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INDIA'S REALITY SOARES
By PRIYANKA BHARADWAJ
Given the mercurial stock market, low returns on small savings
schemes, instability in mutual funds, Indians are investing in real estate,
like never before. Indeed, after remaining dormant for years, real estate in
India is abuzz once more with prices of plots and apartments almost doubling
in the past couple of years. In the financial year 2003-4, the non-resident
Indian (NRI) made a big splash into the real estate market, but 2004-5
turned out to be bigger and the investments are more widespread. Whether in
the political or financial capitals of Delhi or Mumbai, information
technology hubs Bangalore or Hyderabad, Kolkata or Chennai, the property
market, whether commercial or residential, is witnessing huge inflows from
NRIs, high-salaried and high net worth individuals. High-end housing is now
considered the fastest growing market in the real estate business with
expected growth being pegged at over 30%.
Consider this: Apartments that were quoting at $ 20 per square feet two
years back in the suburban township of Gurgaon (next to Delhi) are now being
sold at $ 50 per square feet. Translated into a three-bedroom 2,000 square
feet flat, the price difference works out to be $ 60,000, a capital
appreciation that cannot be matched by any other investment; in the
financial year 2000, the number of outstanding home loans by commercial
banks exceeding $ 200,000 stood at 279, in 2001 109, in 2002, 124. In 2003,
the number has shot up to 1,690 and should cross 5,000 in the year 2005.
Indeed, as investment in the Indian real estate market fast catches the
imagination, it has triggered a mad scramble among builders to come up with
plush villas and housing complexes that can match any other in the world.
For example, Omaxe Construction is setting up an exclusive NRI City at Noida
near Delhi. The company has also launched a $24.22 million project for high
net worth Indians, both resident and non-resident. Named ``The Forest'' and
adjoining a 325-acre green belt, the project is already under development,
with 105 ultra luxury apartments priced between $ 250,000 to $ 350,000,
complete with features such as a personal health club for each apartment,
hi-tech security and glitzy façades in glass and metal. DLF, Unitech, Vipul,
Eros, Zee, Parsvnath, Balaji are among the other names that are now involved
in the frenetic construction activity.
The interest in real estate comes when the construction boom is at an
unprecedented scale in India to meet the soaring needs of India's high-tech
sector. It's a building boom where 70 per cent to 80 per cent of the demand
is coming from software services and business and process outsourcing
companies. Bangalore is moving from an IT back-office location to a
full-fledged IT hub, with cutting-edge research combined with low
value-added services. Properties with the potential of being leased out to
MNCs, large corporates, banks or embassies are the most in demand. In Mumbai
and Delhi, lease rentals are as high as 10-13 per cent of the value of a
residential property and 13-14 per cent for furnished apartments and
offices. ``The investments are being made after closely studying the markets
and taking an informed decision about any location in the country,'' says a
recent report by property consultants Cushman & Wakefield.
In the next 12 months it is reckoned there will be about 8 million sq ft of
new offices in cities like Bangalore, Delhi, Mumbai, Hyderabad and Chennai.
That will increase to about 24 million sq ft in the next 36 months. The
frenetic construction activity is happening in all the major metros at
almost equal speed — though Bangalore leads the way followed by Gurgaon. In
Bangalore, the Prestige Group is building 2 million sq ft of office blocks;
In Gurgaon DLF Universal is putting in place about 2 million square feet for
blue-chip corporate clients; in Hyderabad Larsen & Tourbo and the K Raheja
group have major plans in place. In Bangalore Intel, SAP, Texas Instruments
and Motorola have taken over 70 acres of land, while in Gurgaon BMW and
Maruti have big plans.
