Foreign investors are throwing money at India’s booming property market. Topland, the private British property group, has just launched a fund with £1billion (Rs8,600 crore) to spend on developing Indian residential property.
Last month, the US private equity group, Apollo, closed a $2billion (Rs8,800 crore) fund with local partner SUN. And seven Indian groups have raised over £1billion on London’s Alternative Investment Market in the past year. This has raised fears that the market is becoming overheated.
In Delhi and Mumbai, yields have fallen to 10% on commercial property and 8% on residential, down from 12% and 10% two years ago. Yet, base rates now stand at 7.5% and may have to rise further to choke off inflation, which is currently running at 6.1%. The risk is that money is pouring in faster than the market can absorb it.
Even so, the fundamentals of the market are compelling. Each year, 2.5 million graduates are added to India’s 200 million expanding middle-class, all of whom need offices and demand better housing. The government estimates a shortfall of 20 million homes among those who can pay.
That’s driving up rents.
India has just 100 million sq. ft office space, yet its IT sector needs 160 million sq. ft. within four years. Much of the growth is likely to be centred on second-tier cities such as Hyderabad and Chennai, which is where funds like Topland and SUN-Apollo are focusing their efforts.Here, yields tend to be much higher—11% for commercial property and 9% for residential.
In third-tier cities such as Coimbatore and Bhopal, yields are more than 12% for both commercial and residential. And thanks to a new tax break, the Indian mortgage market is forecast to take off, fuelling huge demand for homes.
Developing markets can be volatile, as stock market investors discovered last year when the Sensex index plunged 30%. And real estate is the most illiquid of investments, making it hard to get one’s money out in a crisis. But property investors are betting on the sustainability of India’s boom.