India's Exploding Real Estate Market: Shades of the Florida Condo Bubble 41 comments
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I just returned after spending a few weeks in New Delhi, India. The incredible pace of growth in India inspired me to see if I can participate in the growth by investing. India does not allow direct investment in equity markets for non-resident Indian citizens (and definitely not not foreigners). I do invest in US-listed ADR like Infosys (INFY) and exchange traded funds or closed-end funds like the India Fund (IFN). But I wanted to invest directly. One option available is real-estate.
The numbers when it comes to real-estate just don't add up though. Real-estate in India is incredibly expensive and not just by Indian standards (with per capita GDP of US$ 700 per annum). Here are some numbers:
- Condos in New Delhi, India: 2-bedroom, 1000 sq. ft. apartment for $200,000. [$200 per sq ft] (Source: 99acres.com)
- Condos in Chicago, USA: 2-bedroom, 1000 sq. ft. apartment for $400,000 [$400 per sq ft] (Source: Google Housing)
Now, remember that the median income in Chicago is 50 times more than that of New Delhi. Why Chicago? Because New Delhi can grow in all 4 directions much like Vegas can (and Chicago can in 2 directions) as compared to Manhattan and San Francisco that are geographically restricted.
Next, look at agricultural land prices.
- Agricultural land in Faridabad, Haryana (adjacent to New Delhi much like New Jersey is to New York): $250,000 per acre (source: 99acres.com)
- Agricultural land in New Jersey: $12,000 per acre (source: USDA (pdf file), and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)
One may argue that Haryana is too close to Delhi. Land in Dehradun is available at only $100,000 per acre while its much cheaper at only $20,000 per acre in villages in Himachal Pradesh. All at prices way higher than Florida or California. Commercial land is even more expensive.
The issue of population density pops up every time I discuss this. Let me be clear, the population density of India is much higher than USA. But, when you compare New Jersey and India - New Jersey is actually slightly more densely populated. And New Jersey is much more densely populated than Haryana, India.
The next issue that comes up is one of regulation and availability. Yes, real-estate is regulated in India with laws that prevent easy buying and selling and land records that are poorly maintained. This simply means that the prices can be artificially inflated in the near term (that could last several years) but in the long-term must return to rational values.
Will someone please explain this to me? How can farmers that make less than $1000 per annum continue to own land that is valued (notionally) at several $100K? Are the low rental yields (2-5%) indicative of the bubble?
Update: Thursday's Wall Street Journal writes about a trader that made billions betting against the real-estate bubble.
"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond," Mr. Paulson says. "Mortgage experts were too caught up" in the housing boom.
In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn't enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, "you can't short houses."
I heard the same arguments repeatedly in India - house prices never go down etc. We shall see!
Disclosure: Long IFN and INFY
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This article has 41 comments:
My concern however is not so much from pushy sales people but that the fundamental assets are so overvalued that they create inflationary pressures and over supply.
I don't know when or if a correction will take place but that this does not look very pretty.
There are several web based brokers that support direct investments from NRI's especially from the Middle East region. Share Khan, India Bulls, Navia Markets all have NRI oriented support help sites on how to invest. You will need permission from the RBI (valid for 5 years), under the PIS (Portfolio Investment Scheme). You need a valid PAN number to apply, the funds that you invest will have to go through an identified branch and an identified account (PIS account). The funds that you invest can only be on a delivery basis i.e. you will have to take delivery of the stock before you can sell it (No short sales). There are limits on each Industry / Company on how much of the total equity can be held by FIIs & NRIs, once this limit is reached, no further investments are allowed. Every transaction needs to be reported to the RBI.
It is true that Foreign Individual investors are unable to invest directly in Indian stocks. However, Foreign Institutional Investors (FIIs) are allowed, after they obtain permission from the RBI and SEBI.
India is a land in transition, there are extreme variations in incomes. Delhi has the highest per capita income in the nation. Prices are supported by demand. If there is no demand, prices will come down. You can see this in Bangalore - there are several apartment builders who are sitting on vacant apartments in areas such as Outer Ring Road, Sarjapura Road. Incomes are going up 15% a year, i.e. doubling every 6-7 years. I know of several people in the age group 21-30 earning more than 12 lacs per annum, who own houses they purchased at 50-60 lacs. This was unthinkable 10 years ago. So the number of people earning high salaries has gone up significantly. This has caused asset inflation in all categories and consumption. This is what is driving the Indian Growth story. When will this end ? Good question. The RBI has already taken steps to cool the real estate sector. Some of its effects are already felt in high growth regions. It is expected that prices will fall 10-15% in these areas in the next 2-3 years.
