Pradeep Jain is a property developer with a unique problem. The chairman of Parsvnath Developers Ltd, India’s second biggest listed real estate company, just can’t find space for a bigger office in India’s capital city. Jain wants to move to an office that is double the size of the 30,000-sq. ft one Parsvnath currently occupies in Connaught Place, Delhi’s central business district. The company did develop a building with 100,000 sq. ft of space in Delhi’s suburb of Gurgaon, but it was fully leased out even before it was completed.
Jain’s problem is unlikely to be solved anytime soon; a recent drive by Delhi’s local administration shut down businesses operating out of premises in residential areas.
“There’s a big shortage and the demand is more,” says Jain. “You have to wait because no commercial land is available today in Delhi, Gurgaon, or Noida (another Delhi suburb).
In terms of the sheer unavailability of space, India’s capital and its suburbs have overtaken Mumbai, which has traditionally been more strapped for the commodity. Mumbai can grow only to its north, while Delhi can in all directions, and has done that.
Yet, Mumbai has a 5-6 percent surplus of commercial space, largely in its suburbs. The corresponding number in Delhi is zero; in its suburbs, 1.4 percent. A 7 percent surplus is considered the ideal balance between demand and supply.
Monday, March 31, 2008
Scarcity of houses despite of real estate boom in India
Even though the real estate sector is at its all-time-high in the country and is apparently showing no signs of slowing down, total returns or operating profit from the sector is likely to moderate in future in comparison with those of the past three years.
Moreover, despite the boom, the sector is unlikely to be able to fulfill the growing housing demands of the country, especially of the middle and lower income groups.
According to the ICICI Bank Global Investment Outlook for July, brought out by the bank’s Private Banking Research Division, operational income of the sector grew at a rate of 179 per cent over the past 5 quarters, with operating profits up by a massive 469 per cent. Average margins of constructors are now as high as 29 per cent with some real estate companies in the national capital region and the Mumbai-Pune belt earning an astronomical 200-170 per cent.
The report also points out that despite the boom, the sector will not be able to fulfil the demand for low and medium income group (LIG and MIG ) housing and there will be a shortage of about 27 million houses by 2012.
A prosperous middle class, higher incomes and fast urbanization has presented numerous opportunities to develop the retail sector especially in India and China. The report foresees a huge growth in MIG and LIG housing. “Property prices have stabilized over 6 months as developers cannot afford to hoard flats. But there is maximum demand in the LIG and MIG sector which will result in a shortage of 27 million houses by 2012 estimated.”
However, North and West India is likely to see 15-20 per cent correction in realty prices and 50 per cent fall in real estate offtake may also be witnessed. “We expect global real estate securities to benefit from continued GDP growth and strong property fundamentals,” the researchers observed. The sector will continue to have the potential to deliver attractive returns, albeit at lower levels than seen in the past three years. Citing reasons for the growth in the real estate market in India the report observes: “The retail market in India has been growing due to increasing demand from retailers, growing number of employed women, higher disposable incomes, media proliferation and growing consumerism.”
Moreover, despite the boom, the sector is unlikely to be able to fulfill the growing housing demands of the country, especially of the middle and lower income groups.
According to the ICICI Bank Global Investment Outlook for July, brought out by the bank’s Private Banking Research Division, operational income of the sector grew at a rate of 179 per cent over the past 5 quarters, with operating profits up by a massive 469 per cent. Average margins of constructors are now as high as 29 per cent with some real estate companies in the national capital region and the Mumbai-Pune belt earning an astronomical 200-170 per cent.
The report also points out that despite the boom, the sector will not be able to fulfil the demand for low and medium income group (LIG and MIG ) housing and there will be a shortage of about 27 million houses by 2012.
A prosperous middle class, higher incomes and fast urbanization has presented numerous opportunities to develop the retail sector especially in India and China. The report foresees a huge growth in MIG and LIG housing. “Property prices have stabilized over 6 months as developers cannot afford to hoard flats. But there is maximum demand in the LIG and MIG sector which will result in a shortage of 27 million houses by 2012 estimated.”
