Showing posts sorted by relevance for query real estate. Sort by date Show all posts
Showing posts sorted by relevance for query real estate. Sort by date Show all posts

Friday, February 13, 2009

Indian Real Estate: Investors Are Shopping, but Are They Buying Hype?

By M H Ahssan

Drive through any of India's major cities and it will be impossible to go a mile without running into brightly colored cranes, construction rubble and men in yellow helmets scurrying up and down skyscrapers. Commercial high rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping to feed the frenzy.

But several astute industry watchers have begun poking big holes in that picture. For one, they say that many foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors' margins significantly. Finally, they note that concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. India Knowledge@Wharton spoke with prominent private investors, property developers and brokerage firms to understand how these factors are tempering investors' appetites for Indian real estate.

With yields between 30% and 40% during the past two years, India's real estate industry has been the toast of global investment funds. But expectations for future returns have been sharply reduced to between 12% and 20% over the next few years. For many foreign investors, this means having to weigh Indian real estate opportunities against deals that offer comparable returns in other emerging markets like Eastern Europe or Latin America.

Fears of a real estate bubble and an overheated economy have led India's central bank to require a lender cutback on real estate loans. That move has pushed up interest rates, lowering consumers' appetites for home financing and simultaneously raising rents for apartments and offices. Most Indian real estate companies are privately held and their financial information is not readily available. The absence of comprehensive market data across product types like office, retail, industrial and residential properties further hurts the ability of investors to read the right signals, and the occasional rumor of a large deal going bust or a property developer resorting to a distress sale can damage investment sentiments far more than warranted.

More Hype than Actual Investments

Clearly, local investors understand the terrain far better than foreign investors. Much of the foreign capital committed to Indian real estate ventures has yet to be invested, says Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai. "Last year, less than $1 billion [was actually invested in] Indian real estate. That's less than the value of half a building in Times Square," he says. That compares with market estimates of between $15 billion and $20 billion in foreign capital headed for Indian real estate.

Kalra cited these figures during a panel discussion on real estate investing at a recent New York City event organized by The Indus Entrepreneurs (TiE), a network of entrepreneurs founded 15 years ago in Silicon Valley. "A negligible amount of foreign capital will get invested in Indian real estate in the next 24 months," he told the panel.

Sameer Nayar, managing director and head of real estate finance-Asia Pacific at Credit Suisse, offers a similar assessment. "There is a lot of hype about capital going into Indian real estate ... [but] not a lot of money is actually going in," he says. Extracting good returns from those investments calls for significant local market expertise in dealing with regulatory and other obstacles. "You make money because you can deal with the problems, and that's why your returns could be 50%," he adds. "If it were an easy market to work in, you would make only 15%."

Short-term Disenchantment

In April 2006, Trikona Capital group firm Trinity Capital raised 250 million pounds ($500 million) for Indian real estate investment in a public offering through London's Alternative Investment Market (AIM). Kalra says his company has deployed about $400 million in Indian real estate projects over the past year.

Including Trinity, about a dozen real estate funds targeting India have raised a combined $2 billion in the past year through listings on the AIM. Most of them are currently trading at levels significantly below their offer prices, revealing investor disenchantment. Trinity's share made its debut in April 2006 at one pound; it now trades at about 86 pence. Hirco, an Isle of Man-domiciled company promoted by the Mumbai-based Hiranandani Constructions group, raised about 382 million pounds ($755 million) from its IPO last December; since then, its shares have lost considerable sheen, down from 5 pounds to about 390 pence in the second week of May. Exceptions include Unitech Corporate Parks, which listed on the AIM last December at 93 pence and now trades at 96.25 pence.

"We see the opportunity [in Indian real estate], but we also see the risks and challenges involved," says Chanakya Chakravarti, managing director of real estate at Actis, a London-based private equity fund that manages assets of about $3.4 billion. Actis plans to set up a $300 million India real estate fund. It already has two other existing funds with an estimated equity of $475 million that have invested in Indian real estate, auto ancillaries and other industries. "Each fund has a unique risk-return profile, and we work with these. For us, India is a long-term story," he adds.

Chakravarti lists three main risks or challenges that real estate investors in India will be up against in the short term. The first, he says, is an oversupply of office space in the major and second-tier cities. A hazy regulatory framework fostering indecision and delayed investments is another concern. Finally, he notes, opaque deal-making processes that narrow the exit routes will deter serious investors.

