Realty funds rush to India as bubble lurks

Mumbai: India's property market is luring global realty funds.

And the fast-growing economy boosts demand for office space, houses and shopping malls. But on a downside soaring prices pose a risk of a meltdown.

Realty funds have assets worth about $4.7 billion in India, with industry estimates on growth varying widely from $30 billion to $90 billion by 2010.

Analysts warn spiraling prices and interest costs, coupled with shoddy property transaction and ownership records, may weaken the demand and hasten the property bubble to burst.

"There is a lot more capital available than good transactions," David Ellington, trustee at the San Francisco Employees' Retirement System, said during his visit to India. "That is going to heat up the market."

California Public Employees' Retirement System (CalPERS) ploughed $100 million into an Indian realty fund in April. While American International Group has launched a real estate investment division in India.

A posh seafront apartment in south Mumbai was recently bought at the equivalent of $1,400 a sq ft, doubling from 2004, which makes it as expensive as an apartment in New York.

Prices in big cities like Mumbai, Delhi, Bangalore, Kolkata and Chennai are rising at 30-40 percent a year.

It’s boosted by sparse land and rising incomes in an economy that has been growing at about eight percent for the past three years. A trend that is expected to be maintained for many years ahead.

The potential is huge for Asia's third-largest economy, where demands for homes have jumped on the back of tax breaks and low interest rates for the past five years.

According to India's second-largest lender, property services arm of ICICI Bank Ltd. India's retail real estate market is expected to top $463 billion by 2010, from $292 billion in 2004.

Risks abound high prices and rising interest costs could slow down demand and hasten the property bubble to burst, analysts said.

"The housing finance-driven demand is under threat," said Rajnish Rastogi of credit rating agency Crisil Ltd. "The banking sector has to move away from the metros and start funding the self-employed in smaller towns to keep it going."

Housing loan rates, which had halved to 7 percent from a decade ago, have begun rising in the last four months driven as banks pass on rising cost of funds.

Some loan rates have risen by as much as 150 basis points since the start of January, with the largest lender State Bank of India increasing rates by 50 basis points in May.

PAGE_BREAK

"The same problem that happened to private equity is about to happen in real estate," Ellington said, referring to the dotcom meltdown in the late 1990s when investors lost millions of dollars.

A spate of new gleaming shopping malls in cities like Delhi pose the biggest threat to the property bubble, analysts said. Many malls are letting out their premises for free to big retailers, hoping this would attract other firms to move in, but the strategy has not been working.

"I am very bearish on malls that exist in India," said U.S.-based Subhash Bedi of Red Fort Capital LLC. Red Fort plans to invest $400 million in Indian real estate. "Developers are selling them like condos which won't work."

Investors are also worried about shoddy property transaction and ownership records that may result in long court litigations. "It is a wild card out there," said Ellington, whose San Francisco fund has $15 billion in assets.

"I still have key questions that I need answers to. There are transparency issues, governance issues. Some of the legislation governing land is more than a century old, and rents and land holdings in some cities like Mumbai are capped, making transactions difficult."

"The legalities, state laws, central laws can be a serious hazard as they can defer your eturns by months and even years," said Parimal Shroff, an advocate practicing in civil disputes.

India ranks 116th of 155 on a World Bank report on ease of doing business, 25 places below its emerging markets rival China.

"The government is reluctant to grant permission for non-agriculturists to buy farm lands worrying that the agriculturists will be elbowed out leading to unrest," Shroff added.

The rule is not strictly followed with many developers buying non-clear titles in the race to grab land.

"We are all going to be in a liquidity crunch when it all crashes. There is nowhere to hide," said Ellington.

"There is plenty of time to get in. India is still scratching the surface. We are going to figure out who is going to wash out and which fund is going to burst."