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It’s the Tip of the Iceberg

Real estate in India is a classic bubble, even though the real estate folks might not want to believe this. Like in the last days of the boom, real estate developers tend to dismiss you and say ‘you don’t get it’ if you ask them tough questions.” This is the view of Gaurav Dalmia, founder and chairman of Landmark Holdings, who interestingly enough is a financial investor in real estate projects.

He is not alone. Kishore Gotety, manager of ICICI Ventures real estate fund, is “keeping a close watch on prices in specific areas. We do anticipate there could be some kind of correction in a few localities.”

Sameer Sain, CEO of Pantaloon Group’s financial services arm Future Capital Holdings, suggests that in the real estate space “currently, form may overtake substance”.

In case you haven’t noticed, India is going through a real estate boom. A Royal Institution of Chartered Surveyors report in May estimated that India has US$79 billion in investment-grade property comprising “0.5% of the world’s investable property” and termed the country “low transparency, with comparable transparency levels to that of China and Indonesia”.  

Everyone interviewed for this article said the fact that housing in India’s two leading metropolis cities Delhi and Mumbai – even in their distant suburbs – has soared to levels which are unaffordable for the middle-class Indian. Many of the recent buyers have clearly been speculators interested in making a quick buck rather than end-use buyers, and that applies to both the case of residential and commercial property. Furthermore, inventory has started building up. This is in contrast to earlier years when apartment blocks would be announced and sold within days.

The point is well illustrated by looking at another property market which has seen a huge run-up – Bangalore. Whitefields, a suburb of Bangalore is frequently called the information technology (IT) hub. In 2005 it was nigh impossible to identify unsold residential or commercial property here. This year, the situation has changed. India property portal,, suggests “in 2Q06 rentals have seen a marginal decline of 4% in the Whitefields area”. Of equal concern, properties that are for sale are now quite easily available.

Commenting on the situation, Landmark’s Dalmia jokes, “The information technology industry would be shocked to hear the amount of space the real estate community has planned for them in the next five years!”

In the satellite suburb of Delhi called Gurgaon (which is also the country’s outsourcing hub), 1000-square-foot apartments in building complexes with no facilities and with only the barest of fittings (eg no cupboards, bathroom fixtures, etc) routinely sell for Rs4,000 (US$86) per square foot, making the cost of an apartment Rs4 million. Compare this with India’s 2004 per capita income of US$620 – a substantial increase over 1996 levels of US$380 but is still very low. Even if we assume India’s middle class – which numbers about 250 million – earn a multiple of that, it is difficult to see who can afford these apartments.

Narayan Aint Buying

Take Rajesh Narayan, who heads boutique advisory firm Edge Advisory in Mumbai and would ideally like to buy an apartment. This would protect Narayan from fluctuations in the rental market, force him to save towards mortgage payments and – hopefully – see capital appreciation. But Narayan is categorical that he cannot afford to buy the kind of apartment he currently rents in an upmarket Mumbai locality, Worli. Narayan comments, “I’m a novice to real estate markets but I know this – million-dollar price tags on South Mumbai apartments are not sustainable. I’m also anticipating a correction in prices when further supply starts becoming available from old mill properties which are under development.”

Mumbai is home to a number of textile mills in an area known as Parel. The mills have relocated or ceased to function. However, an archaic law – which was challenged recently – prevents such mill land from being redeveloped. Although the process is still facing some hiccups, observers are convinced that the entire mill area will soon be redeveloped. It’s estimated that 600 acres of land could be released, dramatically increasing the supply of real estate available in the city.

Safe as Houses

Concerns are also doing the rounds in regard to implementation. All existing real estate developers are stretched both for capital and management but are seeking to have a pan-Indian presence. This is despite many attributing the success of DLF to its “stick to your knitting strategy” of focusing on one area, Gurgaon.

DLF is probably India’s most prominent real estate company. The company has a large land bank in Delhi’s satellite suburb, Gurgaon – indeed, in India DLF owner KP Singh is often termed “the owner of Gurgaon”. While not technically correct, the development of Gurgaon into India’s business process outsourcing hub has created immense wealth for DLF.

DLF was set to raise around Rs140 billion (US$3 billion) from an IPO which would have made it the largest capital raising in India. However, that deal has been postponed.

With both stockmarkets and real estate prices high, a number of real estate companies have made plans to access capital markets to provide funding for future growth.