"The property market today is rife with uncertainties. Prices as well as interest rates have been rising," says Anuj Puri, managing director of real estate services firm Trammell Crow Meghraj, the Indian joint venture of Dallas, Tex.-based real estate services firm Trammell Crow and the Meghraj Group, a financial services firm in London. "It is not advisable to expect any short-term gains; but of course, for long-term investors, India's strong fundamentals are still intact. A long-term investor can expect average returns of 15% to 20% per year."

Vikas Oberoi, managing director of Oberoi Constructions in Mumbai, says the risk-return profile for real estate investments is far brighter for those who have accumulated land inventory at prices much lower than prevailing levels. "The average net margin in today's market is 20% to 25%; we can easily do 15% better than the market," he says. Oberoi claims his company can achieve those higher returns because, among other reasons, "most of the land has been bought earlier."

Oberoi Constructions has an inventory of 15 million square feet of mostly prime land in Mumbai. At today's prices, Oberoi expects it to generate gross revenues of $2.2 billion. The company is focused mostly on for-sale residential apartments, although it dabbles in shopping malls, hotels and other commercial property lines. Oberoi expects his company to post $200 million in revenue this year, rising to $300 million in 2008.

This past January, Morgan Stanley's Special Situations Fund invested $152 million for a 10.75% stake in Oberoi Constructions, effectively valuing the company at about $1.4 billion. Oberoi says the untapped upside in his company's land bank was a major attraction for the institutional suitors it attracted. For instance, five years ago it bought a land lot with 8 million square feet in Mumbai's northwestern suburb of Goregaon for Rs. 100 crore ($24 million). Oberoi says the property would be worth 20 times more today.

"Where is the supply? There is only demand," says Oberoi. "In fact, I want the market to stabilize or [prices to] come down because then we would get land at cheaper prices. It is absolutely a seller's market."

Second-tier Migration

The most visible changes in the Indian real estate sector include the emergence of well defined product categories, the division of the market into tiered cities and a widening of financing options.

In the past, real estate was sold either as residential or as commercial property. With the maturing of the market and globalization of the investor base, the categories have been sharpened and new ones established. "Investors in the residential market are very different from the office and retail space investor," says Sanjeev Dasgupta, CFO and head of investments at Kshitij Investment Advisory Services, part of the Future Group, a large Mumbai-based owner of shopping malls across the country. In the residential sector, investors are in for high returns and are willing to take high risks, he says. This also allows for easy exit, although the risk of a mismatch between potential and real returns is high, he adds.

According to Poonam Mahtani, a national director of retail services firm Colliers International in India, "The investment risk is lower in the metros, but prices there are much higher than those in tier II cities." Several equity funds have consciously focused on tier II cities, because they believe that this offers the most potential. "Land prices are skyrocketing. Buying to sell is a very risky strategy. Land prices are way beyond levels that will generate a decent return. It doesn't make sense to invest any more unless you go to second- or third-tier markets."

Kalra, too, sees the markets outside of India's major cities as the most attractive, simply because they are not the low-hanging fruit sought by the early crop of investors with relatively lower risk appetites. "There are lots of opportunities outside the main metros. India has 30 cities with a population of a million people each," he says. Adds Dasgupta, "The returns are huge in tier II cities, where there is a large untapped potential." He believes that this sector will see a rental yield of 12% to 14% in the next few years.

In office space, experts see a migration towards second-tier cities. A recent report by Deutsche Bank on real estate trends notes, "As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area (Mumbai and Delhi)." In Mumbai, secondary business districts have emerged in recent years, including the Bandra-Kurla complex in the central suburbs, 25 miles from the old commercial hubs in the southern end of the city.

Much-needed Transparency

For foreign investors, one troubling fact is a pan-India phenomenon: inadequate transparency in land valuations they use to price their investments. In an interview last month, M. Damodaran, chairman of the Securities and Exchange Board of India, discussed the lack of clarity in real estate companies' disclosures, especially with respect to their land banks. "We sought clarity ... on matters like, 'What does your land bank comprise, [and] what are the valuation aspects you have indicated?'" he told the India news wire service. "Where there is only an agreement to develop land, there must be complete disclosure. All such agreements are to be made available for inspection," he said, adding that he preferred land valuations to be made at current prices and not on the basis of future projections.

