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Realty funds rush to India as bubble lurks
Published on Tue, May 09, 2006 at 17:47, Updated on Tue, May 09, 2006 at 17:52 in Business section
Tags: Real Estate, Property , Mumbai
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Mumbai: India's property market is luring global realty funds.
And the fast-growing economy boosts demand for office space, houses and shopping malls. But on a downside soaring prices pose a risk of a meltdown.
Realty funds have assets worth about $4.7 billion in India, with industry estimates on growth varying widely from $30 billion to $90 billion by 2010.
Analysts warn spiraling prices and interest costs, coupled with shoddy property transaction and ownership records, may weaken the demand and hasten the property bubble to burst.
"There is a lot more capital available than good transactions," David Ellington, trustee at the San Francisco Employees' Retirement System, said during his visit to India. "That is going to heat up the market."
California Public Employees' Retirement System (CalPERS) ploughed $100 million into an Indian realty fund in April. While American International Group has launched a real estate investment division in India.
A posh seafront apartment in south Mumbai was recently bought at the equivalent of $1,400 a sq ft, doubling from 2004, which makes it as expensive as an apartment in New York.
Prices in big cities like Mumbai, Delhi, Bangalore, Kolkata and Chennai are rising at 30-40 percent a year.
It’s boosted by sparse land and rising incomes in an economy that has been growing at about eight percent for the past three years. A trend that is expected to be maintained for many years ahead.
The potential is huge for Asia's third-largest economy, where demands for homes have jumped on the back of tax breaks and low interest rates for the past five years.
According to India's second-largest lender, property services arm of ICICI Bank Ltd. India's retail real estate market is expected to top $463 billion by 2010, from $292 billion in 2004.
Risks abound high prices and rising interest costs could slow down demand and hasten the property bubble to burst, analysts said.
"The housing finance-driven demand is under threat," said Rajnish Rastogi of credit rating agency Crisil Ltd. "The banking sector has to move away from the metros and start funding the self-employed in smaller towns to keep it going."
Housing loan rates, which had halved to 7 percent from a decade ago, have begun rising in the last four months driven as banks pass on rising cost of funds.
Some loan rates have risen by as much as 150 basis points since the start of January, with the largest lender State Bank of India increasing rates by 50 basis points in May.
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