But as in many other areas of economic activity, there has been a remarkable change in the Indian real estate sector. Last week saw two major developments that will have a lasting impact on the industry. The National Housing Bank (NHB), the housing finance sector regulator – and a subsidiary of the Reserve Bank of India, the country’s central bank – launched a house price index.
The other major development was the emergence of realty stocks as a group as a powerful component of the stock markets – accounting for over four per cent of the market capitalisation of the Bombay Stock Exchange – following the listing of shares of DLF Ltd, the country’s largest real estate firm, which had raised a whopping $2.3 billion through an initial public offering (IPO) last month.
Finance Minister P. Chidambaram launched the Residex, an index which will initially track the movement of real estate prices in five cities: Mumbai, Delhi, Bangalore, Kolkata and Bhopal. “We need a real estate national index as it will help in the flow of capital,” pointed out Chidambaram.
According to S. Sridhar, chairman, NHB, the index would be extended to cover 35 cities – with a population of over a million each – in due course. Ultimately, it would cover 63 Indian cities, and an all-India index would be established. NHB also has plans to set up separate indices for rentals, land prices, and affordability.
The base year for the Residex is 2001, the same as for the Wholesale Price-based Index and the Consumer Price Index. According to the NHB, the price of properties in all five cities has more than doubled over the past six years; in Bangalore, an IT hotspot, prices have nearly tripled since 2001.
The Residex assigns weights to a dozen parameters – including the location, quality of construction, amenities and infrastructure – to calculate the average price of a residential property in the five cities. It will be revised every six months. The index will emerge as a useful new tool to compile economic data.
Despite the boom in the real estate sector, there has been no tracking of prices and other data in India. State governments impose hefty stamp duties on real estate transactions, but have scant data to indicate growth of the sector.
The government of India opened up the real estate sector to foreign direct investment (FDI) just a few years ago. Billions of dollars have poured into the sector, as mutual funds, private equity funds, pension funds and other financiers from the US, Europe, the Middle East, South East Asia and the Far East have been pouring money into the sector.
This year, analysts expect over $3 billion to flow into the property market. Real estate giants such as DLF have been raising billions of dollars through IPOs and follow-on public offers.
And the investing public has responded overwhelmingly to these issues. The real estate sector has driven the IPO market, and accounts for the largest amount of money raised over the past 18 months.
According to analysts, almost a fourth of the funds raised through IPOs have been by real estate companies. After listing, real estate stocks have soared by an average of over 70 per cent, as against a modest 22 per cent overall gain for all post-IPO stocks.
Before the reforms, real estate developers had to depend on unreliable sources for funding. Besides their own internal accruals, they would seek finance from investors, who would pitch in with 10 to 20 per cent of the cost of an apartment. While the big, professional developers accessed funds from clean sources, many of the smalltime players were forced to borrow money — at extortionate rates — from shady operators, including the underworld.
Consequently, most real estate transactions in India comprised two forms of payments: white and black. There was a time when 60 to 80 per cent of the payment would have to be in black – or cash, and unaccounted funds – and thousands of middle-class consumers and salary-earners, who had no access to such funds were deprived of a house.
Professional investors or speculators, who paid a part of the cost of a residential or commercial unit, stood to make handsome profits on selling off their minority stake in a unit within months of booking it. But this unhealthy practice led to prices expanding by 10 to 20 per cent a month, and with an acute shortage of new units, it played havoc with the market.
And because of the ‘speculative’ nature of the business, banks were reluctant to advance funds to developers. The opening up of the sector resulted in an abundant inflow of funds, and the virtual demise of the black money system.
The listing of the DLF scrip on the stock markets has resulted in an upheaval in the list of richest Indians, and in market capitalisation rankings. Kushal Pal Singh, the promoter and chairman of DLF, and his family members – who still have an over 80 per cent stake in the company – have now emerged among the richest people, not just in India, but even in the world.
The net worth of Singh and his family members has jumped to over $20 billion, catapulting them to the third richest business family in India – after Mukesh Ambani and Anil Ambani, the two quarrelling brothers, who split up the Reliance empire two years ago.
The DLF scrip’s market capitalisation also crossed the Rs1 trillion-mark, making it among the 10 most valuable companies in India, ahead of established manufacturing groups, and even government-owned giants.
Importantly, real estate stocks as a group have also emerged as a powerful new category, which could influence the benchmark indices on the Bombay Stock Exchange and the National Stock Exchange. At present, none of the real estate companies are listed in the benchmark indices, but analysts expect DLF to move in over the next few weeks.
Following the successful listing of DLF, real estate sector stocks have now come to play a major role in the Indian stock markets. They add up to four to five per cent of the market cap, as against a little over 2.5 per cent in China, two per cent in Brazil and less than one per cent in Russia.
Of course, the share of real estate stocks in total market capitalisation is much higher in other Asian countries: about 12 per cent in Singapore, over 10 per cent in Hong Kong and Taiwan, and 6.5 per cent in Thailand.
But the doubling of the value of real estate stocks in India is expected to send the right signals to dozens of other foreign investors, including pension funds, who are waiting to enter the market.
Importantly, they will bring about much-needed transparency in the realty sector, and also encourage other companies to tap the IPO market for funds. Market sources point out that half a dozen other major real estate IPOs have been lined up, and by the year’s end they could raise another Rs15 billion from the market, further boosting the share of realty firms in the stock markets.