In any case, this has very little do with the asset inflation scenario I describe above.
Thank you for letting us know.
1. the price has to defy measurement on all possible parameters ( relative/absolute/medi... before it crashes.
2. actual deal has to happen at the topmost price
3. bubble collapses only Slide accelerates..not just slide happen
4. bubble collapses only when an institution directly involved in the bubble "signals fatigue" ...
5. icici stock starts falling and the investment rep comes back to you ( but now he represents citi!!)
The problem arises when investing through mutual funds based in India -- PFIC becomes an issue for US based residents . See www.altassets.com/case...
You can however invest in Indian equities directly - for this brokerages in India do not provide an online method, you will have to do it via phone or email only. You will still have to obtain the RBI's permission (PIS scheme or PMS scheme), set up demat accounts, identify the bank branch and bank account through which you will fund the broking account, make arrangements with your broker to report your transactions to the RBI. Its all a big hassle. I am investing in Indian equities directly from the USA through HDFC / Navia Markets for the last 2 years.
Please investigate your tax situation and the types of accounts you would like to use - NRE / NRO etc. You can also find lots of useful information on this subject at www.r2iclubforums.com/.../
RE: The Real Estate prices that you spoke about in your article, I agree with you that there is a bubble. But there is also accelerating demand - due to migration to cities, due to increasing salaries, due to SEZs and Real Estate companies buying up HUGE land banks, & amazing amounts of foreign direct investment in real estate in India (currently FDI in real estate is automatic, no prior RBI / FIPB permission is needed, so companies abroad can and do waltz in with their bubble money and buy up huge amounts of land). So while there is basis for increasing prices, prices as they currently exist are probably bubble like and like every bubble will burst sometime in future.
Opinions expressed here are my personal opinion and do NOT reflect opinions of my employer or any other organization. They are NOT legal opinion, please consult your legal advisor before taking any action based on opinions mentioned here.
- US is 3X the size of India, land is an expensive commodity.
- The top 1% of Indian population can afford these $200,000 apartments, for them this is relatively cheap. Think about the rest the 99% joining the party! - Slowly or course!
- Finally, you have to live where you work. And big cities in India are where the jobs are.
Considering these facts, real estate in India is cheap! In fact, if you go there in 5 years you would have tripled your investment! Can't say that about US, eh!
Sanjeev
There are serious short term factors at work here - the lack of good title to properties is a serious problem, for example, you can't think of buying a property in most of Karol Bagh, Chandni Chowk, west Delhi, much of South Delhi too because you don't know how many claimants are there to the title. So you can only go to the new developers like Ansals, DLF and others that give you a clear title. There is certainly a demand unmatched by supply as houses can't be built overnight, but supply is responding to the demand & it remains to be seen what happens in the next 3-4 years. Increasing urbanization is a factor but I don't believe the rural masses moving to the cities are bringing the kind of money these houses demand.
There is another issue I am still unsure about. In the US, foreclosure laws are well established and the procedure is followed. In India, if you default, and if the lender takes you to court under civil law, he has no choice but to wait for 5 years for the case to come up for first hearing. So it will be interesting to see how that one unfolds when people start defaulting (which is statistically inevitable, no matter how rich India is compared to the US ;-), as is the argument I have heard made by some.
But one can analyze to one's heart's content, the market is what the market is, and the fact is that these are the prices. In 2004 I looked at an apartment which then was 1 crore rupees in Noida near Delhi, and today is more than double that. If I wish to buy something I would be comfortable with for my family, that would currently cost nothing less than half a million dollars. I don't know how the guys in India manage that kind of money, or the courage to take on mortgages whose monthly payments are in the $3k a month range with an Indian salary. Someone I put this question to said there is no dearth of the newly rich who work for Infosys, Daksh and many others and whose share options have made them dollar millionaires. Maybe I & Anshu missed the boat. Ten years ago when I was in Thailand I was shocked to see million dollar condos there - maybe these prices are par for the game in developing countries. The bubble may just stay the same or shrink a bit instead of bursting because when prices go down, the property markets just become shallow and deals stop happening, and declines will only happen by the effect of inflation while nominal prices hold. Who knows.
However, I think that property prices even in Bay area are ridiculously high. My theory is that someone making $100K/annum should not be given mortgage for buying anything above $300K-$350 K.
Hi Anshu, few more points to your observation, as like you even i came back from my holiday in Hyderabad.
The real estate sector like its star performer DLF stock is in big bubble, why? lets start with DLF, for 2007, the company earned a net profit of 427 million USD on a turnover of 582 million USD, if the margins are that high then every other corporate in the world whoud be doing realestate business in India.
