Mumbai/Hong Kong, 3 September After a two-year surge, home prices in India have dropped as much as 20% because even the most upwardly mobile tech graduates can no longer afford to buy, forcing developers to consider building for the poorer masses.

“We’re at a point where growth in salaries has not kept pace with property price increases," said Hari Krishna, of Kotak Realty Funds, a unit of Kotak Mahindra Bank that has been raising $350 million for property joint ventures in India.

“Many developers are rationalising prices across the country, and certain sets of people are saying there’s a need to focus more on either the luxury or the mass market."

Since India eased rules on inward property investment in early 2005, the country has swept into a dusty frenzy of construction, causing land prices to double in major cities.

Drawn by a thriving, 1.1 billion-person economy, where a new batch of graduates swarm out of technology parks eager to shop and go home to modern apartments, global property investors such as Citigroup and Morgan Stanley have rushed in.

A raft of developers such as DLF Ltd and Parsvnath Developers Ltd have listed on the Mumbai stock market to raise funds for expansion drives. Annual property investment is projected to double to $90 billion by 2010.

But a drop of around 20% in residential transactions since January -- as rising interest rates and soaring prices put India’s new rich off buying -- has persuaded many developers to take a second look at their business models.

Prices have fallen 15-20% in the New Delhi area and Punjab state, and have paused in Mumbai after sharp rises.

Recession proof?

Most developers have been targeting the roughly one million families bringing in $25,000-$50,000 a year -- for example, middle level accountants, or software programmers.

Another million families are expected to join their ranks over the next three years, according to an economic think-tank, while the number of “super-rich" families with an annual income of more than $250,000 is set to nearly triple to 141,000.

But with fierce competition to build high-margin apartments for the rich, some investors are starting to target the 53 million families earning $2,500-$5,000 a year -- where the much-vaunted figure of a 20 million home shortfall originates.

An estimated 22 million families should be lifted out of poverty and into this segment of society by 2010.

Gross margins for the mass market are around 20%, rather than the 30% for high-end housing. But developers can forge healthy businesses by building huge townships on non-prime land that is more easily acquired.

“Our view is that building residential units for the lower middle class in that part of the world is pretty recession proof," said Alastair King, chief executive of Eredene Capital, which is listed on London’s Alternative Investment Market (AIM).

“These are people taking out mortgages for the first time," he said, citing bank clerks, junior civil servants and hotel chambermaids as examples.

Bank exposure to housing loans tripled in three years to around $60 billion in 2006, but that was only about 6% of GDP -- so industry players are unconcerned about any US-style mortgage default crisis. Mortgage debt in the US and Britain is equal to about 50% of annual GDP.

Eredene has invested an initial 16.4 million pounds ($33.06 million) in a joint venture that plans to build 185,000 units in Panvel, where a planned train link aims to cut the 90-minute commute to Mumbai by half.

King said blocks could also be sold en masse to Indian developers working on slum redevelopment projects in central Mumbai who are obliged to find new homes for people they evict.

Some investors are steering clear of residential homes altogether.

“The residential market has taken a bit of a beating, but commercial prices are super buoyant and will continue to rise," said Vikram Mehta, associate director at Coldwell Banker, a unit of US real estate brokerage Realogy Corp. “Multinationals and Indian companies -- everybody wants to expand."

Worries about the housing market and recent stock market turmoil have depressed property stocks. On Monday, the latest developer to list, Puravankara Projects, was trading nearly 6% below its issue price by 0549 GMT after making its market debut.

The country’s biggest listed developer, DLF, has seen its stock fall 12% from a peak reached a week after its 5 July market debut. But analysts say the firm, which raised $2.25 billion in its IPO, is undervalued and a planned move by the company into mass housing should be positive.

“DLF is going into mass housing two years down the line, and that’s a good thing," said JPMorgan analyst Gunjan Prithyani, which has an “overweight" recommendation with a price target of Rs725, or a 21% upside.

“Like Chinese companies, it’s a volume game rather than a margin game, but it has huge potential." ($1=40.63 Indian Rupee) ($1=.4960 Pound) REUTERS