Mumbai seems unaffected by recession but commercial property is under pressure elsewhere
Affordable housing is one of the growth areas attracting foreign investors to the subcontinent.
Aditi Shah reports from the Cityscape India conference in Mumbai India’s property industry is abuzz about “affordable homes”.
Developers and investors seem convinced of their success, and they were the talking point at the Cityscape India property conference in Mumbai in December 2009.
Of India’s 1 billion people, the urban population is expected to more than double from 230 million today to 600 million by 2030, and most demand for housing is expected from the mid-to-low-income segment.
The debate among Cityscape India’s 4,000 delegates centred on the financial viability and execution of these developments. The concept of affordable homes is in its infancy and lacks definition. Critics claim it is merely the old “low-income” and “mass” housing with a new name.
Prices range from £6,250 for one-bedroom homes to £37,500 for three bedrooms.
For projects to be viable they must be on the fringes of cities where land is cheaper but sites often lack infrastructure and employment opportunities.
The biggest hurdle, however, warns panellist Abhimanyu Anil Londhe, head of real estate investment management at mortgage lender ICICI Home Finance, will be banks’ ability to secure sufficient collateral on which to lend mortgages to prospective homebuyers with low incomes.
Former banker and delegate, Akshay Kumar, founder and chief executive officer of micro-finance provider Park Lane Property Advisors, believes this may deter some big banks, but it will create a new breed of mortgage lenders, albeit with higher interest rates to reflect greater risk.
Looking up
Like demand for affordable homes, optimism among delegates about the wider property industry was on an upward trajectory. After a year of pricing corrections, signs of a revival began to emerge in the second quarter of 2009.
The International Monetary Fund reported that Indian GDP was 7.9% in the third quarter of 2009, compared with 5.3% in the third quarter of 2008. The GDP for the whole of 2009 was 5.4% and this is expected to rise to 6.4% this year.
But the recovery has been patchy. Gaurav Kumar, vice-president at Credit Suisse India, notes that Mumbai and Delhi seem unaffected by recession, but Bangalore, Pune and Hyderabad have experienced some pain.
He reports that commercial property is still stressed in most cities but residential demand has made a comeback.
An Investment Perception Survey by Colliers CRE, published at the conference, showed that 75% of its 227 respondents preferred Mumbai as an investment location. PricewaterhouseCoopers confirms this in its Emerging Trends in Real Estate Asia Pacific 2010 report: Mumbai is beaten only by Shanghai as the top investment destination and Delhi ranks fourth.
Tears for 2 and 3
Meanwhile, the success of tier 2 and tier 3 cities such as Indore, Nagpur, Ahmedabad, Cochin and Chandigarh has faded. Lata Pillai, director at Deutsche Bank India, says that oversupply made it difficult for investors to judge the viability of projects.
Investors turned to these cities when Mumbai and Delhi were too expensive. But after a 25%-to-40% correction in prices across all property sectors over the last 18 months, their interest is waning.
Kumar predicts that investors will be more selective now the 35%-to-40% returns have vanished. They should expect up to 20% returns, which are closer to some more mature markets in the US or the UK.
Several conference speakers expressed concerns that reduced returns might hamper India’s ability to attract capital in the short term. Risk-averse investors willing to take slightly lower returns will turn away from India and its currency and price fluctuations, restrictions on foreign investment and lack of transparency in the market.
AIM-listed Eredean Capital has a stake in the Tanaji Malasure City project on the outskirts of Mumbai
Long game
Despite these obstacles, India offers stable and higher returns in the longer term and this has caught the attention of Philip Blumberg, chairman and chief executive of US-based Blumberg Capital Partners. Blumberg is raising a $1bn fund for the US, of which $300m will be deployed overseas.
He told the conference he would prefer to invest in income-producing assets but Indian law prevents this. “Unlike Dubai, India is a powerful revenue-producing country. If the country wants more money for development, it needs to allow investment in income-producing assets. This will help rotate capital and developers can free up the equity tied into completed projects.”
The only way to achieve this is by relaxing policies on foreign investment. If the government wakes up to this, it will open the door for investors clamouring to get in.
Keywords: Aditi Shah, Blumberg Capital Partners, CRE, fund, India, International Monetary Fund, Mumbai, overseas, Philip Blumberg, property
