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Friday, February 09, 2007

Property Correction Coming?

This article in Bloomberg this morning may be to the point:

Shares of Unitech Ltd., India's largest real-estate developer by market value, soared 26,869 percent during the past three years. Anant Raj Industries Ltd., a competitor, leapt 39,548 percent.

Both have dropped at least 5 percent 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.

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 percent to 100 percent 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.

Still, demand for homes and offices mean any drop in property stocks will probably be a correction and not a rout.

``While a decline in housing affordability and potential oversupply could weaken prices in the near term, the long term outlook remains attractive on strong demand,'' analyst Mahesh Nandurkar at CLSA Asia Pacific Markets wrote in a Jan. 25 note.

All of this seems realistic enough. What may well happen is a correction in the property market, but we need to think beyond this. Any such correction will take the impetus out of the middle class consumer growth sector, and cool things down a bit on the one hand, but this may merely mean that the growth impetus will then move onto the investment leg. This is something India badly needs to equilibrate the growth process. But this will mean an expansion in infrastructure and an increase in export oriented industries.

So it will solve some of India's issues, since it will take some of the pressure of the agricultural sector by providing work for some of the youngsters, but it will only add to some of the global imbalances issues as India begins to export more to pay for the technology it is now going to import. Good news for Germany and Japan, bad news for the US, the UK, France etc etc.