The Financial Express - November, 2007

The real estate potential in India is not a mirage, nor is it easy to exploit.

The past few months have seen interesting numbers being thrown around by governments, the media and real estate developers in India. On one hand, the FDI and FII flowing into this sector is unprecedented.

Headlines such as “Protego brings $400 million Indian office fund to market” and “DLF Dubai to develop a $12 billion project in India” no longer raise eyebrows. The introduction of real estate funds, such as Anand Jain’s Urban Infrastructure Opportunity Fund, with its $550 million corpus (double that of the HDFC Real Estate Fund) and the Launch of HSBC and ING funds in October 2007, only highlight the appeal of the sector. Combine this with the successful IPOs of various realtors, the much-quoted shortfall of 22 millions of sq.ft required by the space hungry IT/ITeS sector, and the picture presented is one of excitement, growth and potential.

But look harder, and a contradictory image seems to take shape. Loans have become dearer with the RBI’s CRR hike, through home loan lending rates stay unchanged. Recently, on October 29, some 25,000 protestors marched from Gwalior to Delhi, demanding better land rights. Over May-June 2007, India’s home loan off take declined by 70%. Meanwhile, in the distant background are a quaking US housing market and a related credit squeeze.

H ow do we interpret this scenario for the real estate buyer/ investor?
First, the basic facts.
Fact 1: the Indian economy is growing at a scorching pace, and attended by an interesting democracy. India is the globe’s preferred investment destination.
Fact 2: economic prosperity is fanning out, both in terms of cities and socioeconomic class. Trickle down seems to be operational.
Fact 3: the great Indian joint family is giving way to nuclear families and dual income households across all cross-sections.
Fact 4: an increasing willingness to spend rather than save has resulted in leaps of conspicuous consumption.
Fact 5: all of the above have fueled demand for housing, offices and retail spaces that far outstrips supply. The potential is vast.
Fact 6: FDI and FII funds are flowing into the sector heavily, with billions of dollars seeking opportunities.
Fact 7: Indian banks are lowering interest rates on home loans, and thus absorbing the CRR hike.
Fact 8: construction costs are soaring. A bag of cement has risen by Rs 80 over a year and steel prices by nearly Rs 3,000 per tonne. Shortages persist.
Fact 9: poor public infrastructure constrains real estate development severely, a problem compounded by a lack of clear land and property ownership titles.
Fact 10: clearances take much too long and uncertainties here delays and inefficiencies in asset utilization.
Fact 11: land is subject under local authorities. All-India developers need to relearn several process city by city, thus limiting the scope for  economies of scale.
Fact 12: developers are turning to professional management in a big way.
What does this set of 12 facts really mean for the Indian real estate sector?
It is quite clear that the potential in Indian real estate is not a mere mirage. But it is equally clear that the current ways of doing business in this sector are neither built for speed nor for the future. Metaphorically speaking, the opportunity is rock solid, but distinguishing between reality and myth must lead to a programme of change that allows its true value to be realized.
What does this mean to end users and investors? If the current state of affairs is maintained, then the end user is unlikely to see any efficiencies are unlikely to be generated in the first  place. For the investor, the long run is likely to show substantial gain, but the incline of the trend could be appreciably better if the sector is put through a transformation. As responsible citizens too, individual or corporate, all of us should be clamoring to achieve what we can achieve , especially since the Indian real estate sector is still in its early phase of development from a broad perspective. We still talk of “market size”, rather than anyone’s “market share”, for example, and the “soft” intellectual aspects (such as the value of brand association) remain mostly a matter of happenstance (localities acquire their own prestige). This is changing in several parts of India, but could change much faster and more comprehensively. In other words, there is a win-win possibility that can be made the most of. Can it be done?

The answer is not simple, but the encouraging part is that solutions exist. And this is a good starting point. The underlying theme of the answer is change. Developers need to change, policies need to change, government officials need to change, landowners need to change, and last but not the least, consumers and investors need to change. This change is likely to be the fulcrum that turns the real estate sector into one of dynamism and development.