However, North and West India is likely to see 15-20 per cent correction in realty prices and 50 per cent fall in real estate offtake may also be witnessed. “We expect global real estate securities to benefit from continued GDP growth and strong property fundamentals,” the researchers observed. The sector will continue to have the potential to deliver attractive returns, albeit at lower levels than seen in the past three years. Citing reasons for the growth in the real estate market in India the report observes: “The retail market in India has been growing due to increasing demand from retailers, growing number of employed women, higher disposable incomes, media proliferation and growing consumerism.”
Indian real estate: boom or bubble?
Property prices are rising fast as the tech boom spreads across the country.
When Farallon Capital Management, a U.S. hedge fund, and its joint-venture partner, Indiabulls, snapped up an 11-acre property in central Mumbai in March 2005 for $54.5 million an acre, the purchase was called an act of idiocy by local developers. A few months later, when the same joint venture offered $95.5 million an acre for a nearby property, its was the second-lowest bid.
Property prices in India are rising fast, and not just in the biggest cities. As the tech boom spreads across the country, as more Indians buy homes, and as the economy grows at faster than 8% a year, real estate is attracting more investors, many of them from abroad.
"India is one of the last few countries where there is primary demand for real estate rather than individuals trading up," says Rajiv Sahney, who runs the India operations of New Vernon Advisory, a $1.4 billion New Jersey hedge fund.
Merrill Lynch forecasts that the Indian realty sector will grow from $12 billion in 2005 to $90 billion by 2015. "India is the most exciting real estate market in Asia," says Michael Smith, head of Asian real estate investment banking at Goldman Sachs. "It's one of the last major countries in Asia with an improving market."
That improvement worries some. Concerns about an asset-price bubble have led the Reserve Bank of India to raise the risk weightage on real estate loans extended by banks, and mortgage rates have gone from 7.5% to about 9.5% as a result. That's still well below the 15% rates that most Indians were used to, but it's enough to raise questions about whether the speculation of the past year and a half, which has driven land prices up by 30% to 100% and real estate stocks up as much as 2,000%, may be coming to an end.
The run-up in prices has attracted the likes of Morgan Stanley, which has invested $68 million in Mantri Developers, a midsized construction firm in Bangalore, and Merrill Lynch, which invested $50 million in Panchsheel Developers, a regional builder. Foreign companies have also poured money into funds that invest in Indian developers. GE Commercial Finance Real Estate, for example, has invested $63 million in an $800 million fund that is building IT parks, and Calpers and the Oregon Public Retirement Fund have invested $100 million each in the IL&FS India Realty fund.
Real estate funds set up to invest only in India have already raised more than $2.7 billion. And new funds worth as much as $4 billion are being planned by J.P. Morgan, Britain's Knight Frank, and other foreign investors. Warburg Pincus, the largest private-equity investor in India, says it is spending nearly a third of its time studying opportunities in this area. And Deutsche Asset Management recently hired someone to head its real estate activities in India. "As the largest active managers of real estate funds in the world," says Edouard Peter, head of Deutsche Asset Management Asia Pacific and Middle East, "we expect to be actively raising and investing funds in real estate in India."
It isn't going to be a cakewalk. "It's not easy to do business in India," says Seek Ngee Huat, president of GIC Real Estate, an arm of the Singapore government that is planning to invest several hundred million dollars in Indian real estate over the next two years. "It's difficult finding suitable partners who have the same long-term objectives, as most firms are small and family run."
Already margins have shrunk. "The vast majority of the planned real estate funds are targeting annual rates of return of between 25% and 30%, but I'm skeptical that the vast majority will cross 20%," says Mumbai real estate advisor Rajiv Bhatia.
