Setting investors' sights on India's satellite cities

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THE time is ripe for eligible investors outside of India to invest in the country's satellite cities as values begin to rebound, according to Parikshat Chawla, head of residential and commercial investments at Indian property investment company MacDonald Sarin.

"We have been seeing capital growth per annum of 20% for 1½ to 2 years in some of these emerging markets. Even in places where the market has slowed down, values are still around 15%, and they are slowly moving up," Parikshat tells City & Country.

"Even with currency fluctuations of 5% to 8%, it doesn't matter because you can bridge that gap with the rising values of property investments."

The ringgit has been gaining strength against the rupee in recent years. As at Dec 5, RM1 is 17.93 rupees.

The satellite towns Parikshat recommends for investors are Pune, Gujarat, Bangalore, Chennai, and Gurgaon in Haryana, which is just 33km to the north of New Delhi.

"Gurgaon, where we are based, is one of the biggest business satellite towns. It's right next to New Delhi, so it has seen good spillover effect. It's like New York, where all the banks and businesses are. After a period of time, it's going to be very expensive to get more real estate here. You'll have to pay through your nose," he says.

Fuelling demand for properties in these states are changing lifestyles. High-rise homes are becoming increasingly popular as the traditional extended family structure breaks into smaller nuclear families. "It has become acceptable to live on your own," says Parikshat.

In New Delhi, Mumbai and Bangalore, prices range from 50,000 to 100,000 rupees psf for a luxury apartment, while in Gurgaon and Pune, similar products can go for as low as 12,000 rupees psf.

Parikshat notes that India's GDP is expected to grow at least 7% next year, arguing that this will support housing demand. "Residential demand will reach 7.5 million units by 2013, with the highest demand growth coming from Tier-1 cities such as Gurgaon, Bangalore and Mumbai," he says, citing international consultancy Cushman and Wakefield.

Perhaps it is no coincidence that projects in these cities were promoted at an Indian property fair organised by MacDonald Sarin in Kuala Lumpur in early November. The fair was held to tap into the Indian diaspora here, comprising people of Indian origins — locals whose grandparents were Indian citizens — as well as non-resident Indian citizens who are currently based abroad.

The fair featured developers such as House of Hiranandani, Arun Excello, Green Homes, MCB Assetz, Amar Prakash, Rahejas, Aaspire Developers, India Bulls, Heritage Homes, Kataria Buildteck, Phoenix Builders, Golden Homes, Unitech Builders, MacDonald Sarin, SPL Housing, Tekton Housing and Rachna Lifestyles.

While the path towards owning property in India is still fraught with intricacies — for starters, ownership is limited to three categories of people, namely non-resident Indians, persons of Indian origin and overseas citizens of India — stakeholders, such as developers and politicians, are pushing for the country to liberalise its real estate market, says Parikshat.

"India has passed laws for dual citizenship, but it has not implemented them yet," says Anu Saigal, MacDonald Sarin's local partner here.

In addition, stakeholders such as Indian real estate developers and politicians are lobbying for percentages of properties to be opened up to eligible foreign investors.

"India is discussing a cap, of say 15% to 20% or so. My personal feeling is that they should start at a third [of these projects], where if a developer launches 100 flats, for instance, 33 of them should be available to foreigners. You can sell them at the prevailing market rates or even at a premium if that helps to satisfy the government because at the end of the day, all of these transactions are going to result in higher taxes for the government and it will revitalise the market," says Parikshat.

Financing institutions have also been more supportive, with most banks offering loans of up to 70% of the property price. Parikshat notes that payment schemes are usually aligned to the construction milestones. For instance, a three-year project will see buyers put a 10% down payment, pay a further 15% on excavation, pay 10% more on completion of the basement and so on.

Although yields of residential properties are fairly low — at around 5% to 6% per annum for high-rise homes — capital appreciation is generally higher, at around 30% to 40% annually in certain markets.

Meanwhile, demand for office space is expected to reach 196 million sq ft in 2013. Commercial properties, such as serviced apartments, warehouses and retail properties, fare better in terms of yields, at 7% to 15%. "In the future, they will also look at trading and renting parking spots," Parikshat says.

However, their capital appreciation is arrested by the fact that businesses prefer to rent when they expand, and this is compounded by a typical nine-year lease with renewals set at every three years, during which tenants and landlords decide if the former should stay or go. "Therefore, prices don't rise exponentially unless there are extraordinary factors such as new infrastructure or major developments nearby," he says.B2B effortsBesides end users, some Malaysian companies are expanding into India's real estate market. "At the moment, we have Malaysian architects designing housing estates in Chennai. We are working with one of the developers here, and we've signed an MoU. I don't want to mention the names yet, but we have two — one in Noida and one is looking very closely at Gurgaon, after the Dwarka Express," says Anu.

"MacDonald Sarin has also tied up with the Kuala Lumpur & Selangor Indian Chamber of Commerce and Industry to launch a lot of interesting projects. We are still talking about it but the plan is to mutually benefit both countries, where we promote Malaysian properties in India and vice versa. In this recent expo itself, some Malaysian architects were hired by Indian developers."

In the pipeline is a fund designed to invest in residential properties in India's first to third-tier cities. The types of properties range from upscale to middle class, says Anu.

"We have shortlisted some qualified property developers to work with suitable cities. First-tier cities would include Mumbai and New Delhi, while second-tier ones would be Gurgaon and Pune, and third-tier cities would include Jaipur."

This story first appeared in The Edge weekly edition of Dec 10-16, 2012.