The rental yields are very low as you had pointed out. That is because the condos are being built not to sell for people to stay but for speculation purpose. The stock market is generating returns which is getting diverted into the real estate market.
That is also the reason why despite the rising interest levels it has no impact on the demand, the way the interest rates have gone up, it would have crushed earning class house owners. Also, lets accpet, if you are not in the financial sector or related to stock option or owns stock options in IT sector how many employees are in a position to earn enough salary to pay for such expensive housing.
What netx? the bubble will burst, already signs of falling transaction and the foriegn money (read NRI) which was fueling the bubble will slow down on account of falling stock markets, fear of job losses and falling value of the Dollar against rupee.
As we all know, the real estate bubble take time to burst unlike the stock market bubble which just burst.
visit my blog : optionsview.blogspot.c...
My guess (again its a guess) is 80 percent of 30 billion amount goes southern cities, pre-dominantly Hyderabad, followed by Bangalore and Madras, since most of Indians in US and Canada are from these cities. Add up Gujaratis and Punjabis and Malayalis from Middle East; ton of this money is not going into productive resources (Job creating) like Manufacturing or technology but mostly it to buy land (which is fixed supply). Naturally Indians enjoying free ride in real estate, now the demand outweighed by supply and eventually speculators and greed.
If you are concerned about northern cities, you cannot imagine souring high prices in Southern cities, even including third tier towns in Andhra Pradesh.
What bothers me most is, financial system in India is not very tightly regulated. Banks including ICICI, HDFC, CITI are willing to give loans more than 100 percent value. Last night I got cold call from ICICI and willing to give 1 crore loan ($250,000). We are worried about sub-prime loans in US, which we all thought highly monitored market ended up in to deep mess and pulling entire economy in recession.
Indians never had such kind of wild boom in its entire history after independence. All the sudden every one who hold few acres of land feeling like multi-millionaires. Do you remember early 2000 and late 1999 days in USA?
Some argue Indians making higher salaries than before due to outsourcing and buying more properties, well what about 99 percent of Indians working on jobs not related to US software and associated firms.
Indian stock market has grown leaps and bounds since 2002 and the valuation is so high after all the foreign money including hedge funds pumped into Indian market. When will we see March 2000 days in India? Is India at verge of Bubble to pop? Or some more time stream left in the wild ride? Prudent idea is, cash out and deposit your proceedings in a banking system where you will get guarantee for whole deposit.
I would rather not see Indian market to collapse and vanish all the paper wealth overnight. However, at this extreme over-priced real estate and stock market makes me nervous. Time only tell the unbearable prices (even in dollar terms) are real or irrational. Nevertheless, if there were correction in Indian market, probably it would be brutal since Indian capital market does not have checks and balances like other matured western markets. If Indian market catches the cold, Banks will belly-up with liquidity issues and bankruptcies drive both real estate and stock market to bottom. Indian banks do not have insurance more than $2500 (RS100,000), and people have deposits other than federal(state/union) banks will seeall their wealth also get vanished overnight. That is what happened in 1929 market crash in USA, India has not seen that kind of catastrophe before and I hope not.
The South East Asian economic crisis comes to mind when property prices dropped precipitously.
Hopefully, the innocent will not get hurt. History, although, suggests otherwise.
propertybots.blogspot....
As an investor in Indian real-estate who is based in the US, I share the angst of many others who are trying to figure out what to do. My short take, as I noted in my recent blog, is that this bubble has room to run due to one thing: poor infrastructure.
Poor infrastructure (highways/roads) means that people have to crowd around in cities. Others have noted this. But I think this is THE key issue. I doubt if infrastructure will improve any time soon. So, the only other solution is creation of self-sufficient satellite towns, like the US suburbs. Self-sufficient means these are de-facto new towns/cities, and people don't have to commute to the main city for basic needs (schools, hospitals, jobs etc.).
So, for example, like Naperville is to Chicago. However, people still commute for jobs from Naperville to Chicago. So, India will need not just Napervilles, but actually a mini-Chicago in Naperville, so people don't have to commute.
Hope that makes sense. More on my blog (propertybots.blogspot....) down the line.
Assuming that 3% of the Indian population are ultra rich that accounts for a 30 million population (these are people who can afford the $1 mil houses)
Given the infrastructure issues one has to be close to work/school/entertainm...