Parsvnath Developers is a real estate developer seeking to raise in excess of Rs10 billion from the capital markets this year. This could be the first large real estate IPO to hit Indian capital markets. Many in India are predicting the Parsvnath IPO will indicate whether retail investors are willing to buy into stocks with valuations they may not completely understand.

The expansion of India’s real estate companies has been phenomenal. As if to prove the point, Pradeep Kumar Jain, the chairman of Parsvnath, comments proudly “although we started in North India, we now have a pan-Indian presence. Currently, we have operations in 37 cities covering 13 states.” Parsvnath is developing 84 projects with a saleable area of over 100 million square feet. In realisation terms this translates to approximately US$2.8 billion of saleable value including 18 integrated townships, 24 residential projects, 15 commercial complexes including shopping malls, 11 projects with Delhi Metro Rail Corporation, 14 hotels and 3 information technology parks. Parsvnath is also developing 14 special economic zones. If the numbers seem staggering, it is probably because they are. To date, Parsvnath has completed 17 projects.

ICICI’s Gotety comments, “The next acid test will be execution, ie will developers be able to deliver timely and quality construction as promised?”

Dalmia, whose sceptical comment opened this article, sums up the situation succinctly, “Asset inflation has forgiven mistakes in the last three years. I am not sure this will be the case in the next three.”

For Sale

There is also no agreement on where – and what – investors’ focus should be.

Sunil Balagopal, who has a full-time career in financial services in Singapore, is an investor in Indian property. His own interest in the area led him to set up a real estate portal called The site has received an overwhelming response since its launch four months ago and has been approached for content sharing, given the current interest in this area. Balagopal believes “on a long-term basis the Indian property market provides opportunities for enormous capital appreciation at relatively low risk”. But the steep run-up in prices in Delhi and Mumbai has made Balagopal focus on other Indian cities such as Chennai.

Jain feels the tier two and three cities will witness the highest price appreciation in the coming years. This is because the working population in India’s cities is largely migrants from smaller towns and will in the long term return to their home. Jain suggests “smaller towns, for example, in Haryana and Punjab have huge potential to develop.”

Gotety predicts what could change is the asset focus suggesting that, “in a growing market the focus could change to affordable housing from an ultra-luxurious product.”

Kanishk Khullar, managing director of Delhi and Gurgaon-based real estate firm, Suburban Realty, disagrees with this view. Khullar remains bullish on premium properties citing the continuing influx of multinationals into the city. He alludes to recent announcements by IBM and Dell about setting up offices in Gurgaon stating, “If 1,000 senior executives want high quality apartments, scarcity will drive up prices.”

Despite all these concerns, investors are still targeting the India real estate market in droves (see box below). Where do they see the potential to make money? And why do these investors and others continue to chase a piece of the action?

In the recent report by the Royal Institution of Chartered Surveyors, it sought to measure the performance of the property market. It analysed the market in Delhi and Mumbai versus Indian stocks and compared their performance from the second quarter of 1998 until the end of 2005. Its conclusion? “The property markets underperformed the Indian stock market but they generally had lower levels of risk,” said the report. This result is perhaps not entirely surprising as these years coincided with a bull run in the stock market, especially in the latter part.

The period under review is also seized upon by Khullar to corroborate his own bullishness. Khullar believes the property market is incorrectly being benchmarked against levels seen in the year 2000 and suggests, “a base of 1993 which is when Indian property saw its last big boom, is more appropriate. Between 1993 and 2000 prices were mostly flat. Over a 12-year timeframe, appreciation has not been unnaturally high.”

Jones Lang LaSalle’s Global Real Estate Transparency Index 2006 suggests India has achieved one of the region’s most significant improvements in real estate transparency over the past three years. (This is obviously at variance with the findings of Royal Institution of Chartered Surveyors report.) The investors seem to be in agreement with Jones Lang LaSalle, however, if the number flocking to India is any indicator.

Nipun Sahni heads GE India’s property business and is clearly bullish. GE’s most recent investments, he says, are in “the fastest growing and most attractive information technology destinations in India, ie Bangalore and Hyderabad.”

Sahni could well be right, but it is equally true that in January last Infosys stated that it would not be adding any capacity in Bangalore, both because of land constraints but equally due to the slow pace of infrastructure development and the increase in travel time in the city.

This suggests the potential for industry and commerce to increase in Bangalore could be limited by the same factors and hence real estate prices may have peaked – for now at least.

