February 12, 2007

Loan curbs may spell end of India's property boom

SHARES of Unitech Ltd, India's largest real-estate developer by market value, soared 26,869 per cent during the past three years. Anant Raj Industries Ltd, a competitor, leapt 39,548 per cent. Both have dropped at least 5 per cent from peaks in November and December and further losses may lie ahead. The highest interest rates in four years, tighter lending requirements and seven share sales this year are hurting real-estate stocks. Those companies had rallied as a property boom pushed apartment prices in southern Mumbai to near-Manhattan levels. "Property stock valuations are approaching bubble territory," said Parameswara Krishnan, who manages US$150 million (US$1 = RM3.50) at DNB Nor Asset Management in Chennai, India. "We should see some correction".He said he is avoiding real-estate shares. Real estate-related stocks last year accounted for six of the top 10 performers in the BSE-500 index, the broadest measure of India's stock market. Three of the six are down this year and just one is among the top 10. Three, Mahindra Gesco Developers Ltd, Parsvnath Developers Ltd and Peninsula Land Ltd, are in the 10 worst. Unitech has declined 13 per cent from its November 23 peak, while Anant Raj has lost 5 per cent since its December 12 high. The shares are down 0.2 per cent and 0.3 per cent respectively last Friday. Indian developers are among the BSE index's most expensive members on a price-to-earnings basis. Unitech trades at 31 times expected earnings, while Anant Raj, a New Delhi-based developer in which billionaire George Soros bought a stake last year, is at 67 times. That compares with 21 times for the BSE-500 and 19 times for the eight stocks in Bloomberg's Asia-Pacific Home Builders Index. Average home prices tripled over the past three years, buoyed by the world's second-quickest growth rate among major economies after China. Prices rose 50 per cent to 100 per cent over the past year in cities such as Delhi, Bangalore and Hyderabad, property consultant CB Richard Ellis said in a report for the quarter ended December. A six-bedroom duplex apartment in the Malabar Hill area in South Mumbai, where Bollywood actor Vinod Khanna and Citigroup Inc's India head Sanjay Nayar reside, sold for about US$5.7 million, according to the buyer, Rakesh Jhunjhunwala. Jhunjhunwala, a Mumbai-based private investor with about US$250 million in Indian equities, bought the property in india June of last year. A comparable apartment on the Upper East Side of Manhattan would cost between US$6.5 million and US$8 million, said Jonathan Miller, president of Miller Samuel Inc, a real-estate appraisal firm in New York. India's developers also look expensive when their share prices are measured against the value of the land they own for construction, Jhunjhunwala says. Though he bought an expensive apartment to live in, he's avoiding real estate stocks. "Land bank valuations by developers are unrealistically high," he said. The valuations may not be justified because the projects will take five or six years to complete, he said. Rising incomes and easy financing have driven demand for housing among India's 1.1 billion people. Average salaries in India rose 13.8 per cent last year, the fastest growth in the Asia-Pacific region. They may rise as much as 15 per cent this year, according to Hewitt Associates Inc, a human resources company based in Lincolnshire, Illinois. Demand for office space is expanding in downtown Mumbai and other cities in India as banks such as Lehman Brothers and Credit Suisse set up shop. They join such technology companies as International Business Machines Corp and Dell Inc. The central bank is moving to cool the market. The Reserve Bank of India on January 31 raised its overnight lending rate for the fifth time in a year to 7.5 per cent and asked lenders to double provisions for commercial real estate loans to 2 per cent in an attempt to curb defaults. Housing Development Finance Corp, the country's second-largest mortgage lender, raised its rates four times over the past year to 9.5 per cent. "The continued high credit growth in the real estate sector, is a matter of concern," the central bank said. Colliers International India Property Services says average property prices across the nation may drop as much as 20 per cent over the next two years as more homes are built. Still, demand for homes and offices mean any drop in property stocks will probably be a correction and not a rout. Source: //btimes