacent 5-acre Kohinoor Mills was bought by Bombay hotel and transport company Kohinoor Consolidated Transport Network Ltd. for $100 million - twice the price per acre of DLF's deal.

India's property markets are in a frenzy, driven largely by the rapid expansion of its information technology industry and the simultaneous growth of its middle class. In the land-starved island city of Bombay, property prices are up 25% in the past six months. Although no one keeps national statistics, international property consultant Knight Frank says there are thousands of commercial, retail, and residential projects springing up across the country. In 2004 developers erected 18 million square feet of commercial buildings in India. This year 23 million sq. ft. of new space will come on the market, and by 2009 the number will rise to 50 million, according to global real estate services provider Cushman & Wakefield. Retail and residential development is growing even faster.

The building surge is modest compared with China, where 25 million sq. ft. of commercial and 200 million sq. ft. of residential space will be built this year in Beijing alone. But experts think India has as much potential as China - especially if the government removes a tangle of restrictive regulation. The investment hot realty spots now are the tech-driven growth centers of Bangalore, Mumbai, Hyderabad, Chennai and Gurgaon. The real estate boom has also hit second-tier cities such as Pune in the west, Jaipur and Chandigarh in the north, and Kolkata in the east.

Even those in the business are surprised at the rapid runup in prices - and worry about a correction. "It's madness, especially with all the unplanned development," says K.G. Krishnamurthy, chief executive of the HDFC Property Fund, one of seven new private equity funds focused on real estate that have launched in India in 2005. Nearly $1 billion has poured into the funds so far this year.

Reality Check!!

There is a real need for new construction to keep pace with India's robust 7% economic growth. The commercial and residential real estate market is valued at about $50 billion now, and is expected to grow 25% annually. Rental income yields are more than 12% in India, compared with 9% in China and 5% to 8% in developed markets. Pent-up demand could increase that return. Analysts see an annual shortfall of 20 million housing units through 2011, and they say India will see 75 million sq. ft. of retail space by 2007. 3 years ago, India, with 1 billion population, had just three shopping malls. Now investors are planning 250 new centers by 2008. Some says, it all amounts to "the biggest growth story in organized retail ever witnessed on Planet Earth.

Overseas companies are taking advantage. Last February, India adopted a regulation allowing foreigners to bid on Indian construction projects without local partners. (They still cannot own property or buy and sell existing buildings.) Since then a half-dozen foreign builders, including New York-based Tishman Speyer, have launched projects. Atlanta's Portman Holdings, which helped develop Shanghai a decade ago, will open an office in Bombay by yearend. The foreigners are expected to bring the latest technology, discipline, and management systems to this nascent market.

About 70% of the new construction is for the IT industry -- whether it's tech parks for companies or housing and shopping centers for their employees. The most stunning new development is in Bangalore - Adarsh Palm Meadows, an 85-acre California-style gated community complex of commercial, residential, and IT park space. In Bombay, K. Raheja Corp. spent about $1.4 billion building a 5 million sq. ft. upscale complex called Mindspace, which includes IT back offices, residential towers and stores.

On the residential side, the increasing affluence of IT workers and more liberal bank lending has helped sustain the building boom in houses and apartments. The average age of a new homeowner is now 32, compared with 45 a decade ago, according to Kotak Property Trust. And the typical mortgage is now 20 years instead of 10. The average price of a middle-class home in Bombay has shot up 40% in the last three years.

The early foreign players in the new Indian real estate market have been Asians, led by Singapore's Ascendas Pvt. Ltd. Ascendas has been in India since 1994, when it joined with the Tata Group to build one of the first tech parks in Bangalore. Since then it has built three more, in Hyderabad and Chennai, and two will soon be developed in Kolkata and Pune. By next year, Ascendas will have invested nearly $500 million in 4 million sq. ft.

Large Indian players like DLF, K. Raheja, and Hiranandani Constructions are starting to expand beyond their home markets of Delhi and Mumbai. Their advantage is that they own big "land banks" that they bought years ago. DLF Group, for instance, bought 3,000 acres in the town of Gurgaon on the outskirts of New Delhi in 1986 that sat undeveloped for years. Now Gurgaon is India's second-largest tech city after Bangalore. DLF is expanding into other cities.

It still isn't easy for real estate developers. They are hampered by rent control laws and other regulations that have confined construction to the upper end and driven prices too high. So much infrastructure development is dependent on the government that bureaucracy bungling could stall a boom. That's why some players urge caution.

More optimistic analysts assert that even if some developers go bust, the basic need for modern real estate will still provide opportunities for the shrewdest players. India needs its industrial campuses, office towers, and more if it is going to compete head-to-head with powers like China.