At a recent property conference in Mumbai, speakers predicted falling Indian land prices, tightening credit conditions, sliding stock markets and bad times for property developers.
Developers might be gloomy over prospects for the Indian real estate market, they see price falls of 15% to 50%, depending on location, but private equity groups are sensing opportunities. According to
It is against this background that
Since 2005, when the market was liberalised, foreign investors, some of which are European private equity groups, have earmarked US$20bn for the Indian real estate market. According to government statistics, barely 10% of that has actually been invested over the last three years.
That is not altogether surprising given developers have earned a reputation for sharp practices. They pretty much had it all their way, with real estate prices quadrupling over the last three years. But that has now changed.
A sure sign that something was afoot came when Dubai-backed developer
With developers becoming tight for money, private equity groups are stepping in with the readies. However, deals need to stack up and they’ll drive a very hard bargain.
So why are private equity groups getting so excited about India just as real estate prices are showing weakness? It can all be summed up in one word: potential.
The economy is growing by 8% a year, a burgeoning middle class is emerging and they want decent quality homes. Office rents are on the rise and hot spots such as Mumbai may not see much of a correction in values anyway.
These factors could drive Indian real estate prices for decades, so any setback could represent a great opportunity to position for out-performance. Even hotels are an opportunity, with an estimated shortfall of 150,000 rooms. Some 50,000 rooms are already under construction and it goes without saying that not all these projects will make money.
In other words, the Indian market looks like a classic case of strong fundamentally driven demand potentially being left unsatisfied due to a cash shortage. It’s just the sort of situation private equity groups are ideally suited to exploit with their fundraising abilities.
However, there are some caveats that need observing. Business in India is not easy. Construction costs are up by a quarter so far this year and getting the best location is absolutely essential. Get all that right, and Indian real estate could turn out to be a very good investment. A case of cashing in on the chill while at lasts!