Indian spending is skewed (i.e. they spend a most of their money on houses/marriages);
Credit availability at a cheap rate
Unaccounted money needing a place to park
One lakh apartments may remain vacant in Bangalore by April B. S. Satish Kumar and Sharath S. Srivatsa
45 to 50 per cent slump in registration
People choosing only property with clear titles
BANGALORE: Is Bangalore's real estate market heading for a slump? Such is the impact of the real estate slowdown in Bangalore that the number of unoccupied apartments in and around the city is expected to touch nearly one lakh by April.
Citing the outcome of an "informal survey," Inspector-General of Registration and Commissioner of Stamps H. Shashidhar told a workshop organised here on Tuesday by the Building and Other Construction Workers' Welfare Board that these indeed were the current market trends.
Later, speaking to The Hindu, he said that the figure included both old and new apartments, i.e., those that had not been sold, those that had not been rented out and those now under construction. Mr. Shashidhar said that registrations of property in the State had reduced by 45 to 50 per cent, partially due to the ban on registration of revenue sites.
Infrastructure Lack of infrastructure such as proper roads, drinking water supply and availability of schools had also contributed to the slowdown in property transactions. Moreover, people had become cautious while buying property and choosing only those which had clear titles.
It appears that only genuine users were buying the properties now while speculative investors were keeping themselves away from property transactions, he said.
Feroze Abdullah, realtor and proprietor of Feroze Estates, confirmed the slump in the sales of apartments, particularly on the outskirts of Bangalore in areas such as Whitefield and Marathahalli, over the last three months. He said his own business had seen a 50 per cent drop during this period. "There is more supply than demand. Prices in the last three years have risen unnaturally and the market is now seeing a levelling. But in the central districts, the prices are still high."
Unrealistic prices, poor infrastructure and traffic problems had also contributed to the slump in sales of apartments, Mr. Feroz said. However, the builders have not reduced the prices of apartments hoping that they may pick up once the new airport commences its operations.
President of Karnataka Ownership Promoters Association A. Balakrishna Hegde maintained that the industry was expected to grow at a rate of 15 per cent this year and refuted any suggestion of a slump.
The upward revision of guidance value for property in Bangalore has deterred a number of apartment buyers from registering their property as the revision has increased the stamp duty burden. Over 50,000 housing units would be added this year in Bangalore, he said.
C.J. Roy, general secretary of Karnataka Township Developers Association, said that the real estate market had not gone down overall, though there was a small slump in prized locations.
I wouldn't suggest it though. India is overall coming from a low base and there is money in the Tier 1s to support those prices. However, I'd bet on the lower Tiered cities where there are 10-15 year growth cycles...in residential, hospitality, retail and perhaps commercial.
1 crore apartment will fetch rent far below than what interest on that 1 crore will get you. There is no denying that the indian property bubble will crash hard.
One would like to bring to your attention a few facts:
Real estate in Mumbai has seen a climb of over 200% in last 2 years !!!
Is it manageable? Well it depends from whose eyes you see it.
For an investor who bought into the property during pre-launch and launch, well yes. For an example : We offloaded our stocks at our Vile Parle project as low as 2300/sq ft and averaged 6500/ sq ft in toto. Now the current prices hover around 12000/ sq ft to 14000/ sq ft. These are unaffordable to the masses. Due to un affordability, the option of rentals have struck the chord. Rentals per sq ft are at 50/month or 600 per annum. Considering average returns on average prices sold at, the investor makes cool close to 10% on the residential property today...
We can argue that the correction would take place as the investors need to liquidate. Well as for one's investors, they are renting it out and have decided to leverage on bank loan for 25 years to invest in other property we are developing.
It all depends at what level of development we get in. We always make profit when we buy not when we sell...
Second example: We are developing a 100 acre Holiday Home cum Resort at Karjat. As off now the land is undervalued. Why one says that is that Land at Panvel which is barely 25 km from Karjat is selling around 1200 / sq ft at the lowest whereas at Karjat we are picking it up for 6,00,000 per acre!!!
Now the infrastuctural development cost is higher than the land cost. Its pure value addition that drives the valuation and not land prices which is basic raw material.
We are offering land holding benefits to our initial investors. That means that they get benefit that they would have as holders of raw clear title land. This is what is the best model for retail investors serious about real estate. Value creation in pure financial terms is 3.5x in 5 years. Real estate is a patience game. You can't short in real estate. At most you can flip properties. That calls you to be a real estate player. But, contrary to the belief many hold in India, real estate must be sold for its rental returns rather than appreciation. You must be clear that you are participating in value creation right at the bottom and not be a consumer who buys it at market price.
Happy investing....
Thanks and regards,
Nitin Singhal
Why do we keep on generalizing on the whole community when we address? Why do we say that Indians have a herd mentality?
