India Real Estate Jitters

By F. Colton

I have recently read about a few laws the India Government has passed to slow the real estate market in India. The false claim that too many foreign real estate funds are driving up real estate values is complete rubbish. First and most importantly, I can count on two hands the number of foreign real estate funds that have actually invested money on a real estate project in India. It's just not happening like the media claims. Foreign Real Estate funds find the India market appealing, but it still lacks the transparency available in other more mature markets.

So how are the real estate prices being driven up? For one, local Indian developers and local speculators are driving the cost of real estate up. Most are ignoring real estate fundamentals and are paying any price to participate. The smart ones are forming Joint Ventures with landowners to reduce their exposure and risk. Most of these joint ventures are win-win scenarios.

Real estate is a cycle of booms and busts. The Indian government may try and smooth the peaks and valleys but inevitably the cycle must continue. Moreover, India is in need of a complete overhaul in infrastructure. Why scare away the very investor you are looking to attract to help build out the infrastructure India sorely needs? There is no so called bubble in the India real estate marketplace. Of course prices are too high in some areas and will come down. However, the fact remains that almost 95% of the buildings in India are Class D or F in other parts of the developed world.

India needs foreign capital to drive its real estate market and to compete with other Asia countries. Foreign investment brings jobs and skill development not currently found in domestic India. The India Government should be focused on enticing FDI and not protectionism. India has momentum, but as history has shown, it can change overnight by thoughtless, short-term strategies that may get one reelected but not allow the country to modernize.

In summary, India is at yet another cross roads. This won’t be the last one but it is an important signpost directing foreign investment in or out. Unlike more mature markets, India’s modernization depends on foreign capital. The world is globalizing and is looking for alternative investments outside of the US and Europe. India can either open the door a little wider to foreign capital or discontinue FDI liberalization and risk foreign capital finding other alternative markets. Large foreign investors are a finicky bunch.

The author is the Editor, The India Street.