Trammell Crow Meghraj's Puri agrees. "There is a marked lack of transparency, corporate governance and accountability among India's real estate developers. There also continues to be a serious lack of quality infrastructure. In addition, India scores low in terms of congenial political environment in terms of the real estate sector. This means that there is a lack of clarity in pertinent policies."

But Puri also believes those issues will soon fade away as India's real estate markets mature. "Although real estate is a regional and highly location-specific industry, India will replicate the events that occurred in emerging markets like Mexico and Central Eastern Europe [including Russia, Bulgaria and Poland]," he says. "In these countries, too, foreign investments were the primary drivers for transparency, accountability and higher capital appreciation in the real estate sector."

Saturday, January 24, 2009

Indian Real Estate: Investors Are Shopping, but Are They Buying Hype?

By M H Ahssan

Drive through any of India's major cities and it will be impossible to go a mile without running into brightly colored cranes, construction rubble and men in yellow helmets scurrying up and down skyscrapers. Commercial high rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping to feed the frenzy.

But several astute industry watchers have begun poking big holes in that picture. For one, they say that many foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors' margins significantly. Finally, they note that concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. India Knowledge@Wharton spoke with prominent private investors, property developers and brokerage firms to understand how these factors are tempering investors' appetites for Indian real estate.

With yields between 30% and 40% during the past two years, India's real estate industry has been the toast of global investment funds. But expectations for future returns have been sharply reduced to between 12% and 20% over the next few years. For many foreign investors, this means having to weigh Indian real estate opportunities against deals that offer comparable returns in other emerging markets like Eastern Europe or Latin America.

Fears of a real estate bubble and an overheated economy have led India's central bank to require a lender cutback on real estate loans. That move has pushed up interest rates, lowering consumers' appetites for home financing and simultaneously raising rents for apartments and offices. Most Indian real estate companies are privately held and their financial information is not readily available. The absence of comprehensive market data across product types like office, retail, industrial and residential properties further hurts the ability of investors to read the right signals, and the occasional rumor of a large deal going bust or a property developer resorting to a distress sale can damage investment sentiments far more than warranted.

More Hype than Actual Investments
Clearly, local investors understand the terrain far better than foreign investors. Much of the foreign capital committed to Indian real estate ventures has yet to be invested, says Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai. "Last year, less than $1 billion [was actually invested in] Indian real estate. That's less than the value of half a building in Times Square," he says. That compares with market estimates of between $15 billion and $20 billion in foreign capital headed for Indian real estate.

Kalra cited these figures during a panel discussion on real estate investing at a recent New York City event organized by The Indus Entrepreneurs (TiE), a network of entrepreneurs founded 15 years ago in Silicon Valley. "A negligible amount of foreign capital will get invested in Indian real estate in the next 24 months," he told the panel.

Sameer Nayar, managing director and head of real estate finance-Asia Pacific at Credit Suisse, offers a similar assessment. "There is a lot of hype about capital going into Indian real estate ... [but] not a lot of money is actually going in," he says. Extracting good returns from those investments calls for significant local market expertise in dealing with regulatory and other obstacles. "You make money because you can deal with the problems, and that's why your returns could be 50%," he adds. "If it were an easy market to work in, you would make only 15%."

Short-term Disenchantment
In April 2006, Trikona Capital group firm Trinity Capital raised 250 million pounds ($500 million) for Indian real estate investment in a public offering through London's Alternative Investment Market (AIM). Kalra says his company has deployed about $400 million in Indian real estate projects over the past year.

Including Trinity, about a dozen real estate funds targeting India have raised a combined $2 billion in the past year through listings on the AIM. Most of them are currently trading at levels significantly below their offer prices, revealing investor disenchantment. Trinity's share made its debut in April 2006 at one pound; it now trades at about 86 pence. Hirco, an Isle of Man-domiciled company promoted by the Mumbai-based Hiranandani Constructions group, raised about 382 million pounds ($755 million) from its IPO last December; since then, its shares have lost considerable sheen, down from 5 pounds to about 390 pence in the second week of May. Exceptions include Unitech Corporate Parks, which listed on the AIM last December at 93 pence and now trades at 96.25 pence.

