Wednesday, January 03, 2007

India's property boom yields high returns

From .com - By Shailendra Bhatnagar

NEW DELHI (Reuters) - Rajan Sharma bought 4,000 square feet of office space on the outskirts of India's capital, New Delhi, for 2,900 rupees ($65) a square foot in 2002 and hasn't stopped grinning since.

Four years later, the 42-year-old consultant regularly gets offers more than three times the price he paid for the same office space as the arrival of foreign players, easy finance and rising incomes fuel a rush for prime real estate.

"It has been a very short but a hugely profitable journey," Sharma, who now runs a property firm, told Reuters.

"Seeing these profits I feel I should have done real estate all my life."

He is not alone.

There are literally thousands of sellers and speculators who have laughed all the way to the bank because of a property boom in New Delhi and its two satellite towns -- Noida and Gurgaon.

The pace has been almost as brisk in many other cities in India.

In Delhi, prices have been pushed even higher by a government campaign to close shops and offices built illegally in residential neighborhoods, adding to already fierce competition for commercial property.

And a spreading underground rail network in Delhi, which will eventually reach parts of Noida and Gurgaon, has spurred property prices along existing and planned routes.

"There is also fundamental and growing demand for office and retail space because of sustained economic activity driven by software companies and branded firms," said Tanaji Chakrabarti of real estate firm Trammell Crow Meghraj.

Delhi and its suburbs are also home to fifth-ranked software services exporter HCL Technologies Ltd. and huge backoffice units of companies such as American Express Co. and Convergys that employ thousands of staff.

The $23 billion software services sector has been one of the biggest consumers of real estate along with changing shopping tastes that are favoring multi-brand malls over neighborhood mom-and-pop shops, said Chakrabarti.


Spurring the boom, the government has slashed cobwebs of legislation by allowing 100 percent foreign direct investment in large projects. Stamp duties have been rationalized and reduced, and a policy to set up special economic zones is boosting industrial growth.

Nascent chains such as Pantaloon Retail (India) Ltd. and Reliance Retail Ltd. have lined up multi-billion dollar expansion plans in which the largest component has been set aside for leasing or buying organized retail space.

In addition, companies such as Nike Inc. and Adidas are deepening their presence through franchised operations beyond India's metros to soak up demand from millions in the growing middle class.

"The demand for retail space across India will increase," said Vivek Dahiya, associate director at global property advisor DTZ India. "Certain markets seeing oversupply will see reduction in vacancies."

In Delhi, Gurgaon and Noida alone organized retail space is likely to rise to 14 million sq.ft. by the end of 2007 from 2 million now, he said.

But the sharp rise in commercial rentals in the past three years is hurting growth prospects of organized retail chains, which operate on margins as low as 3-4 percent.

"Rentals are now dramatically higher - by at least 50 percent in a lot of cities," said Kishore Biyani, managing director at Pantaloon. "At these prices we can't sign up new properties."

Biyani, who started retailing in 1997, said annual sales needed to be at least 50 percent higher to offset rising rentals.

In central parts of heavily congested Mumbai city, monthly rentals for discount stores have soared in excess of 125 rupees sq.ft from 55 rupees sq.ft about 2 years ago, said Pranay Vakil, chairman at Knight Frank India.

"This is madness and has little relevance to actual supply and demand factors," Vakil said. "Rentals are now crossing the industry norm of 12 percent of gross sales, making it extremely difficult and unaffordable for retailers."

But even after this rise, monthly retail rentals in prime commercial space or "high street" in Mumbai are low at $11 per sq.ft compared with $24 in Singapore and $80 in Hong Kong, according to data from Knight Frank India.


Research firm SSKI forecasts demand for 160 million sq.ft. of commercial real estate over the next 3-4 years, driven primarily by the services sector, which contributes nearly 55 percent of
GDP in Asia's fourth-largest economy.

Similarly, the housing sector is likely to see 15.9 billion sq. ft. of construction by 2010, SSKI said in a recent report.

However risks abound despite runaway gains and could harm short-term demand for residential property.

"The sharp run in property prices over the last 2-3 years and an upturn in the interest rate cycle are the key risks," said Shirish Rane, an analyst at SSKI.

"Commercial and retail properties are threatened by the trend of rising rentals which impact profitability."

Prices of prime residential property in central Delhi have soared more than 75 percent over the past two years thanks to demand from a growing tribe of millionaires and a law that limits the number of floors that can be constructed.

All this euphoria has also spilled onto the stock markets where the real estate stocks have been among the top performers thanks to scarce supply of quality paper.

Initial public offerings of firms such as Parsvnath Developers Ltd. have seen huge demand and the stock listed, in November, at an 83 percent premium to the issue price of 300 rupees.

($1 = 44.61 rupees)

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