PROPERTY BOOM YIELDS HIGH RETURNS
Economic Times :NEW DELHI
Rajan Sharma bought
4,000 square feet (372 square metres) of office space on the outskirts of
India's capital, New Delhi, for Rs 2,900 ($65) a square foot in 2002 and hasn't
stopped grinning since.
Four years
later, the 42-year-old consultant regularly gets offers more than three times
the price he paid for the same office space as the arrival of foreign players,
easy finance and rising incomes fuel a rush for prime real estate.
"It has been a very short but a
hugely profitable journey," Sharma, who now runs a property firm, told the
media.
"Seeing these profits I feel
I should have done real estate all my life."
He is not alone.
There are literally thousands of sellers and speculators
who have laughed all the way to the bank because of a property boom in New Delhi
and its two satellite towns - Noida and Gurgaon.
The pace has been almost as brisk in many other cities
in India.
In Delhi, prices have
been pushed even higher by a government campaign to close shops and offices
built illegally in residential neighbourhoods, adding to already fierce
competition for commercial property.
And a spreading underground rail network in Delhi, which
will eventually reach parts of Noida and Gurgaon, has spurred property prices
along existing and planned routes.
"There is also fundamental and growing demand for office
and retail space because of sustained economic activity driven by software
companies and branded firms," said Tanaji Chakrabarti of real estate firm
Trammell Crow Meghraj.
Delhi and
its suburbs are also home to fifth-ranked software services exporter HCL
Technologies Ltd. and huge backoffice units of companies such as American
Express Co. and Convergys that employ thousands of staff.
The $23 billion software services sector has been one of
the biggest consumers of real estate along with changing shopping tastes that
are favouring multi-brand malls over neighbourhood mom-and-pop shops, said
Chakrabarti.
A NEW ECONOMY
Spurring the boom, the government
has slashed cobwebs of legislation by allowing 100 per cent foreign direct
investment in large projects. Stamp duties have been rationalised and reduced,
and a policy to set up special economic zones is boosting industrial growth.
Nascent chains such as Pantaloon
Retail (India) Ltd and Reliance Retail Ltd have lined up multi-billion dollar
expansion plans in which the largest component has been set aside for leasing or
buying organised retail space. In addition, companies such as Nike Inc and
Adidas are deepening their presence through franchised operations beyond India's
metros to soak up demand from millions in the growing middle class.
"The demand for retail space across
India will increase," said Vivek Dahiya, associate director at global property
advisor DTZ India. "Certain markets seeing oversupply will see reduction in
vacancies."
In Delhi, Gurgaon and
Noida alone organised retail space is likely to rise to 14 million sq ft by the
end of 2007 from 2 million now, he said.
But the sharp rise in commercial rentals in the past
three years is hurting growth prospects of organised retail chains, which
operate on margins as low as 3-4 per cent.
"Rentals are now dramatically higher - by at least 50
per cent in a lot of cities," said Kishore Biyani, managing director at
Pantaloon. "At these prices we can't sign up new properties."
Biyani, who started retailing in
1997, said annual sales needed to be at least 50 per cent higher to offset
rising rentals.
In central parts of
heavily congested Mumbai city, monthly rentals for discount stores have soared
in excess of 125 rupees sq ft from Rs 55 sq ft about 2 years ago, said Pranay
Vakil, chairman at Knight Frank India.
"This is madness and has little relevance to actual
supply and demand factors," Vakil said. "Rentals are now crossing the industry
norm of 12 per cent of gross sales, making it extremely difficult and
unaffordable for retailers."
But
even after this rise, monthly retail rentals in prime commercial space or "high
street" in Mumbai are low at $11 per sq.ft compared with $24 in Singapore and
$80 in Hong Kong, according to data from Knight Frank India.
SERVICES SECTOR
Research firm SSKI forecasts demand
for 160 million sq ft of commercial real estate over the next 3-4 years, driven
primarily by the services sector, which contributes nearly 55 per cent of GDP in
Asia's fourth-largest economy.
Similarly, the housing sector is likely to see 15.9
billion sq ft of construction by 2010, SSKI said in a recent report.
However risks abound despite
runaway gains and could harm short-term demand for residential property.
"The sharp run in property prices
over the last 2-3 years and an upturn in the interest rate cycle are the key
risks," said Shirish Rane, an analyst at SSKI.
"Commercial and retail properties are threatened by the
trend of rising rentals which impact profitability."
Prices of prime residential property in central Delhi
have soared more than 75 per cent over the past two years thanks to demand from
a growing tribe of millionaires and a law that limits the number of floors that
can be constructed.
All this
euphoria has also spilled onto the stock markets where the real estate stocks
have been among the top performers thanks to scarce supply of quality paper.
Initial public offerings of firms
such as Parsvnath Developers Ltd. have seen huge demand and the stock listed, in
November, at an 83 per cent premium to the issue price of Rs 300.