NEW DELHI, Sep.25, 2004
Priyanka Bhardwaj
Asia South
Frustrated with a mercurial stock market, low returns on small savings
schemes and instability in mutual funds, Indians are investing in real
estate like never before. After remaining dormant for years, the property
market is on fire again with prices of plots and apartments almost doubling
in the past year.
The government has 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% 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
component. "This means there isn't much of a difference in cost
between hiring a flat and taking a loan to buy one. So why wouldn't
one buy one?" says Sanjiv Sethi, a property dealer.
In 2003-04, non-resident Indians (NRIs) made a big splash in the market,
but 2004-05 is turning out to be even better, and the investment more
widespread. Whether in the political or financial capitals of Delhi
or Mumbai, information-technology (IT) hubs of Bangalore or Hyderabad,
Kolkata or Chennai, the property market - commercial or residential
- is witnessing huge inflows from NRIs, high-salaried and high-net-worth
individuals. High-end housing is now considered the hottest item in
the real estate business, with expected growth pegged at more than 30%.
Consider this: apartments that were quoting $20 per square foot six
months back in the suburban township of Gurgaon (near Delhi) are now
being sold at $50. Translated into a three-bedroom, 2,000-square-foot
flat, the price difference works out to be $60,000 - a capital appreciation
unmatched by any other investment. In 2000, the number of outstanding
home loans by commercial banks exceeding $200,000 stood at 279, in 2001
it was 109 and in 2002, 124. In 2003, the number has shot up to 1,690.
The demand has triggered a mad scramble among builders to come up with
plush villas and housing complexes. Omaxe Construction is setting up
an exclusive NRI City at Noida near Delhi. The company has also launched
a $24.2 million project for high-net-worth Indians, both resident and
non-resident. Named "The Forest" and adjoining a 132-hectare
green belt, the project is already under way, with 105 ultra-luxury
apartments priced between $250,000 and $350,000, complete with features
such as a personal health club for each apartment, high-tech security
and glitzy facades in glass and metal. DLF, Unitech, Vipul, Eros, Zee,
Parsvnath, Balaji are among the other biggies involved in the frenetic
construction activity.
The interest in real estate comes at a time when India is already witnessing
a construction boom to meet the soaring needs of the country's high-tech
sector. It's a building boom where 70-80% of the demand comes from software
services and business and process outsourcing companies. Properties
with the potential of being leased out to multinational companies (MNC),
large corporates, banks or embassies are the most in demand. In Mumbai
and Delhi, lease rentals are as high as 10-13% of the value of a residential
property and 13-14% for furnished apartments and offices. "The
investments are being made after closely studying the markets and taking
an informed decision," says a recent report by property consultants
Cushman & Wakefield.
In the next 12 months, it is reckoned there will be about 8 million
square feet (743,000 square meters) of new offices in cities such as
Bangalore, Delhi, Mumbai, Hyderabad and Chennai. That will increase
to about 24 million square feet in the next 36 months. The construction
boom is evident in all major metros with almost equal frenzy - though
Bangalore leads the way, followed by Gurgaon. This is perhaps because
Bangalore is fast moving from an IT back-office location to a full-fledged
IT hub, with cutting-edge research combined with low value-added services.
The Prestige Group is building 2 million square feet of office blocks
here. 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 28 hectares,
while in Gurgaon BMW and Maruti have ambitious designs.
The Confederation of Indian Industry has said Mumbai is rapidly losing
out to Delhi and Hyderabad as the preferred location of big corporate
houses. Even the low-cost housing in Kolkata is seen as a role model.
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 on the suburbs for prime
apartments and penthouses. In Delhi, NRIs are attracted to farmhouses,
followed by retail space in malls and offices.
"In the last few months, bookings by NRIs, high-salaried and self-employed
have gone up threefold," says T C Goyal, managing director of DLF
Universal, which has developed several properties at Gurgaon, including
the recently announced Icon luxury apartments priced close to $200,000.
Experts say the interest in buying property was never more, barring
a period between 1993-96 when speculation was at the highest. In the
early 1990s, many investors were drawn by the zooming real-estate prices
with the intention of booking 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 driven by the end-users rather than suppliers.
A combination of indirect factors and genuine structural amendments
is behind the current spate. The most important of course is the fact
that Indians are earning more than ever before: abroad as high-tech
workers, in the country manning back offices as well as Indian global
software firms doling out dollar-equivalent salaries, as MNC employees,
and as beneficiaries of the boom in hospitality, tourism, health, education
and banking sectors.
As the economic scenario in the US began to get dismal after September
11, 2001, with an increasing number of foreign employees handed pink
slips and a stiff cap imposed on H1-B visa quotas, many NRIs began to
invest in property in India as a backup if the situation worsened in
the US. This has pushed up the demand for residential premises, and
prices.
Others who have actually shifted have invariably managed lucrative
jobs or substantial savings, and seek out comfortable apartments to
match their lifestyle abroad. Earlier, developers would focus on middle-class
apartments in the range of $15,000-$20,000. With the demand increasing
for housing in the $100,000-$200,000 range, developers have shifted
focus to this high-end segment.
However, this is only part of the big picture. Experts point to the
genuine maturing of the real-estate market. The surge in demand follows
the decision to allow NRIs to move their investments freely in and out
of the country. The government has permitted repatriation of rental
income every year (announced in the 2003-04 budget) as well as proceeds
from the sale of property purchased through overseas sources, without
a lock-in period.
However, there is still a long way to go. Strong fundamentals are backing
the real estate boom now, but more needs to be done. Experts say that
although the government has allowed flexibility in rent and dividends,
there are still bottlenecks - capital gains cannot be repatriated, which
means there is no real capital account convertibility. Others fear oversupply
can lead to property prices crashing, as happened in Southeast Asian
countries, and warn that since the boom is driven largely by the high-tech
industry, it's important to ensure that not too much is created. However,
most industry players agree that the real-estate spurt is genuine and
not a speculative burst that should be calibrated for further gains