Every community is having herd mentality. People all over the world have herd mentality. Is it not true that whole lot of americans borrowed beyond their capacity to leverage credit? Do majority of American investors not loose their money in stock market? Everytime there is a herd of people who operate from Fear & Greed and get onto such situations themselves.
One invites you to not single out Indians dude. Human being operating from Fear & greed will always get into financial traps. These are market dictated traps. Who we are at the bottom and the top of these market decide our financial health. Do you invest in any vehicle you personally have acumen in our are advised into by someone who doesn have substantial stake in such vehicles?
Are you buyin real estate in America today or waiting further slide. Or are you waiting for cycle to turn around or for bloomberg or cnbc to yell that good times are here again.
One apologises if one has been blunt here. But, matter of fact is that all the investments are personal decisions. No one buys something becos someone else is. Thats the fact. He/she buys it either with having adequate info or by flowing into conversations doing rounds in the market.
Would invite you to let know how do you plan to invest in torrid times. That would make a difference at least to one's life and sure all others.
The madness in markets is a perception...
thanks and regards,
Nitin
This would again fuel the rates of the property and this cycle of debt and rising prices have reached a climax now. As you pointed out that the value of property in India is even higher than Chicago or San Jose, I am pretty sure India did not learn any lessons from the 1997 - 98 real estate market collapse in India or the 1989 - 90 real estate collapse in Japan. In the former case the implications were low since money was not pumped in as it is now and few people who suffered losses, had taken heavy loans. This time around the situation will be really similar to Japanese real estate bubble of 89-90. People buy and buy assuming prices never drop taking heavy loans in the process, later once the demand for buying converts into glut of selling and causes bubble to burst (some people in Japan are still repaying loans from properties they don't even own). To make matters worse, Indian housing in cities is so much apartment - focused, that its hard to understand what the builders are going to do with the empty houses once such a phase will be entered.
The average higher middle class income in India is 2.5 lakh to 8 lakh per household. But nobody actually knows how many such families are present and how many are willing to buy property. Speculation in their numbers have created a shift from focusing on housing for the needy and lower income groups - which I feel would have better long time yields for overall development of India.
- writing from Phoenix Arizona
bangalore.craigslist.c...
The last I remember was starting from 1996 and then the market recovered only in 2003.
The price of real-estate fell by 20-40% depending on the area - but it could not be measured as almost all the transaction used to be done in cash in India (registered amount used to be very small), and no paper records could track the market price.
Indian Real Estate Market had seen lack of buying interest from last quarter to 2007. Throught 2008, Indian Builders hung on to high price. They have been too sluggish to react to the market.
Builders are like middle aged women. It takes a woman courageous effort, to come to terms with the harsh reality of aging. You can continue to live in a make believe world for months or even couple of years?but natural aging just can't be stopped.
Those who read the signals and adjust their lifestyle, carry on with minimal impact, on their lives. Those who refuse to read signals and adjust lifestyle, end up in medical care.
90% of women are smart enough to admirably adjust and are prepared well in advance. (Salutes to women on Women's Day!!). However, more than 90% of the builders react sluggishly to realities of the market which could affect, if not personal but definitely their financial health.
In a booming market, builders were quick to react by resetting prices upward, every week. The possibility of making larger profits drove them to be extra alert! When market trend shows negativity, it is rightly expected that the same builders would be quick to act, to cut losses. After all, cutting losses is MORE IMPORTANT than making quicker profit. (In boom, whether one reacts quickly or not, there is profit, always. Its only the quantity of profit that varies. But in a sliding market, money gets burned. And that could be deadly)
And this is exactly where builders have gone, dreadfully wrong. Even now, many are in a "make believe world". Comforting themselves, with grandiose vision of early boom! Unfortunately, they are unaware that they are shooting themselves in the leg. And soon, the self inflicted injuries may aggravate.
Cutting losses by aggressive pricing in anticipation of worsening market, should have been the mantra 9 to 12 months ago. But the opportunity was lost due to the blind belief that boom is perpetual and negative trend, a flash in the pan. Builders offered small cuts from August 08 onwards which had absolutely no impact.
There were opportunities as late as September 08 to offer aggressive pricing and convert leads to Sales. But once the negative trend firmed into solid slide, NOTHING could work. Its only in December 08, after a whole year and a half of negativity, that few builders started to react with larger cuts. But the horses had bolted in September 08 itself. And builders who reacted late, know that the stable is empty.
For the smarter builders, the market has indeed given an opportunity to prepare itself for the future. Those who have learned the lesson that procrastination will cause misery, may be quick to act during a slide, after the next boom!
David at exclventures.com , exclusivereal.com
www.onlineghar.com/