Dominic Whiting, Reuters
Mumbai: “The grave dancer”, U.S. tycoon Samuel Zell, was in a mood to spoil a two-year-long party when he told a gathering of Indian property executives this week they were “on the brink of excess” and their boom would end in tears.
The developers and fund managers could only agree.
The man who earned his nickname, and a $4.5 billion (Rs18,483 crore) fortune, picking up cheap offices in the 1990s U.S. downturn and packaging them into a property trust sold last year for $39 billion, said it was “mental masturbation” to believe there were endless riches for investors in India’s one billion person market.
Only a top sliver of the population can afford to buy the homes being built.
“India’s greatest asset today is everyone’s imagination,” Zell said.
Many in the audience nodded in assent.
The only difference of opinion among some of India’s leading property professionals at the conference in Mumbai was how far property prices would drop, probably at some point in the next year — 10% or 40%?
The last time a property bubble burst in India prices slumped by as much as 70% between 1995 and 2001. But this time around, a raft of international funds raised by the likes of Citigroup, Morgan Stanley and Credit Suisse are likely to step in looking for bargains and cushion the fall.
“Our expectation is that sometime in the course of this year you’ll see a 30% to 40% drop in prices,” said Ajit Dayal, chief executive of fund manager Quantum Advisors.
An estimated $10 billion was raised internationally for Indian property funds last year.
But rising mortgage rates and a doubling of property prices in major cities in the past two years will lift home prices beyond the reach of even the 40 million richest Indians that developers are targetting, Dayal said.
Since 2004, 10-year bonds have risen around 300 basis points to 8%, as the central bank seeks to control inflation in an economy that is estimated to have grown by 9.2% in the year ended March 2007, its fastest pace in 18 years.
Young software engineers earning between $700 and $2,000 a month in the country’s outsourcing boom could stop buying homes.
The price of a 100-square-metre Bangalore flat has jumped 60% in two years to $100,000. Prime residential prices in Mumbai and New Delhi have doubled in that time to about 20% lower than Shanghai and 40% below Singapore and Hong Kong.
Dayal said that in some cities, such as Kolkata, new housing supply outstripped demand by 5 to 10 times.
“There’s nothing culturally or socially in India to force 19-year-olds to leave home and buy a property,” he said. “They’ll just stay with their parents.”
The property boom gathered pace quickly after the government eased rules on foreign investment in the construction industry in early 2005 to help revamp the country’s crumbling infrastructure and fill an estimated shortfall of 20 million homes. About 90% of all property investment is in residential development.
“It’s very scary, prices are sky-high,” said Aditya Bhargava, an executive at fund manager Trikona Capital, which is raising a $400 million fund for Indian property.
“I don’t know when the correction will happen, but there’s significant overheating.”
Nayan Shah, chief executive of township developer Mayfair Housing Ltd, agreed with Zell’s outlook for the market, but said the U.S. billionaire’s comments would shock many in the industry.
The demographic fundamentals for India’s real estate boom touted by analysts appear compelling for many investors.
For example, according to CLSA, disposable income has grown 12% a year for the past five years, and the number of people per household has dropped to 5.1 from 5.52 in the past decade as young professionals move away from their parents.
“I think it’s an ice-breaker for our country, it’s like someone saying look east when everyone’s looking west,” Shah said of Zell’s comments.
“I’ve seen three recessions and booms in my life, and he’s seen more,” he said. “But I think it will stay stable for now, and maybe from 2008 there’ll be signs of distress.”
Some fund managers are laying plans for when prices fall.
“We’ll step up more in 9 to 12 months time when the liquidity crunch hits the market,” said Sameer Nayar, the Asia head of Credit Suisse’s real estate arm.
Zell said that he had no property investments in the country. His company, Equity Group Investments, is pouring money into mass housing in Mexico and Brazil, selling units for around $20,000. But the model is unlikely to catch on soon in India.
An office delivery boy, employed to scooter through Mumbai’s dusty streets lined with crumbling tenements and shacks, would earn about $70 per month, and keep $15 aside for housing. With land prices spiralling, developers do not build for him.
“We may occupy lots of slots on the Forbes billionaire list but we also occupy lots of slots on poverty lists,” Quantum Capital’s Dayal said. “If someone can make housing and sell it for $2,000, it would be a great market now, and for decades.”