"We see the opportunity [in Indian real estate], but we also see the risks and challenges involved," says Chanakya Chakravarti, managing director of real estate at Actis, a London-based private equity fund that manages assets of about $3.4 billion. Actis plans to set up a $300 million India real estate fund. It already has two other existing funds with an estimated equity of $475 million that have invested in Indian real estate, auto ancillaries and other industries. "Each fund has a unique risk-return profile, and we work with these. For us, India is a long-term story," he adds.

Chakravarti lists three main risks or challenges that real estate investors in India will be up against in the short term. The first, he says, is an oversupply of office space in the major and second-tier cities. A hazy regulatory framework fostering indecision and delayed investments is another concern. Finally, he notes, opaque deal-making processes that narrow the exit routes will deter serious investors.

"The property market today is rife with uncertainties. Prices as well as interest rates have been rising," says Anuj Puri, managing director of real estate services firm Trammell Crow Meghraj, the Indian joint venture of Dallas, Tex.-based real estate services firm Trammell Crow and the Meghraj Group, a financial services firm in London. "It is not advisable to expect any short-term gains; but of course, for long-term investors, India's strong fundamentals are still intact. A long-term investor can expect average returns of 15% to 20% per year."

Vikas Oberoi, managing director of Oberoi Constructions in Mumbai, says the risk-return profile for real estate investments is far brighter for those who have accumulated land inventory at prices much lower than prevailing levels. "The average net margin in today's market is 20% to 25%; we can easily do 15% better than the market," he says. Oberoi claims his company can achieve those higher returns because, among other reasons, "most of the land has been bought earlier."

Oberoi Constructions has an inventory of 15 million square feet of mostly prime land in Mumbai. At today's prices, Oberoi expects it to generate gross revenues of $2.2 billion. The company is focused mostly on for-sale residential apartments, although it dabbles in shopping malls, hotels and other commercial property lines. Oberoi expects his company to post $200 million in revenue this year, rising to $300 million in 2008.

This past January, Morgan Stanley's Special Situations Fund invested $152 million for a 10.75% stake in Oberoi Constructions, effectively valuing the company at about $1.4 billion. Oberoi says the untapped upside in his company's land bank was a major attraction for the institutional suitors it attracted. For instance, five years ago it bought a land lot with 8 million square feet in Mumbai's northwestern suburb of Goregaon for Rs. 100 crore ($24 million). Oberoi says the property would be worth 20 times more today.

"Where is the supply? There is only demand," says Oberoi. "In fact, I want the market to stabilize or [prices to] come down because then we would get land at cheaper prices. It is absolutely a seller's market."

Second-tier Migration
The most visible changes in the Indian real estate sector include the emergence of well defined product categories, the division of the market into tiered cities and a widening of financing options.

In the past, real estate was sold either as residential or as commercial property. With the maturing of the market and globalization of the investor base, the categories have been sharpened and new ones established. "Investors in the residential market are very different from the office and retail space investor," says Sanjeev Dasgupta, CFO and head of investments at Kshitij Investment Advisory Services, part of the Future Group, a large Mumbai-based owner of shopping malls across the country. In the residential sector, investors are in for high returns and are willing to take high risks, he says. This also allows for easy exit, although the risk of a mismatch between potential and real returns is high, he adds.

According to Poonam Mahtani, a national director of retail services firm Colliers International in India, "The investment risk is lower in the metros, but prices there are much higher than those in tier II cities." Several equity funds have consciously focused on tier II cities, because they believe that this offers the most potential. "Land prices are skyrocketing. Buying to sell is a very risky strategy. Land prices are way beyond levels that will generate a decent return. It doesn't make sense to invest any more unless you go to second- or third-tier markets."

Kalra, too, sees the markets outside of India's major cities as the most attractive, simply because they are not the low-hanging fruit sought by the early crop of investors with relatively lower risk appetites. "There are lots of opportunities outside the main metros. India has 30 cities with a population of a million people each," he says. Adds Dasgupta, "The returns are huge in tier II cities, where there is a large untapped potential." He believes that this sector will see a rental yield of 12% to 14% in the next few years.

In office space, experts see a migration towards second-tier cities. A recent report by Deutsche Bank on real estate trends notes, "As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area (Mumbai and Delhi)." In Mumbai, secondary business districts have emerged in recent years, including the Bandra-Kurla complex in the central suburbs, 25 miles from the old commercial hubs in the southern end of the city.

