Saturday, March 29, 2008

Indian property sale flop could cause wider flap

One thing that has never been a hard sell in Mumbai over the past few years is property.

But last week, for the first time in 13 years, Mumbai's metropolitan authorities failed to sell government land in an auction in India's financial capital.

Up for sale were five plots in the Bandra Kurla Complex - a prime commercial real estate district where the existing tenants include the country's largest stock exchange, the securities market regulator and Citigroup's India headquarters. But the government was able to dispose of only three plots, raising Rs13.2bn ($326m) rather than the Rs19bn originally targeted, according to Bloomberg.

Only a few months ago, the government was holding land sales in the same area that the domestic press touted as the most lucrative in the city's history.

So what does a government property sale have to do with Indian equities? While there is no direct link, property prices are an important indicator of sentiment in India's financial capital, where real estate and stock market valuations often move in tandem.

Just as the long-running rise in Indian property prices seems under threat, so too there is talk that the country's great five-year stock market bull run is losing steam.

The benchmark Sensex Index of 30 leading stocks closed last week at 14,994.83 points, down about 29 per cent from its highs in January when the market was still one of the world's hottest.

India's stock market is being buffetted by the same global pressures affecting its peers worldwide - concern surrounding the subprime crisis and uncertainty about the potential impact of a US recession on the country's economy.

The jitters in India started in the information technology outsourcing sector, the Indian industry most dependent on the US economy for business and one of the country's biggest earners of export dollars. IT stocks are down almost 30 per cent from last August.

But now concern has begun to shift to whether the country's significant domestic economy, which is based largely on consumption, can sustain its momentum. Indeed, headline economic growth has already begun to slow from levels near 10 per cent to between 8 per cent and 9 per cent.

The problem is partly a structural one. High commodity prices are putting upward pressure on inflation, forcing the central bank to keep interest rates frozen near their peak at 7.5 per cent.

The central government, meanwhile, is preparing for general elections by May next year and is in an expansive mood, in February announcing tax exemptions and debt waivers for lower income earners that will pump more money into the economy.

While this could act as a welcome stimulus at a time when the economy is slowing, it could also feed inflation, further tying the the central bank's hands on rates.

The tight monetary policy has already forced banks to slow lending to consumers. Industrial groups are still flush with cash from a period of record profits but if the market downturn drags on, they will begin to find it hard to raise money to finance their expansion plans, many of which looked incredibly ambitious even when times were better.
DLF, the country's biggest developer, for instance, plans to build 750m square feet of floor space in the coming years, triple the amount it has constructed in its entire history. A lot of its funding is expected to come from the stock market.

Against the bears, though, there remain many investors in India who hope the market is just going through one of its many corrections.

This has happened 12 times during the five-year bull run, according to Ridham Desai, equities strategist with Morgan Stanley in Mumbai. Each dip has been accompanied by a "V-shaped" recovery, in which share prices have rocketed back up to their earlier peaks.

Another factor containing the panic is that while the market has been battered, it has not fallen below its lows in August last year, a better performance than many of its emerging market peers.

And in many sectors apart from technology, Indian stock market valuations remain above their six-year average, according to Morgan Stanley.

In a show of confidence, domestic investors have continued to pump money into local mutual funds in January and February in defiance of net selling by foreigners.

If the turmoil in the US continues, none of this may make much difference. India's great bull run will surely grind to a halt.

But if the US Federal Reserve is able to calm nerves and commodity prices start to ease, the Indian central bank could cut rates and the party on the Indian market could revive.

So here's to the next government property sale in Mumbai. Its success or failure will mean a lot more than a bit of revenue for the government.

No comments: