Dr. P.V. Viswanath

pviswanath@pace.edu

Lights on, nobody home: The swagger comes out of India’s property market

Aug 21st 2008, From The Economist print edition

FREDDY REBEIRO, a 38-year-old architect, was looking forward to buying his first flat, albeit a cramped one on the edge of the Indian capital. Then on July 29th India’s central bank raised its key lending rate for the third time in two months, to 9%, an attempt to curb cantering inflation. Mr Rebeiro and his wife watched the discomfort of their homeowner friends, who had already been struggling with high repayments, and resolved to wait. It may have been a wise decision. In a recent report, HSBC predicted that house prices across most Indian cities could fall by 25-30%.

Less than a year ago India’s property market was smouldering with excitement fuelled by unprecedented economic growth. Companies demanded high-quality office space and a growing clique of upwardly mobile, middle-class buyers wanted swanky new homes. The industry had also been given a boost in 2005, when the government eased rules on foreign investment in the construction industry. Property developers were among the biggest winners in India’s economic boom. When DLF, India’s best-known developer, floated on the stock exchange last summer, it was India’s biggest-ever initial public offering at the time. The company has played a leading role in transforming Gurgaon, on the edge of Delhi, from a scrubby plain into a posh satellite city that is a symbol of India’s ballooning self-confidence.

In recent weeks, however, inflation has tipped over 12%, largely driven by surging oil prices. This has pushed up interest rates and turned property companies into the biggest corporate losers of India’s slowing economy. They have been kicked from several sides. Homebuyers are put off by expensive or elusive credit; banks are rationing credit to developers; prices of building materials like cement and steel have soared. The share prices of property firms are down by 40-70% from their highs earlier this year.

In July DLF announced it would buy back part of its equity—a move some saw as a sign of alarm among its controlling shareholders at the falling share price. The company has shelved plans to list its real-estate investment trust on the Singapore stock exchange, as has Unitech, India’s second-biggest developer. “We’ll have to wait for the market. Isn’t everyone?” remarks Rajeev Talwar, DLF’s executive director.

Part of the problem is that when the market was strong, developers piled into the most expensive properties where the biggest profits were to be made. One upmarket enclave in Gurgaon, which boasts a nine-hole golf course and a “cigar lounge,” has sold fewer than half the houses built in the first phase of development, even though it is now more than a year since they went on sale. HSBC reports that sales in the luxury segment have fallen by up to 70% in Gurgaon.

Until there is a sharp fall in interest rates, developers are focusing on more affordable homes, and ones that are bought to be lived in rather than speculated upon. Gary Garrabrant, chief executive of Equity International, an American property firm which has invested in mass housing in Mexico and Brazil, says he is looking for investment opportunities in affordable housing in India. He cautions, however, that infrastructure, especially roads, will have to improve “before record-breaking speed can be achieved.”

Like so much else, India’s property market hinges on confidence. Even when property prices and interest rates fall, buyers will be slow to catch on, reckons Ashutosh Narkar of HSBC. “It’s not like buying a car,” he notes. “House buyers tend to wait for much longer before they think about spending so much money.” If Mr Ribeiro is any guide, it may be at least a year before they begin to brave the market again.

Questions:

1. Why