Friday, June 6, 2008

Keeping a ceiling on home prices

India's journey towards a home-owning democracy, and Padmakshi Financial Services' continued recommendation to buy the dominant property financiers leads me to wonder if the Indian and US property markets are in different stages of the same journey.

While the US cycle is in a temporary downturn, if the Indian cycle is behind but revolving in the same direction, it has to be worth a status report.

For that, I delved into the recent Padmakshi Real Estate update.

For the non-NRI (non-resident Indian) investor, there is only so much Sensex volatility you could take.

It is all right for the future residents of India to take the long term view and hold onto the handle-bars of the Sensex roller-coaster.

They are not exposed to currency risk and future lifestyle risks that non- NRI, non-Indian investors face.

Exposed? Consider this: the Sensex advanced around 10 percent in April, but retreated 5 percent in a week when I last looked. While still holding out for a good long-term story, its going to be bumpy.

Rohit Chothani at Padmakshi says: Its vital to temper expectations of equity investors the 16 percent to 18 percent per annum longer term average will be nearer in terms of management of realistic expectation than the 45 percent per annum of the last five years.

The Padmakshi brief reads:


1. Go green is the new mantra adopted by all the leading developers across the country to lure clients through its long-lasting benefits. Chennai is leading with the highest number of existing green buildings.

2. Bangalore, Chennai and Pune markets are witnessing a fair flow, and non-IT space demand continues to ascend.

3. Average gross yields in commercial real estate across the metros range between 10 percent and 13 percent.


1. Demand in the luxury segment in city-center properties continues to outpace the supply in all the metro markets.

2. The domination by a few players is declining and giving rise to competition in developing good quality projects. This is attracting buyers.

3. Average gross yields hovered in a range of 4 percent to 8 percent across these metros.

I recall looking at some fancy Victorian but run-down premises in fairly central Mumbai. Built by the Britishers and run down by time and rules that encourage squatting at low rents. That's all changing, says Chothani.

Property developers are forming a significant voice in India Inc and by degrees we will see the asset class mature.

Supporting the statement, Chothani notes the increasing interest shown by private equity players. The biggest property deal saw a consortium led by Delhi-based BPTP buying a 38-hectare commercial plot in Noida for 50.06 billion rupees (HK$9.11 billion). This is a price per square meter of 130,207 rupees.

What does this all mean for the outlook of Indian property. Chothani is bullish due to strong demand, strong FDI inflow, and the support of government-led infrastructure development.

But he warns: Developers will have to adopt innovative techniques to keep a check on spiralling construction. With finance costs also on the rise, developers and private equity projects will be pressured into delivering affordable housing solutions.

Ian Jackson is the general manager at wealth management consultancy Financial Partners