Property development mania is turning vast tracts of India into boom towns 
Abhay Singh and Subramaniam Sharma

Bloomberg

Kushal Pal Singh remembers the encounter in 1981 that set him on the path to becoming India’s newest billionaire.

Singh, an army officer turned real estate entrepreneur, was sitting under acacia trees on the outskirts of New Delhi when a jeep broke down. The passenger was Rajiv Gandhi, son of then prime minister Indira Gandhi.

“He asked me who I was and what I was doing,” recalls Singh, sporting a white safari suit in his New Delhi office. Singh responded that his family had given up its real estate ambitions in the 1960s when the government barred private developers.

He wanted to resume property purchases to create a modern suburb 27km south of central New Delhi, in Gurgaon. A 1975 state law that prevented companies from acquiring farmland for commercial use thwarted him.

Singh says Gandhi pushed for a change in the law. That helped Singh’s company, DLF Universal, acquire 1416ha during the next two decades. Today, in place of vegetables, Gurgaon’s fields sprout $900000 condominiums, gated communities with swimming pools and the headquarters of the Indian branches of Ericsson and Nestlé — all on DLF-owned land.

The company is building offices, apartments and malls in 18 cities and expects to almost double that to 35 cities in two years. India’s construction mania is turning vast tracts into boom towns. The hunger for real estate is also increasing the potential for environmental damage and a property bubble in fast-growing suburbs such as Gurgaon.

“Everyone wants to play in real estate,” says Parameswara Krishnan, who helps manage about $150m in Indian stocks at DNB Nor Asset Management in the southern Indian city of Chennai. “People want to invest because it’s a proxy for the country’s economic growth.”

Singh’s proposal to take his company public is adding fuel to India’s real estate frenzy. DLF plans to raise more than $2bn in a share sale.

“In India, real estate is a growth story,” says Claudio Bernasconi, who helps manage about $280m in emerging-market stocks at Banque Cantonale Vaudoise in Lausanne, Switzerland.

“DLF is limited to a few cities now, but the potential is so huge that even taking only those cities it will be a big company.”

Across India, commercial and residential construction activity will surge to $50bn by 2010 from $12bn in 2005, according to a Merrill Lynch report in May last year. India’s economic growth has averaged 8,1% in each of the past three years, the fastest pace after China’s among the world’s major economies. That is driving demand for houses, office space and shopping centres to serve the country’s increasingly affluent middle class.

Since February last year India has allowed 100% foreign direct investment to develop new housing, commercial properties, hotels and hospitals. Foreign investors are not allowed to buy buildings that are already standing or undeveloped land.

Since India opened the market, overseas investors have earmarked at least $6,3bn for the nation’s real estate, calculations by Bloomberg show.

India allows foreign funds to own stakes of as much as 24% in the nation’s publicly traded real-estate companies. DLF’s share sale will give overseas firms another investment outlet.

It also has disadvantages, says Mridul Upreti, head of corporate finance and investments at the Indian unit of Jones Lang LaSalle, the largest US commercial real estate broker.

“An IPO (initial pubic offering) will make more funds available for the company, transparency will improve and foreign institutional investors will be able to invest directly,” he says. “There is a flip side. If a major project doesn’t come through, then that’ll immediately get reflected in the share price.”

For now, shares of the few publicly traded Indian real estate developers are soaring. New Delhi-based Unitech has rocketed about 34-fold in the past 12 months to a record 262,65 rupees on the Bombay Stock Exchange on July 5. Ansal Properties & Infrastructure, also based in the Indian capital, has more than tripled to 432,55 rupees during the same period. Both companies build homes in Gurgaon and develop retail and office space.

DLF has designed and built some of Gurgaon’s most eye-catching architecture. Nestlé’s Indian headquarters stands out for its curving style that resembles a spiral staircase.

The top of another building called DLF Gateway Tower is shaped like the bow of a ship. The building houses the Indian offices of Corning, the biggest maker of glass for liquid crystal displays, and Cargill, the largest US agricultural company.

The “Mall Mile,” a road leading into Gurgaon from New Delhi, features shopping complexes, some made by DLF. The nearby DLF Golf and Country Club has a floodlit, 18-hole, par-72 course.

One of DLF’s most expensive properties, called the Magnolias, hugs the course. The apartments, which range from 541m² to 929m², have soared in value by almost two-and-a-half times since they were announced in October. The Magnolias features tennis courts, a swimming pool and a valet service for cars.

Even in boom times, it can be difficult to work out how to profit from India’s property craze. Real estate is hard to acquire because holdings are small and fragmented, sometimes with multiple members of a family staking claim to a piece of land. Transactions are often cash only, and their values are usually understated to avoid taxes and fees.

Laws limit the amount of land a single owner can buy in some states’ urban locations, in some cases to as little as 500m². And developers have to deal with a multitude of government departments to get permits to acquire land and then build.

“Permissions are given by local municipalities, and it differs from state to state as well as from city to city,’’ says Shishir Baijal, CEO of PFH Investment Advisory, a fund management company started by Pantaloon Retail India, India’s biggest operator of supermarkets by market value, to invest in shopping malls.

Information on land and ownership is not readily available, says Jonathan Yap, CEO of India operations at Ascendas, a Singapore-based developer.

In 1994, Ascendas was one of the first overseas property companies to enter India, with a joint venture to create office space for software companies in Whitefield, on the outskirts of Bangalore. He says he had to import some materials and educate the government and even customers about what features the new offices provided.

The work culture in India presents its own unique challenges, Yap says. “Initially, you try and do this your way, efficient and fast, so that the customer doesn’t wait,” he says. “But in India, five minutes don’t really mean five minutes.”

To navigate the hurdles that may come with being outsiders, investors such as Morgan Stanley, the third-biggest securities firm by market value, and Dubai-based Emaar Properties PJSC, the largest publicly traded property developer in the Middle East, are joining with Indian companies.

In March, Morgan Stanley invested $68m in Mantri Developers, which has built offices and apartments in Bangalore. In December, Emaar announced a joint venture with New Delhi-based MGF Developments, which runs car dealerships and has a financial services business.

The venture plans to spend $4bn to build houses, shopping centres and office space in New Delhi and the states of Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu.

Though enthusiasm abounds, foreign investors may discover that getting expected returns is harder than they thought because of poor construction quality, says Ankur Srivastava, MD of the Indian unit of real estate adviser DTZ Holdings.

“There is a frenzy in the market,” he says. “There is an eagerness to do a deal, and they are tying up with all kinds of local developers. When private equity investors exit three to five years down the line, they will not be able to get the kind of yields they had targeted.”

Renu Karnad, executive director in charge of mortgage lending at Housing Development Finance, India’s biggest mortgage lender, says she is worried about the flood of investments backed by easy home loans.

“There is a whole lot of money chasing this market,” she says. “People are taking multiple loans to purchase two or three homes, hoping next year they’ll be able to sell and make money. That becomes an issue.”

Some hot areas are starting to cool, especially in Gurgaon, where prices have more than doubled in the past two years.