Don't believe the hype

Despite the huge potential in the Indian property market, serious concerns about pricing, supply-and-demand fundamentals and infrastructure remain. Has the hype outpaced the reality on the ground? By Aaron Lovell

Last month, a group of investors gathered in a New York City conference room to debate the opportunities in the Indian real estate market—a topic so much at the forefront of the international property scene that more than a hundred people showed up on a beautiful, late-spring Saturday afternoon.

Yet for all the optimism and enthusiasm surrounding the country, the mood among the panelists that day was one of apprehension. Yes, many of them talked about the wealth of investment opportunities in India, but there was even more discussion about the country's lack of infrastructure and its rising land prices.

It's a feeling that seems to be affecting real estate conferences everywhere. The previous week, halfway around the world at a property panel in Mumbai, Sam Zell was quoted as saying that it was “mental masturbation” to believe there were limitless opportunities in the Indian market.

“You have this interesting paradox of some international-quality real estate that exists in a sea of bad infrastructure.”

“India's greatest asset today is everyone's imagination,” he told the audience, reiterating the concerns of many who feel that real estate prices in the country could fall by as much as 40 percent.

But back in Times Square, where panelists met to discuss the Indian real estate market as part of a larger symposium on Indian business hosted by TIE Tri-State, there was some more nuance in the debate—though Zell's words were on some peoples' minds (and were brought up at least once).

Aashish Kalra of Trikona Capital seemed bullish on the market. In addition to raising a £250-million (€366 million; $492 million) real estate fund on London's Alternative Investment Market, his firm is reportedly planning a $400-million private equity fund focused on property and infrastructure.

“There are things you need to be cognizant of,” he told the audience, stopping well short of calling the market a bubble. But he noted, with the exception of China, property professionals have been more likely focused on distressed and turnaround opportunities in Japan and Korea than on growth plays in countries of more than 1 billion people. “The world has forgotten how to deal with growth,” he said.

While everyone agreed the investment opportunities were getting trickier, panelist Jean-Claude Goldenstein of NAI's New York office compared the interest in India to the excitement surrounding European property in the last decade. He said that the “three Ts” of Europe—“things take time”—now apply to India.

A sea of bad infrastructure
Of course, it can take time just to get into the country: Ask anyone who does business in India and they'll tell you about the country's lagging infrastructure—problems that are evident even before one gets to the airport.

“Fly into Delhi at a peak hour and you're circling for an hour or an hour-and-a-half of your day,” Sameer Nayar of Credit Suisse told conference attendees. “That takes away productivity.”

It's a topic that is on the lips of most property professionals involved in the country—and for good reason. In a growing economy like India's, poor infrastructure can eat into the upside. Some estimate that, with better roads, airports, seaports and bridges, the country's GDP growth could push past the 10 percent mark.

Reached by phone later in the month, Lee Menifee, a senior director for investment research at Los Angeles-based CBRE Investors, echoed these concerns, adding that there is increasingly a dichotomy between India's real estate and its infrastructure. “You have this interesting paradox of some international-quality real estate that exists in a sea of bad infrastructure,” Menifee said. He added that, on the flipside, the lack of infrastructure has also created opportunities for firms who were positioned in the right place with access to the necessary roads and utilities.

To confront these obstacles, some real estate firms are going to the root of the problem and investing in infrastructure alongside their property projects.

Trikona, for example, focuses on property projects where infrastructure development plays a significant role. Last year, the firm committed £28 million to an IT park in Greater Noida, which will comprise 5.2 million square feet of IT space, 894,000 square feet of residential housing, 612,000 square feet of hotel space and 477,000 square feet of retail property.

(top) Mumbai: a star in the eyes of investors (bottom) Delhi: has the train left the station?

“There's talk of 500 malls being developed. That's more than the US. The roads haven't even been developed yet.”

“Our real estate franchise is predicated on the fact that it dovetails with infrastructure,” Kalra said at the panel. “From our perspective, [the question] is, 'How do you build an ecosystem and make it work?'”

