June 2006

Photo: Five-star-deluxe hotels, such as the ”Taj Mahal Palace” in Mumbai, will be sprouting up in Indian cities in the future. On the other hand, high property prices restrict access to the budget hotels, which would otherwise also have good chances of market success.

Market deregulation and a rapidly expanding middle class are fuelling India’s red-hot real estate markets, which saw more development during the last three years than in the preceding 50 years.

India’s real estate markets are growing by leaps and bounds. The massively expanding middle class in Asia’s latest boom country is sending retail revenues skyrocketing. Mortgage loans surged 45 percent last year. Investors from Southeast Asia, the Middle East, Europe and the U.S. are chasing good deals like the gold diggers on the Klondike in late 19th century. The run on India’s real estate pushed prices in Mumbai, Delhi and Bangalore up more than 35 percent last year. In some office projects prices doubled by the time of completion. Prices have already reached a level, that prevents budget hotels from being built in the inner cities. Even giant retailers like Wal-Mart and Carrefour will ultimately have to relocate to the suburbs if the price rally is sustained until the government deregulates the retail sector. Some insiders are starting to complain that the growing scarcity of affordable land is beginning to limit the growth of the economy.

The government in Delhi started to open up the market last year. Foreign direct investment – previously not allowed in office properties – is now being approved in suburbs and inner city locations. One hundred percent foreign ownership in residential projects and shopping malls is now possible in smaller cities. Wal-Mart recently announced that it is getting ready for investments in India. According to a new study by Merrill Lynch the number of malls in Delhi, Mumbai, Bangalore, Hyderabad and Pune will quadruple to 250 by 2010.

”In the last three years the real estate sector has experienced as much growth as in the preceding 50 years”, explained Anshuman Magazine, Managing Director with CB Richard Ellis in India. Supported by GDP growth of close to eight percent investments in office real estate are growing by 13-14 percent every year. The residential real estate market is booming fuelled by rising income, growing consumption and falling interest rates. In 2005, this segment of the real estate market attracted the biggest chunk of available capital. According to a study by Cushman & Wakefield there is a deficit of twelve million apartments in the highest populated areas. The paper predicts that in 35 of India’s biggest cities, 400 new townships will be developed within the next five years, each with a population of 500,000 people.

In the office sector, experts are expecting an additional supply of six million square metres by 2008 – 70 percent of that will be taken by the IT sector and by outsourcing companies. Investments in the commercial real estate sector will surpass five billion US-Dollars per year. ”Finally the Indian real estate market has found its place under the sun”, said Balaji Rao, Managing Director at TCG Urban Infrastructure, a subsidiary of the Chatterjee Group for real estate investments. Rao forecasts a rise in the stock of office space by 200 percent until the end of the decade.

In March, Morgan Stanley Real Estate released that it has invested 68 million US-Dollars in Mantri Developers, a private real estate firm from Bangalore that specialized in residential and office properties. The private equity group Chatterjee from New York plans to invest 450 million USDollars in Indian real estate. UK-based Trinity Capital wants to transfer funds to India. American Insurance Group (AIG), the largest insurer in the world, announced in March that it plans to found its own real estate developer with a separate financing arm. California Public Employees’ Retirement System (CalPERS), America’s largest pension fund, plans to invest up to 400 million US-Dollars, to build homes and apartments in Delhi, Bangalore and Mumbai. CalPERS is expecting returns of 15 percent on its investments.

By Markus Gärtner