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April 24, 2006

Developers as dotcommers

Business Today has a detailed article examining whether the boom in Indian real estate prices is sustainable.

Points on the "Yes" side:
To answer in a word, demand. Underlying it, though, are some key macro-economic reasons. One, the country's growth...To add to it, interest rates have actually come down from high teens to about 9 per cent, giving rise to an EMI (equated monthly instalment) economy, where even a Rs 30-lakh apartment is affordable to a large number of households..."Low interest rates and retail loan boom have turned the latent demand in many of these cities into a real demand," says Gaurav Dalmia, Chairman of Landmark Holdings and also a director on the board of a real estate fund, Fire Capital India.

And then there are the usual Planning Commission, PwC and other consultacy numbers:
"Currently, there is a need for 22 million dwelling units in India, and till this gap is bridged, there is no reason for the demand (for residential units) to abate," says Sushil Ansal, Chairman, Ansal Properties & Infrastructure. Ansal isn't the only one betting on the boom. Thanks to key changes in foreign investment policy in real estate (see FDI Friendly), there's a flood of wannabe investors in everything from residential units to townships to special economic zones. "The next four to five years will see annual inflows of $2-3 billion (Rs 9,000-13,500 crore) into India," says Cushman's Verma..."Yields on real estate at 8-10 per cent and returns on investment at 17-18 per cent are the most attractive among all Asian markets," points out Anuj Puri, MD, Trammell Crow Meghraj, another real estate services firm.


Points on the "No" side:
The article says that "(while) a general market crash doesn't seem likely...some developers and investors will be hard-pressed to justify their investment". It provides examples of developers paying very high rates for acquiring sites where they hope to create hotels and malls. But high acquisition costs would be a huge challenge for the hoteliers or retailers.
Kishore Biyani, the man behind Pantaloon and Big Bazaar, says that...the retail industry, where profit margins are thin and volume is the name of the game, cannot help sustain the current price levels. "Everything (prices) is illogical," quips Biyani. Pantaloon, for instance, has an internal benchmark rental price of $1 (Rs 45)/sq. ft, which it tries not to breach while negotiating leases. What's true of Pantaloon is true of other retailers as well. They cannot lock into high-rental deals when there's no guarantee on revenues.

HDFC Chairman Deepak Parekh is among the more credible voices on the nay side.
HDFC's Parekh, for one, is clear that the industry is flirting with disaster. "The current price rise is a bubble fuelled by developers. Where else do you see prices rising like this?" he asks. Others like Dalmia of Landmark say while it is unlikely that India will face a Japan-like situation, where the bursting of the real estate bubble pushed banks over the edge and the economy into a long recession, the real estate euphoria does raise concerns. Says Dalmia: "In 1999, the underlying sentiment with the tech entrepreneurs (read: dotcommers) was that they were cat's whiskers and the rest were idiots. It is exactly the same posturing that one sees in the real estate tribe, and that is scary."

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.