The price is wrong
One word bandied around at the New York event was “hype.” The excitement about Indian property, in part drummed up by frothy press reports in the country's numerous newspapers and media outlets, has substantially pushed up prices, creating a situation where landowners are holding out for the evergreater windfalls that could be headed their way.

Most dismissed the hype as a by-product of a hot, emerging market. “I lived through the hype in Europe in the early 1990s,” said NAI's Goldenstein. “Hype is a fact of life.”

But for others, current pricing levels are not only unsustainable, they are primed for a massive correction. “Everybody is kind of looking for the next greater fool,” Credit Suisse's Nayar said. “I think we're seeing signs of a classic market bubble.”

But Kalra felt that the “bubble” label was too strong. “Are there pockets of inflated optimism?” he asked. “Absolutely.” With prices shooting skyward in the major markets, investors looking for good returns are following the ageold emerging-market strategy and heading to the second- and third-tier cities—similar to what's been happening lately in China, where international firms are developing projects in cities many people in the West have never heard of before.

Karla told the audience at the panel that he thinks smart investors are looking beyond the obvious. “I think there is more to India than the central business districts of Mumbai, Bangalore and Chennai,” he said.

Of course, it's a long way from Mumbai's CBD to these secondary cities and firms pursuing these strategies need an advanced level of expertise and sophistication. “I have difficulty finding the right corner in Mumbai or Delhi—and I grew up in Delhi!” joked Nayar.

Finding the right project
Part of the problem, many surmise, is a supply-and-demand mismatch. As speculation by locals pushes prices through the roof, many of the projects being slated by property firms and foreign groups are targeted towards the higher-end of the market— expatriates and newly minted members of India's upper class. But there's not always enough demand among the locals to support all these new properties.

A few days after the event in New York City, Harin Thaker, chief executive officer for Europe and India at Hypo Real Estate, said that on a recent trip to Delhi, he saw a street with 12 new shopping malls on it—and one of them had already failed and was being converted into offices.

The retail sector has long been attractive to foreign retailers— the potential for some 1.1 billion new customers would make any retailer salivate—but draconian ownership rules have largely prevented foreign groups from getting into the sector. French retailer Carrefour—the second largest in the world—recently announced that they were going to wait and see how US retail giant Wal-Mart fares in its joint venture with Indian phone company Bharti Enterprises before setting up shop.

On the panel, Nayar pointed out that a number of retail projects don't take into account basic facts about Indian shopping habits, which, up until now, have largely been based around mom-and-pop businesses and dominated by small storefronts situated along the main streets.

“There's talk of 500 malls being developed,” Nayar said. “That's more than the US. The roads haven't even been developed yet.”

Another casualty of these types of supply-and-demand mismatches have been special economic zones—those areas set aside for office and logistics space for foreign companies. At the panel discussion, Trikona's Kalra said that SEZ's have become disastrous investments. Because Indian companies targeting the local market can oftentimes build tax-free, they have no use for the special economic zones. At the same time, the projects are usually not located near ports and much-needed infrastructure—making them unattractive for foreign firms.

Don't call it a bubble
Despite the drawbacks discussed on the panel—and other concerns about transparency and title—the Indian property sector continues to draw interest. Since the relaxation of foreign direct investment rules in 2005, foreign firms continue to pile into the country. Last month, for example, ING Real Estate said that it was moving into India due to client demand.

But with additional players entering the space, the very reservations being expressed in conference rooms and hotels lobbies could only become more of a concern. The additional capital could also create additional opportunities in the future—especially in a market with as much uncertainty as India.

In fact, some on the panel in New York see the faulty projects of 2006 becoming the white elephants of the future, even as the Indian economy continues to grow. “I think we're going to see more distressed opportunities in a growth market, which will be unique,” Goldenstein said.

In fact, towards the end of the panel, participants were asked to predict when the bubble, if it existed, would burst. One panelist hoped it wouldn't be too long or too painful. But Kalra, while agreeing that there would be a shakeout, still hesitated to use the b-word.

“You can't call it a bubble,” he said. “It's capitalism at its best.”