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Indian developers eye mass market as prices fall

September 4th, 2007 · No Comments

Property stocks depressed on worries about housing market

(MUMBAI/HONG KONG) After a two-year surge, home prices in India have dropped as much as 20 per cent 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 US$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 US$90 billion by 2010.

But a drop of around 20 per cent 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 per cent in the New Delhi area and Punjab state, and have paused in Mumbai after sharp rises.

Most developers have been targeting the roughly one million families bringing in US$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 thinktank, while the number of ’super-rich’ families with an annual income of more than US$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 US$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 per cent, rather than the 30 per cent 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 US$60 billion in 2006, but that was only about 6 per cent of gross domestic product (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 per cent of annual GDP.

Eredene has invested an initial £pounds;16.4 million (S$50.3 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.

Mr King said that 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.

Yesterday, Puravankara Projects, the latest developer to list, was trading nearly 6 per cent below its issue price by 0549 GMT after making its market debut last Thursday.

The country’s biggest listed developer, DLF, has seen its stock fall 12 per cent from a peak reached a week after its July 5 market debut.

But analysts said the firm, which raised US$2.25 billion in its initial public offering (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 725 rupees (S$27), or a 21 per cent upside.

‘Like Chinese companies, it’s a volume game rather than a margin game, but it has huge potential.’