Much-needed Transparency
For foreign investors, one troubling fact is a pan-India phenomenon: inadequate transparency in land valuations they use to price their investments. In an interview last month, M. Damodaran, chairman of the Securities and Exchange Board of India, discussed the lack of clarity in real estate companies' disclosures, especially with respect to their land banks. "We sought clarity ... on matters like, 'What does your land bank comprise, [and] what are the valuation aspects you have indicated?'" he told the India news wire service. "Where there is only an agreement to develop land, there must be complete disclosure. All such agreements are to be made available for inspection," he said, adding that he preferred land valuations to be made at current prices and not on the basis of future projections.

Trammell Crow Meghraj's Puri agrees. "There is a marked lack of transparency, corporate governance and accountability among India's real estate developers. There also continues to be a serious lack of quality infrastructure. In addition, India scores low in terms of congenial political environment in terms of the real estate sector. This means that there is a lack of clarity in pertinent policies."

But Puri also believes those issues will soon fade away as India's real estate markets mature. "Although real estate is a regional and highly location-specific industry, India will replicate the events that occurred in emerging markets like Mexico and Central Eastern Europe [including Russia, Bulgaria and Poland]," he says. "In these countries, too, foreign investments were the primary drivers for transparency, accountability and higher capital appreciation in the real estate sector."

Indian Real Estate: Investors Are Shopping, but Are They Buying Hype?

By M H Ahssan

Drive through any of India's major cities and it will be impossible to go a mile without running into brightly colored cranes, construction rubble and men in yellow helmets scurrying up and down skyscrapers. Commercial high rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping to feed the frenzy.

But several astute industry watchers have begun poking big holes in that picture. For one, they say that many foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors' margins significantly. Finally, they note that concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. India Knowledge@Wharton spoke with prominent private investors, property developers and brokerage firms to understand how these factors are tempering investors' appetites for Indian real estate.

With yields between 30% and 40% during the past two years, India's real estate industry has been the toast of global investment funds. But expectations for future returns have been sharply reduced to between 12% and 20% over the next few years. For many foreign investors, this means having to weigh Indian real estate opportunities against deals that offer comparable returns in other emerging markets like Eastern Europe or Latin America.

Fears of a real estate bubble and an overheated economy have led India's central bank to require a lender cutback on real estate loans. That move has pushed up interest rates, lowering consumers' appetites for home financing and simultaneously raising rents for apartments and offices. Most Indian real estate companies are privately held and their financial information is not readily available. The absence of comprehensive market data across product types like office, retail, industrial and residential properties further hurts the ability of investors to read the right signals, and the occasional rumor of a large deal going bust or a property developer resorting to a distress sale can damage investment sentiments far more than warranted.

More Hype than Actual Investments
Clearly, local investors understand the terrain far better than foreign investors. Much of the foreign capital committed to Indian real estate ventures has yet to be invested, says Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai. "Last year, less than $1 billion [was actually invested in] Indian real estate. That's less than the value of half a building in Times Square," he says. That compares with market estimates of between $15 billion and $20 billion in foreign capital headed for Indian real estate.

Kalra cited these figures during a panel discussion on real estate investing at a recent New York City event organized by The Indus Entrepreneurs (TiE), a network of entrepreneurs founded 15 years ago in Silicon Valley. "A negligible amount of foreign capital will get invested in Indian real estate in the next 24 months," he told the panel.

Sameer Nayar, managing director and head of real estate finance-Asia Pacific at Credit Suisse, offers a similar assessment. "There is a lot of hype about capital going into Indian real estate ... [but] not a lot of money is actually going in," he says. Extracting good returns from those investments calls for significant local market expertise in dealing with regulatory and other obstacles. "You make money because you can deal with the problems, and that's why your returns could be 50%," he adds. "If it were an easy market to work in, you would make only 15%."

Short-term Disenchantment
In April 2006, Trikona Capital group firm Trinity Capital raised 250 million pounds ($500 million) for Indian real estate investment in a public offering through London's Alternative Investment Market (AIM). Kalra says his company has deployed about $400 million in Indian real estate projects over the past year.

