India Offers Growth Potential for Real Estate Investors

By Aniruddha Joshi, Hirco GroupThe two big emerging markets that now lead the news are China and India, but there are three key differences between these fast-developing economies that real estate investors need to understand. These market differences are: India enjoys consumption-based growth vs. export-based growth in China;India’s economy is market-driven vs. government-driven; andGrowth is based on private consumption vs. infrastructure investment.The India story is very much about growth based on consumption, as opposed to China’s, which is export-led. To illustrate that, I often say, “China’s growth depends on an American consumer walking into Wal-Mart, whereas India’s growth depends on an Indian walking into a shop in Delhi or Mumbai.” Given all the headlines about outsourcing in India, this is a key fact that is often overlooked. Secondly, growth in India is market-led whereas growth in China is government-led. India has long had a market economy—the Mumbai stock exchange is the oldest in Asia and over 6,000 companies are listed there. More importantly, India has the whole panoply of soft infrastructure to support a market economy—accounting rules, legal systems, banking and financial services. Additionally, in 1991, the government started a process of de-regulation, which reduced the barriers to free-market economic activity, including barriers to foreign direct investment.In India, private consumption as a percentage of gross domestic product is around 60 percent, very similar to developed countries like those in Western Europe. By contrast, in China, private consumption is less than 40 percent. A large part of China’s growth comes from investment in infrastructure like roads and ports. Market implications for real estate First, this means India’s market is less vulnerable to what happens in the U.S. or any Western economy because its economy is not highly dependent on exports. Second, the fact that India has the features and attributes of a market economy means that investors are dealing with an environment that is very similar to what is found in North America, with comparable accounting policies.Third, the fact that private consumption is the key driver for economic growth is significant because that is what supports increased demand for real estate. India has experienced strong economic growth over the past few years and leading economists predict growth is sustainable at a rate between 7 and 10 percent for the next decade. Personal incomes as well as disposable incomes are rising. More and more people are moving upwards from low-income groups to the middle class. The middle class is expected to explode to 580 million by 2025—nearly double the size of the entire population of the U.S. today. The buyer’s perspectiveWith new jobs being created every day, this new middle class is moving to cities and the urban population is growing more rapidly than in the rural areas. Cities that are attracting the middle class include Tier I cities—Mumbai, Delhi and Bangalore. And, as real estate prices escalate, Tier II cities—Hyderabad, Chennai and Pune—are becoming destinations for companies and the people they employ. This new middle class will need places to live, work and shop as well as to stay on holiday and go when sick. The demand for real estate is reflected in all these sectors. In the residential market, the housing shortage is estimated at 27 million units. Major Indian developers have large projects in the works to meet this huge demand. In India, mortgages account for only 5 percent of the GDP whereas in the U.S., this number is well over 50 percent. There are still large sections of the market to be tapped before Indian banks have to start lending to subprime level buyers.Why is the proportion so low? Indians have traditionally been reluctant to borrow. That is changing—the younger generation is much more open to borrowing to finance a desired lifestyle. Another factor is that the government now allows the interest paid on a mortgage to be tax-deductible. More importantly, the rise in individual income levels has made quality housing much more affordable for more Indians. Ten years ago, the average age of the first-time mortgage borrower was 42; now, it is around 30. This suggests that people are better able to save enough to make a down payment much faster than in the past. Investing in Indian real estateWhile each individual investment needs to be scrutinized on its own merits, some general observations may be helpful. First, investing in India is not like investing at home. India is a foreign country with its own culture and 5,000-year history. Differences in business practices are only to be expected. A key consideration, therefore, is local knowledge. Finding a local partner who understands the market is probably the single-most important requirement. Second, the American investor must bear in mind that there is currency risk involved with investing in India, as with any foreign market. In the past 12-18 months, the rupee has been getting stronger vis-a-vis the dollar and this has benefited the U.S. investor. In the long run, currencies may not always move in a favorable direction. One possible way to reduce currency risk for a foreign investor is to invest in dollar-denominated U.S. mutual funds that invest some of their monies in these markets.While there are a number of avenues open for institutional investors in Indian real estate, opportunities are limited for the individual investor. Other options are to choose funds that invest in India or to buy Indian real estate stocks listed on Western exchanges such as the Alternative Investment Market (AIM) of the London Stock Exchange. Plus, Indian regulators have announced a draft set of rules for REITs in India. Choosing the right local partnerThe growth in the Indian real estate market has happened mostly over the last 10 years. A number of new developers have entered the market but not all of them have the experience or the local connections to succeed. It would be logical to assume that there would be a shake-out at some point in the future. However, there are a few developers with a strong track record and long history. Properties built by such developers also have a strong history of value appreciation. Some well-known names are DLF, Raheja and Hiranandani. An established name is also important in another respect. Indian consumers, who are often putting down their life’s savings based on nothing more than architectural plans, look for a strong brand with a good track record. To an investor looking to diversify away from the U.S., emerging markets are an attractive option. As India’s economy continues to expand and its middle-class population grows, it will continue to attract investors seeking long-term returns. Aniruddha Joshi is executive director of the Hirco Group, a developer of integrated townships in India.The opinions expressed in this column are those of the author and not necessarily the editors. To comment on this column or to express interest in writing a market perspective, contact Diana Mosher, editor-in-chief, at