Indian Real Estate Boom Or Bubble

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 2018 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​ 2018 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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