Including Trinity, about a dozen real estate funds targeting India have raised a combined $2 billion in the past year through listings on the AIM. Most of them are currently trading at levels significantly below their offer prices, revealing investor disenchantment. Trinity's share made its debut in April 2006 at one pound; it now trades at about 86 pence. Hirco, an Isle of Man-domiciled company promoted by the Mumbai-based Hiranandani Constructions group, raised about 382 million pounds ($755 million) from its IPO last December; since then, its shares have lost considerable sheen, down from 5 pounds to about 390 pence in the second week of May. Exceptions include Unitech Corporate Parks, which listed on the AIM last December at 93 pence and now trades at 96.25 pence.

"We see the opportunity [in Indian real estate], but we also see the risks and challenges involved," says Chanakya Chakravarti, managing director of real estate at Actis, a London-based private equity fund that manages assets of about $3.4 billion. Actis plans to set up a $300 million India real estate fund. It already has two other existing funds with an estimated equity of $475 million that have invested in Indian real estate, auto ancillaries and other industries. "Each fund has a unique risk-return profile, and we work with these. For us, India is a long-term story," he adds.

Chakravarti lists three main risks or challenges that real estate investors in India will be up against in the short term. The first, he says, is an oversupply of office space in the major and second-tier cities. A hazy regulatory framework fostering indecision and delayed investments is another concern. Finally, he notes, opaque deal-making processes that narrow the exit routes will deter serious investors.

"The property market today is rife with uncertainties. Prices as well as interest rates have been rising," says Anuj Puri, managing director of real estate services firm Trammell Crow Meghraj, the Indian joint venture of Dallas, Tex.-based real estate services firm Trammell Crow and the Meghraj Group, a financial services firm in London. "It is not advisable to expect any short-term gains; but of course, for long-term investors, India's strong fundamentals are still intact. A long-term investor can expect average returns of 15% to 20% per year."

Vikas Oberoi, managing director of Oberoi Constructions in Mumbai, says the risk-return profile for real estate investments is far brighter for those who have accumulated land inventory at prices much lower than prevailing levels. "The average net margin in today's market is 20% to 25%; we can easily do 15% better than the market," he says. Oberoi claims his company can achieve those higher returns because, among other reasons, "most of the land has been bought earlier."

Oberoi Constructions has an inventory of 15 million square feet of mostly prime land in Mumbai. At today's prices, Oberoi expects it to generate gross revenues of $2.2 billion. The company is focused mostly on for-sale residential apartments, although it dabbles in shopping malls, hotels and other commercial property lines. Oberoi expects his company to post $200 million in revenue this year, rising to $300 million in 2008.

This past January, Morgan Stanley's Special Situations Fund invested $152 million for a 10.75% stake in Oberoi Constructions, effectively valuing the company at about $1.4 billion. Oberoi says the untapped upside in his company's land bank was a major attraction for the institutional suitors it attracted. For instance, five years ago it bought a land lot with 8 million square feet in Mumbai's northwestern suburb of Goregaon for Rs. 100 crore ($24 million). Oberoi says the property would be worth 20 times more today.

"Where is the supply? There is only demand," says Oberoi. "In fact, I want the market to stabilize or [prices to] come down because then we would get land at cheaper prices. It is absolutely a seller's market."

Second-tier Migration
The most visible changes in the Indian real estate sector include the emergence of well defined product categories, the division of the market into tiered cities and a widening of financing options.

In the past, real estate was sold either as residential or as commercial property. With the maturing of the market and globalization of the investor base, the categories have been sharpened and new ones established. "Investors in the residential market are very different from the office and retail space investor," says Sanjeev Dasgupta, CFO and head of investments at Kshitij Investment Advisory Services, part of the Future Group, a large Mumbai-based owner of shopping malls across the country. In the residential sector, investors are in for high returns and are willing to take high risks, he says. This also allows for easy exit, although the risk of a mismatch between potential and real returns is high, he adds.

According to Poonam Mahtani, a national director of retail services firm Colliers International in India, "The investment risk is lower in the metros, but prices there are much higher than those in tier II cities." Several equity funds have consciously focused on tier II cities, because they believe that this offers the most potential. "Land prices are skyrocketing. Buying to sell is a very risky strategy. Land prices are way beyond levels that will generate a decent return. It doesn't make sense to invest any more unless you go to second- or third-tier markets."

Kalra, too, sees the markets outside of India's major cities as the most attractive, simply because they are not the low-hanging fruit sought by the early crop of investors with relatively lower risk appetites. "There are lots of opportunities outside the main metros. India has 30 cities with a population of a million people each," he says. Adds Dasgupta, "The returns are huge in tier II cities, where there is a large untapped potential." He believes that this sector will see a rental yield of 12% to 14% in the next few years.

