Investors can’t get enough of property at the moment – and India is no exception. According to the FT, “billboards showing the prices of real estate stock offerings” line Mumbai’s “clogged roads”, while here in London, Ishaan Real Estate, an Indian property investment firm owned by leading Mumbai developer K Raheja, saw its share price jump 10% when it listed on Aim earlier this week. Bankers reckon that similar companies are planning to raise more than $4bn on international and domestic stock markets over the next six months.
There are plenty of good reasons for excitement: the nascent superpower is growing at 8% a year. Demand for office space is soaring – Ernst & Young estimates that India will need an additional 368 million square feet by 2013. Meanwhile, the growing middle class has more money to spend, which means more shopping malls, hotels and, of course, houses – the Asian Development Bank reckons the country will need 22 million more housing units by 2008. But as regular readers will know, here at MoneyWeek we are always wary when a sector attracts this much investment attention. And there are some equally good reasons for investors to think twice before following the herd.
Indian property: have house prices soared too high?
“India displays an alarming number of signs that things have gone too far,” says The Economist. House prices in big cities have more than doubled in the past two years; housing loans have jumped by 54% in the year to June, while commercial property loans rose 102%. Knight Frank India reports that apartments in Mumbai’s “Golden Triangle” district now go for as much as £500 per square foot – that compares to £1,000 a square foot in New York.
Some believe India’s storming stockmarket performance is partly behind the surge in house prices. One Mumbai-based analyst tells the FT: “My sense is that the property market has gone beyond the level incomes can support. It’s supported by the stockmarket wealth creation that people have enjoyed.” Even developers including the aforementioned K Raheja are avoiding big cities and focusing on smaller ones. “Something that has gone up 15 times can come down 15 times,” says owner Rahi Raheja.
Indian economy: the dangers of cheap capital
The trouble with India’s economy is that it cannot grow as fast as China, for example, without sparking inflation because of its lower investment rate, particularly in infrastructure, says The Economist. So even though one of India’s key interest rates has risen by 1.5 percentage points to 6% over the past two years, inflation has risen further, which means that real interest rates are at historic lows. This suggests that cheap capital rather than fundamentals is driving the boom. The Reserve Bank of India is trying to curb speculation by restricting bank lending, but that hasn’t stopped developers raising money through stockmarkets. “You are transferring the risk from the professional banking sector to a sometimes more amateurish and gullible investment class,” Starwood Capital Group’s
Balaji Rao tells the FT.
Opaque property rules are also a cause for concern. This year, India ranked 41st out 56 property markets in a transparency survey by Jones Lang LaSalle real estate – higher than two years ago, but still behind countries such as the Philippines. The sector is fraught with “every conceivable illegality in documentation, ownership, regulation and even simple measurement of constructed property”, says Sucheta Dalai in The Indian Express. She warns that it is almost impossible for those investing in Indian property to ascertain the legality of titles and the truth behind the valuation claims of local developers. Increased pressure from multinational companies investing in the country should see transparency continue to improve, argues Jones Lang LaSalle, while the possible introduction of
Real Estate Investment Trusts would “provide another major push to improve transparency and operating standards”, says the International Herald Tribune, but it is clear that “there remains room for improvement”.
Indian property funds
So while India is definitely a market to keep an eye on, investors might be better waiting until transparency improves and the crowd becomes less enamoured with property in general. But for those who just can’t wait, Aim-listed funds include the aforementioned Ishaan Real Estate (ISH), Eredene Capital (ERE), which has invested about $26m of its $100m cashpile so far, and Trinity Capital (TRC) which has $110m invested in India, including $22m in a residential project in Mumbai.