How will the recent global uncertainties affect the Indian real estate market and the rest of the Asian market?
Global finance and political uncertainties have to be looked at through two lenses: real economy and financial markets. From the point of view of real economy, India will continue to grow and to have a shortage of housing and of commercial space. This trend will not be affected in a major way by recent events; the long-term demand trend is positive for Indian real estate consumers (such as homebuyers and office tenants).
The capital markets are another story. Swings in capital markets have a high degree of impact on the ability of property promoters to finance new projects and this can lead to price hikes at the retail level. Banks also can become wary of lending and this can slow new supply. It can also lead to downward pressure on prices as buyers are taken out of the market. These are obviously contradictory forces, which lead to short-term swings in prices. But the long-term fundamentals are good.
Do you see symptoms that are similar to what eventually led to the 2008 slowdown?
No. The 2008 slowdown was a result of too much leverage at the level of financial companies such as commercial banks, investment banks and non-bank lenders, largely outside India. The year 2011 is about political uncertainty in big economies. In practice, both the US and the euro zone have no crisis of solvency and no crisis of liquidity. Their political dithering will slow their economies to the benefit of large emerging economies, including India, China and Brazil, which can expand from internal growth.
John Macomber, Senior lecturer in real estate, Harvard Business School.
What problems do you see in the Indian real estate market?
As a teacher of real estate finance and strategy, I focus on capital structure, marketing, strategy and design/construction. However, these seem to be third-order issues for Indian property promoters with whom I speak. The first-order problem is well known and it has to do with land registration, land aggregation and the fair price for land to be paid to farmers. The second-order problem has to do with corruption, at least according to the newspapers. Around the world and through history, property has been a vehicle for transferring wealth and for influencing policy, while being difficult to monitor. These two problems, which create inefficiency and drive up prices, will be a dampening factor on the delivery of residential and commercial real estate.
Which markets in Asia and elsewhere do you see as prime investment destinations for private equity firms and financial institutions?
Much of my research is around the long-term finance of large new cities. In India, for example, many sources believe that the population living in cities will increase by about 400 million in the next 20-30 years. However, the investments in infrastructure such as roads, power, water and transit to accommodate them don’t seem imminent from the government or from real estate developers (having a very short return horizon). Private capital, whether as high-return-high-risk private equity or stable-return-low-risk infrastructure bonds, will clearly be a major force in attracting hundreds of billions of dollars to the Indian real estate and infrastructure markets.
Is it the right time to buy property in India?
I am wary of market timing by residential investors. If you need a home and can afford it, buy a home and hold it. Speculative small-scale investing in real estate is championed by financial firms who benefit from activity, but it is a poor vehicle for building personal wealth.