The Confederation of Indian Industry (CII) has said that Mumbai is rapidly
losing out to Delhi and Hyderabad as the preferred location of big corporate
houses. Even low cost housing in Kolkata is seen as a role model. A global
research conducted by real estate consultants Jones Lang LaSalle and LaSalle
Investment Management has predicted that Mumbai and Delhi will face
increasing competition from India's second-tier cities -- Bangalore,
Chennai, Hyderabad and Pune. According to the Cushman & Wakefield report,
much of the buying interest is focused in the suburbs for prime apartments
and pent-houses. In the Capital, NRIs are attracted to farm houses followed
by retail space in malls and offices.
Industry observers echo the sentiment even as the winter months set in when
the property prices reach their peak values
`In the last few months bookings by NRIs, high salaried and self-employed
have gone up three-fold,' says T C Goyal, managing director DLF Universal,
that has developed several properties at Gurgaon, the satellite town of
Delhi, including the Icon luxury apartments priced close to $ 200,000.
`The bookings are for investment as well as to live if they shift,' says
Goyal.
Experts say that the interest in buying property was never more, barring a
period between 1993-6 when speculation was at the highest. In the early
nineties, many investors were drawn by the zooming real estate prices, with
the intention to book quick profits. The market went bust with many
incurring huge losses, the way it also happened in the stock markets during
the same period. But, this time the story is likely to be different as the
boom is end-user, rather than supplier driven.
Indeed, it has been a combination of indirect factors and genuine structural
amendments that has brought about the change. Most important of course is
the fact that Indians are earning more than ever before: abroad as high-tech
workers, in India manning back offices as well as Indian global software
firms doling out dollar equivalent salaries, MNC employees as well as the
huge growth in the people intensive service sector comprising hospitality,
tourism, health, education, banking and more.
Then, there are those who have come back post-September 11 and jobless
growth of the US economy that has seen overnight pink slips being handed to
employees of foreign origin, with a stiff cap being imposed on H1-B quotas,
the ticket for many high-tech workers to the USA. This has resulted in NRIs
investing in property here with the intention of moving house in case the
situation worsens in the USA, pushing up the demand for residential premises
as well as prices. Others who have actually shifted have invariably managed
lucrative jobs or substantial savings and seek out comfortable apartments
that match living abroad. Indeed, where there is a customer, a supplier
invariably appears. Earlier developers were focusing on middle-class
apartments in the range of $ 15,000-20,000. With money flowing into real
estate, the demand for housing in the $ 100,000 to $ 200,000 has gone up.
However, this is part of the full picture. Experts point to the genuine
maturing of the real estate market, with government backing given the
comfortable foreign economics position and a bit of personal finance. The
surge in demand follows NRIs being able to freely move their investments in
and out of the country. The government has permitted repatriation of rental
income every year (announced budget 2003-4) as well as proceeds from sale of
property purchased through overseas sources, without a lock-in period. Many
NRIs have converted to non-resident external accounts that are fully
convertible.
The government has also allowed 100% foreign direct investment in real
estate subject to certain restrictions and may soon allow housing finance
companies to float mutual funds to invest in real estate. This comes at a
time when fixed deposit interest rates are down to below 6% cent while
rental returns are pegged at 9-14%. The surge in housing loans is due to the
low interest cost at 7 % as well as tax benefits on the interest components.
``This means that there isn't much of a difference in cost between hiring a
flat and taking a loan,'' says Sanjiv Sethi a property dealer.
However, there is still a way to go. Strong fundamentals are backing the
real estate boom, but more needs to be done. Experts say that though the
government has allowed flexibility in rent and dividend, there are still
bottlenecks --- capital gains cannot be repatriated which means that there
is no real capital account convertibility. Only savings that NRIs remit into
India can be taken back which is nothing new. Others fear that oversupply
can lead to the property prices crashing as happened in south east Asian
countries and warn that since the boom is driven by the high-tech industry,
it becomes important to ensure that too much is not created. Housing finance
companies want that interest rates on housing loans need to go down further
in the face of inflationary trends.
However, most industry players agree that the real estate spurt is genuine
and not a speculative rise that should be calibrated for further gains.
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EXCLUSIVE STORY