Both Parsvnath’s Jain and Balagopal of deem the current lack of infrastructure an opportunity. That is, as infrastructure is developed more areas will start witnessing price appreciation.

Demographics and strong GDP growth are also key factors underlying the investment case. India’s billion-plus people combined with a large working population are driving many investment decisions – as is its 8% annual GDP growth.

Marc Faber, editor of The Gloom, Boom and Doom Report notes that India is characterised by a “low development of organised real estate and favourable demographics”. What makes this even more attractive is that it is combined with “the fact that the living space per capita will increase over time”.

David Cohen, chairman of REIT Property Management India, the Indian arm of British property group REIT Asset Management, refers to the “economic, demographic and commercial attractions in India and enormous needs in the years ahead”. That’s why his firm started to invest in Indian property.

ICICI’s Gotety is unequivocal. “Holistically, we still believe the opportunity in India which has been identified is only the tip of the iceberg. Improving infrastructure, increasing disposable incomes, easier access to financing will all ensure that the market remains buoyant.”

Sahni comments that if India continues on its growth trajectory “there is a strong demand driver for quality real estate to work, live and shop”.

Retail Therapy

When asked to compare the real estate opportunity in India with other emerging Asian markets Faber says, “India is far behind all other real estate markets except maybe Vietnam. Therefore, India and Vietnam remain my favourites.”

The relatively underdeveloped nature of the Indian real estate market is no doubt driving investment decisions. Regulations have recently been made conducive to foreign investment. Mridul Upreti, head of corporate finance and investments at Jones Lang LaSalle India, suggests that recent regulatory changes have “improved liquidity of the asset class by way of a secondary market, increased the ability to diversify real estate investments by property type as well as location, improved transparency and market maturity and promoted price discovery by the market.”

That all sounds hunky dory. But the reality is the current guidelines leave shades of ambiguity. For example, consider the much-awaited real estate mutual fund (REMF) guidelines. Sain is clear, “We will only venture into this space (REMFs) when there is clarity on the actual format and the playing field is level for all participants.”

So what is Sain up to?

Sain’s Future Capital has mapped Indian towns with a population of more than one million people living within an 8km radius and the group’s Horizon fund will develop malls that are leisure-cum-shopping destinations. Each project will be at least 50,000 square feet. Singapore’s CapitaLand invested US$75 million in Horizon. CapitaLand and Pantaloon will set up a 50:50 JV retail management company to manage the properties.

Future Capital is also planning a foray into hotels targeting Indian leisure and business travellers. Sain makes an interesting point that “hotels that are built or are under construction are typically five star, or end up being priced as one, simply because land is so expensive”. Sain intends to get around this by combining malls and hotels.

Faber buys into the potential Sain sees in the retail and hospitality sectors citing the “4% of Indian retail sales carried out in shopping centres, whereas in the US over 70% is in this sector compared to small mom and pop stores. Also, Indians will have their playgrounds for the rich like we have in Europe and the US”.

Home Runs

Most of the funds have been raised very recently so returns are yet to be quantified.

But Sain comments regarding the group’s first fund, Kshitij, “although we will only know the true returns when properties are completed and fully leased, I think we purchased land intelligently and managed to get the timing right. On a pure NAV basis, I would estimate the current gain on the fund to be approximately 100%”.

ICICI Ventures did not share quantitative data but did state that the return on its first real estate allocation was healthy enough for investors to entrust over half a billion to its dedicated real estate fund.

Dalmia, who has businesses as diverse as cement and technology venture capital, is frank about what motivated him to enhance his focus on real estate. “We were benchmarking returns from our various alternative investment assets, and real estate IRR stood out at 45%.”

Dalmia – who bases his own strategy on “domain knowledge, not bubble bravery” – continues to commit both his own capital and raise investors money; he is even considering a structured debt option to leverage his balance sheet and increase the capital he has available to deploy in Indian real estate.

Gotety likewise is at an advanced stage of negotiations to add a further 250 acres to the ICICI Ventures real estate portfolio. He comments, “like all industries, real estate may witness a slight churn before it stabilises but for long-term investors such as ourselves there is no cause to be unduly worried”.

Sain is categorical when asked if the Indian real estate market currently is a bubble. “To my mind a bubble is something that emerges from a demand-supply imbalance. We are very consumer-focused hence demand-led. I strongly believe that from a long-term perspective, we are in the right asset class in the right country.”

But perhaps emerging markets guru Faber should have the last word. “All asset markets around the world including stocks, commodities, art and real estate contain some characteristics of a bubble. Indian real estate, however, is a compelling long-term story based on favourable fundamentals.” 