To achieve the target returns, several funds are focusing on second-tier towns and second-tier developers. "Many investors are going to lose their shirt here, as it's an opaque market, and a wrong partner can easily do you in," says S. Sriniwasan, executive director at Kotak Mahindra Realty fund in Mumbai. There's also bureaucracy and corruption to deal with. Says Ashwin Ramesh, who runs a boutique fund called Primary Real Estate Advisors: "There are a couple of hundred malls currently being developed across India, and predictions are that only 10% will be successful. Yet every developer feels his mall will be among the survivors."
When Farallon Capital Management, a U.S. hedge fund, and its joint-venture partner, Indiabulls, snapped up an 11-acre property in central Mumbai in March 2005 for $54.5 million an acre, the purchase was called an act of idiocy by local developers. A few months later, when the same joint venture offered $95.5 million an acre for a nearby property, its was the second-lowest bid.
Property prices in India are rising fast, and not just in the biggest cities. As the tech boom spreads across the country, as more Indians buy homes, and as the economy grows at faster than 8% a year, real estate is attracting more investors, many of them from abroad.
"India is one of the last few countries where there is primary demand for real estate rather than individuals trading up," says Rajiv Sahney, who runs the India operations of New Vernon Advisory, a $1.4 billion New Jersey hedge fund.
Merrill Lynch forecasts that the Indian realty sector will grow from $12 billion in 2005 to $90 billion by 2015. "India is the most exciting real estate market in Asia," says Michael Smith, head of Asian real estate investment banking at Goldman Sachs. "It's one of the last major countries in Asia with an improving market."
That improvement worries some. Concerns about an asset-price bubble have led the Reserve Bank of India to raise the risk weightage on real estate loans extended by banks, and mortgage rates have gone from 7.5% to about 9.5% as a result. That's still well below the 15% rates that most Indians were used to, but it's enough to raise questions about whether the speculation of the past year and a half, which has driven land prices up by 30% to 100% and real estate stocks up as much as 2,000%, may be coming to an end.
The run-up in prices has attracted the likes of Morgan Stanley, which has invested $68 million in Mantri Developers, a midsized construction firm in Bangalore, and Merrill Lynch, which invested $50 million in Panchsheel Developers, a regional builder. Foreign companies have also poured money into funds that invest in Indian developers. GE Commercial Finance Real Estate, for example, has invested $63 million in an $800 million fund that is building IT parks, and Calpers and the Oregon Public Retirement Fund have invested $100 million each in the IL&FS India Realty fund.
Real estate funds set up to invest only in India have already raised more than $2.7 billion. And new funds worth as much as $4 billion are being planned by J.P. Morgan, Britain's Knight Frank, and other foreign investors. Warburg Pincus, the largest private-equity investor in India, says it is spending nearly a third of its time studying opportunities in this area. And Deutsche Asset Management recently hired someone to head its real estate activities in India. "As the largest active managers of real estate funds in the world," says Edouard Peter, head of Deutsche Asset Management Asia Pacific and Middle East, "we expect to be actively raising and investing funds in real estate in India."
It isn't going to be a cakewalk. "It's not easy to do business in India," says Seek Ngee Huat, president of GIC Real Estate, an arm of the Singapore government that is planning to invest several hundred million dollars in Indian real estate over the next two years. "It's difficult finding suitable partners who have the same long-term objectives, as most firms are small and family run."
Already margins have shrunk. "The vast majority of the planned real estate funds are targeting annual rates of return of between 25% and 30%, but I'm skeptical that the vast majority will cross 20%," says Mumbai real estate advisor Rajiv Bhatia.
To achieve the target returns, several funds are focusing on second-tier towns and second-tier developers. "Many investors are going to lose their shirt here, as it's an opaque market, and a wrong partner can easily do you in," says S. Sriniwasan, executive director at Kotak Mahindra Realty fund in Mumbai. There's also bureaucracy and corruption to deal with. Says Ashwin Ramesh, who runs a boutique fund called Primary Real Estate Advisors: "There are a couple of hundred malls currently being developed across India, and predictions are that only 10% will be successful. Yet every developer feels his mall will be among the survivors."
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