In office space, experts see a migration towards second-tier cities. A recent report by Deutsche Bank on real estate trends notes, "As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area (Mumbai and Delhi)." In Mumbai, secondary business districts have emerged in recent years, including the Bandra-Kurla complex in the central suburbs, 25 miles from the old commercial hubs in the southern end of the city.

Much-needed Transparency
For foreign investors, one troubling fact is a pan-India phenomenon: inadequate transparency in land valuations they use to price their investments. In an interview last month, M. Damodaran, chairman of the Securities and Exchange Board of India, discussed the lack of clarity in real estate companies' disclosures, especially with respect to their land banks. "We sought clarity ... on matters like, 'What does your land bank comprise, [and] what are the valuation aspects you have indicated?'" he told the India news wire service. "Where there is only an agreement to develop land, there must be complete disclosure. All such agreements are to be made available for inspection," he said, adding that he preferred land valuations to be made at current prices and not on the basis of future projections.

Trammell Crow Meghraj's Puri agrees. "There is a marked lack of transparency, corporate governance and accountability among India's real estate developers. There also continues to be a serious lack of quality infrastructure. In addition, India scores low in terms of congenial political environment in terms of the real estate sector. This means that there is a lack of clarity in pertinent policies."

But Puri also believes those issues will soon fade away as India's real estate markets mature. "Although real estate is a regional and highly location-specific industry, India will replicate the events that occurred in emerging markets like Mexico and Central Eastern Europe [including Russia, Bulgaria and Poland]," he says. "In these countries, too, foreign investments were the primary drivers for transparency, accountability and higher capital appreciation in the real estate sector."

Saturday, March 23, 2013

Heavy Shortage of Urban Houses, REIT Can Boost Housing Supply

As of 2012, there is a shortage of nearly 19 million houses in urban India, but neither the government nor the private sector is in a position to meet this demand. A report says that a Real Estate Investment Trust has the potential to emerge as an answer to these challenges facing the Indian real estate market. 

About 37.7 crore Indians, comprising 31% of the country's population, live in urban areas according to Census 2011. By 2031, about 60 crore Indians will reside in urban areas, an increase of over 20 crore in just 20 years. 
    
This change in the socio-economic landscape will have a bearing on several things, housing being the foremost, real estate consultancy firm Knight Frank said in a report. 
    
At the same time, The Technical Group on Estimation of Housing Shortage projects the total shortage of dwelling units in urban areas in 2012 to be 18.78 million. The estimated slum population in India is 9.5 crore in 2012. As against this, the number of dwelling units sanctioned under JNNURM in its seven-year mission period was 1.6 million. 
    
The supply of decent affordable housing by private sector has remained woefully inadequate. These findings have become the underpinning of the country's 12th five-year Plan (2012-2017), says the Knight Frank report. 
    
Apart from unavailability of land, inadequate financing options is the main reason for the shortage of fresh supply of houses in the country, which, in turn, is also responsible for high property prices. 
    
At the same time, real estate is amongst the largest mainstream asset classes for investment, the report said. But there is no instrument available in the country to participate in the real estate investment by the common man. 
    
In the NCR, real estate has given a return of over 25% compounded annually in the last 20 years. But, the average middle class cannot participate in this class of investment because of its large ticket size. 
    
In contrast to the huge opportunity presented by the housing shortage, the real estate sector has seen bottlenecks in servicing this unmet demand. While there are varied reasons for this situation, the Knight Frank report says that lack of sustained financing options remains the most critical. 
    
Institutional finance to the sector has seen a slowdown. Bank credit to the sector has slowed down on account of increased risk perception translating to higher provisioning and increased cost of funds. 
    
In the last two years, the growth in banks' credit exposure to the real estate industry has come down from 19.08% in November 2010 to 5.29% in November 2012. In contrast, credit growth for housing loans has marginally increased to 13.25% in November 2012, from 12.21% in November 2010. 
    
Similarly, foreign investment in the sector has also seen a downtrend. First, the overall foreign direct investment (FDI) in the country has declined in the current financial year until October. Second, the share of real estate has declined by an even larger magnitude. From 9% in 2011-12, the share of the sector has fallen to 5% in April-October of financial year 2012-13, in the total inflows in the country, the report said. 
    