Who are Some of the Funds and What are They Buying?

Landmark Holdings is the proprietary real estate investment vehicle of the Dalmia Group. Landmark invests primarily in residential developments and selectively in commercial and retail projects. It currently has 50% ownership in over US$600 million of developments. Most of its current interests are in North India, though there are some projects in the East (Calcutta), West (Mumbai) and South (Bangalore) as well. Landmark was formed as a focused vehicle in 2002. Prior to that, the Dalmia Group has been investing in real estate for over 12 years through various proprietary investment vehicles.

In May this year, the Urban Infrastructure Opportunity Fund promoted by Anand Jain raised in excess of Rs20 billion to invest in real estate and special economic zone-related projects. The fund raised the money in just four working days and it is rumoured that Reliance Industries, Enam Financial and DSP Merrill Lynch chairman, Hemendra Kothari (in his personal capacity) were among the investors.

GE Real Estate has a portfolio of investments across assets and geographies globally aggregating US$40 billion. Recently, GE Commercial Finance Real Estate made its first investment of US$63 million in India via the Ascendas US$250 million fund. Ascendas invests in the office segment in Bangalore and Hyderabad.

Morgan Stanley has acquired US$73.1 billion of real estate assets globally and manages about US$40 billion on behalf of clients. In Asia it is already invested in China including Hong Kong, Japan, South Korea and Thailand. In 2006 it forayed into India closing two investments so far this year. In March 2006, Morgan Stanley invested US$68 million in Mantri Developers, a privately-owned, South India-based developer of retail, residential and commercial projects. In July, Morgan Stanley invested US$65 million in Alpha G Corp Development, a developer of projects in northern and western India, diversifying its regional exposure. Morgan Stanley did not release details for either investment but in both cases control remained with the original founders. Market sources reckon that Morgan Stanley acquired 15-20% in Alpha Corp.

REIT Property Management India has identified local development and financial partners with whom it will co-invest in different cities and product areas, with REIT’s equity stake ranging between 20 and 60%. It hopes to see its total investment portfolio reach US$1 billion within five years. Investors are high net worth individuals and institutions. REIT has a focus on residential in selective areas, mid-range hospitality, strong commercial sites and very selectively in retail.

ICICI Ventures raised a US$550 million real estate dedicated fund. Currently the fund has committed and paid for 300 acres. It focuses on developing, acquiring, leasing and selling quality office buildings, residential premises and retail spaces and in hospitality that is attractive to end users. ICICI Ventures is not stage-biased ie, it invests across the spectrum in greenfield projects, projects currently under development or construction and completed projects – especially in the commercial space segment.

The Pantaloon Group raised its first US$80 million fund, Kshitij, in early 2005 from domestic Indian investors. The group recently closed its second fund; Horizon raised US$350 million from international investors and is now planning a foray into hotels targeting Indian leisure and business travellers. It is targeting hotels in the three- and four-star price range for the modern-day Indian traveller and seeks to deploy US$250-300 million to build 20-25 hotels within a two-year timeframe.

Warburg Pincus’ latest India transaction announced in early August was an investment of Rs2.8 billion (US$60.9 million) in the hospitality sector. Warburg Pincus picked up a 26.5% stake in Lemon Tree Hotels and sister concern, Red Fox Hotels. Lemon Tree Hotels operates in the full service, moderate price category, with rooms priced in the Rs3,000-5,000 per night range targeted at the price sensitive business and leisure travellers. Since 2002 it has opened two hotels in Gurgaon and will shortly launch hotels in Pune and Goa with seven further properties under development. Red Fox Hotels is a proposed new chain of hotels in the limited service budget category, priced at Rs800-2,000 per night. The first three Red Fox properties are expected to open in Mumbai, Jaipur and Hyderabad by late 2008.

JPMorgan Asset Management recently closed an Indian property fund with more than US$360 million in capital commitments from institutional and high net worth investors from the US, Asia, Europe and the Middle East. The fund has a target net internal rate of return of 20%, and will focus on the development of new properties across the office, residential, industrial/warehouse, retail and hospitality sectors. It intends to operate through joint ventures with local developers and target large cities including Mumbai, Bangalore, Chennai, Kolkata, Hyderabad, New Delhi and Pune as well as selectively smaller cities such as Surat, Vizag and Nagpur.

This article first appeared in FinanceAsia, September 2006.