Paran Balakrishnan: Cashing in on the Indian land rush

DLF Universal is an obsessively low-profile New Delhi company that is hoping to make history in about six weeks. It is taking advantage of India's red-hot real estate market and launching an IPO that aims to raise about US$3 billion ($4.85 billion).

That will be record-breaking in more ways than one. For starters, it will be the largest IPO ever in the Indian markets. Also, it will send DLF zooming from near obscurity and turn it into one of the world's largest property developers. It will also catapult DLF's chief shareholder, Kushal Pal Singh, 77, to the top of the league tables as the richest man in India (he could be worth about US$20 billion if DLF's plans are not derailed by the yo-yoing sharemarket).

DLF is reaping the dividends of an amazing, far-sighted bet it took almost 30 years ago. Figuring that Delhi would grow southwards, it bought vast tracts of what was then farmland far from the city.

Today, this one-time farmland is a developer's dream. Gurgaon is a sprawling suburb of glittering office towers and condominiums and the closest thing that India has to Shanghai's fast-growth Pudong district.

But DLF isn't the only real estate developer that is putting together multi-storey dreams. As the Indian economy booms, the real estate business has been growing in leaps and bounds. That means more office blocks, more malls and, of course, more condominiums and homes for the growing middle class.

The foundations of the Indian economic boom have probably been laid by the extraordinary rise of the software and business process outsourcing businesses in the last decade. These people-hungry businesses, which are barely a decade old, are still growing at anywhere between 30 per cent and 40 per cent annually and they are constantly sucking up huge numbers of young college graduates.

Late last year, it was reckoned that Infosys and TCS, two of the top infotech companies, were hiring about 125 people every day till the end of the financial year and there's no sign of a slowdown yet. In fact, TCS has just said it will be hiring about 30,000 people this year (that includes some hires outside India).

What does that mean for the real estate industry? Consider that every new hire needs about 7sq m to 9sq m and its not hard to understand why the infotech firms are on a non-stop construction spree. Also, as land costs rise, these companies are spreading out from places like Bangalore, Chennai and Gurgaon to smaller cities where its also easier to hire college graduates at throwaway prices. According to real estate consultants Cushman & Wakefield, the infotech industry alone will need an additional 11,000,000sq m of office space in the next five years.

If that's not enough, perhaps it's time to go shopping. The Indian retail sector which is one of the most fragmented in the world, is poised for a change and a glitzy new look. The developers are building shopping malls on an almost unbelievable scale. There are seven within a short distance of each other in Gurgaon and more are on their way. Now mall mania has spread to the smaller towns and one estimate is that about 250 will be constructed in the next two years.

That's why firms like DLF, Unitech and the Ansals in Delhi, the Hiranandanis and Rahejas in Mumbai and Prestige in Bangalore are putting together the steel and concrete dreams at a never before speed. Also, foreign companies are now figuring how to get a piece of the action. Take, for instance, the Emaar Group (owned by the Dubai Government and said to be the world's largest property developer) which in December tied up with a local firm and said it would invest US$500 million in a slew of Indian developments.

Emaa's investment comes in the wake of new rules that have made it easier for foreign companies to invest in the real estate sector.

At another level, Indian and foreign financial giants which in earlier years would have been wary of putting their money into the unregulated real-estate business are now making up for lost time. Kotak Mahindra, a Mumbai-based financial powerhouse, has just put together a US$100 million venture capital fund. Other high-profile entrants to the Indian real estate scene include global financial giants AIG, Morgan Stanley and the highly conservative Calpers (California Public Employees Retirement System) which kicked off its fund last month. PricewaterhouseCoopers said about US$7 billion could be invested in the Indian real estate sector by foreigners in the next two years.

It goes without saying that land prices have been soaring stratospherically in the past two years. In percentage terms, it's probably climbing most swiftly in southern India in cities like Bangalore, the home of the software industry, and other places like Chennai and Hyderabad. But the headline deals have been taking place in Delhi and Mumbai. DLF bought one chunk of land in central Mumbai for about US$140 million recently.

What's the downside to all this action? Could the Indian real estate sector come crashing to earth suddenly? Interest rates are climbing and that means home loans are getting slightly more expensive. And certainly speculators are pushing up prices which are moving into entirely new realms, especially in places like Delhi and Mumbai. Also, spurred by the boom, small construction firms which don't have very firm foundations are turning ambitious, putting together oversized projects.

If that's not enough, the difficulties of buying real estate in India aren't about to vanish overnight. Land titles are often sketchy and that makes it tough for big developers and small buyers. Black money on which taxes aren't paid are still an essential component of many land deals, partly to avoid taxes that can vary from 7 per cent to 13 per cent on any sale. The result is that Indians usually do not trade upwards once they've bought a house. The difficulties are so great that nobody wants to go through the entire process a second time.

Sharemarket investors are certainly betting heavily on the real estate barons, perhaps taking heart from the old maxim: Invest in land, they ain't making any more of it and definitely not in India.

* Paran Balakrishnan is the associate editor of the Telegraph, Kolkata.