Raising money through sale of equity shares to public has worked for several industries, but in the case of the real estate industry, the report said, this route of fund raising has not yielded much result. 
    
While there are reasons ranging from poor performance of past issues to information asymmetry on account of the nature of this industry, the fact remains that IPO route is not a dependable option to raise finance and fund real estate development. 
    
Just two companies managed to raise funds through this route in the last two years, totalling a paltry Rs 187 crore. The last two years have contributed less than 1% to the total IPO money raised by the industry in the last seven years highlighting the uncertainty of this source of funds. 
    
All these factors have contributed to the shortage of fresh supply of houses and are also responsible for high property prices, the report said. 
    
Hence, the report said a sustained effort is required to address the twin challenges in context of the Indian real estate market. One that can address the housing shortage and another that can enable an individual to participate in real estate investment. 
    
A Real Estate Investment Trust (REIT) has the potential to emerge as an answer to these twin challenges facing the Indian real estate market. 
    
A REIT is a company that directly owns income-producing real estate assets and provides a trading mechanism to the investors. In most of the cases, it is commercial projects like office buildings, retail malls and hotels, and in some cases, housing complexes too. On one hand an institutional market of REITs can ensure steady supply of capital to real estate development, which would aid in increasing the supply of houses, and on the other they serve as investment vehicles for individuals. 
    
Investing in real estate involves huge amount of capital. The high cost of residential and commercial property in the top urban centres like the Delhi NCR, Mumbai, and Bangalore acts as a barrier for investors with small sums of investible surplus. While these cities present an extremely attractive real estate market, the high cost of real estate assets inhibit an individual investor in participating in this opportunity. 
    
Whereas, a REIT investment vehicle holds a portfolio of properties and allocates divisible units of the investment vehicle in smaller denominations making small investor participation possible. 
    
Real estate is a productive asset and investors in REIT earn on account of both dividend and wealth accumulation due to appreciation. Dividend accrues from the rentals of the property and wealth accumulation on account of capital appreciation of the underlying property. Consequently, REITs tend to generate a stable and consistent income stream for investors. In India, the report pointed out, in case of commercial properties like office buildings and retail spaces, the rental yield hovers between 9-12% per annum and residential property averages around 2-3% per annum. 
    
While the REIT structure of investing in real estate has immense benefits for the investors, the report said it still lags in terms of implementation in India. 
    
Securities market regulator Securities and Exchange Board of India (SEBI) had issued draft REIT Regulations in 2008. However, things have not moved since that time. In May 2012, SEBI introduced SEBI (Alternative Investment Funds) Regulations to regulate Real Estate Funds. However, these will essentially be non-REIT investment vehicles, namely private equity funds in real estate where the minimum investor contribution is much higher at Rs 1 crore. As a result even as of 2012, REIT guidelines are on the back burner. 

Thursday, June 25, 2009

Indian Real Estate Firms Face a Reality Check

Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.

In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."

According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."

India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.

Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).

The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.

The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.

Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.

Temporary Slowdown

Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."

"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."

"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."

The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.

Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.

Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.

Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.

Business as Usual?

India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."

The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."

What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.

In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.

Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.

Overseas Markets

The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.

Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."

Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.

Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.

HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.

"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."

The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.

"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."

Affordable Housing

Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.

The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.

"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."

Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.

The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."

Saturday, January 24, 2009

Indian Real Estate Firms Face a Reality Check

By M H Ahssan



Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.



In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."



According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."



India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.



Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).



The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.



The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.



Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.



Temporary Slowdown

Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."



"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."



"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."



The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.



Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.



Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.



Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.



Business as Usual?

India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."



The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."



What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.



In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.



Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.



Overseas Markets

The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.



Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."



Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.



Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.



HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.



"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."



The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.



"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."



Affordable Housing



Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.



The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.



"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."



Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.



The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."

Indian Real Estate Firms Face a Reality Check

By M H Ahssan

Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.

In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."

According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."

India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.

Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).

The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.

The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.

Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.

Temporary Slowdown
Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."

"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."

"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."

The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.

Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.

Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.

Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.

Business as Usual?
India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."

The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."

What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.

In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.

Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.

Overseas Markets
The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.

Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."

Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.

Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.

HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.

"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."

The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.

"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."

Affordable Housing

Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.

The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.

"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."

Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.

The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."