Despite sharp rises in property prices, strong demand will ensure Indian real estate avoids a Dubai-like collapse
By Chitra Somayaji
(Bloomberg) — India's property market, where prices have risen as much as 29 percent in major cities, will escape the kind of collapse that afflicted Dubai, said Keki Mistry, incoming head of the nation's biggest mortgage lender.
"Dubai was very different from India," Mistry, who was appointed on Dec. 4 as chief executive officer of Housing Development Finance Corp. (HDFC), said in a Bloomberg-UTV interview. In "India, the property market is largely end-user based; in Dubai, the property market is largely investor based."
Central banks and governments across Asia have been taking steps to rein in property prices this year on concern speculative money inflows will generate asset bubbles. Some areas in China and India may become the "next Dubai" because of debt-fueled property investment, fund manager Mark Mobius said this month, citing Mumbai and Shanghai.
"It wouldn't be a country-wide situation; isolated pockets of disaster because of over-spending and over-leveraging," Mobius, who oversees more than $30 billion of emerging-market assets at Templeton Asset Management Ltd., said in a Dec. 2 interview with Bloomberg TV in Hong Kong.
Dubai, the second-biggest sheikhdom in the United Arab Emirates, went from being the world's best-performing property market to the worst within a year, underscoring the challenge central bankers face in ensuring rapid credit growth doesn't lead to bubbles.
Mistry, 55, said gains in Indian property prices have been driven by demand for homes in a nation with an estimated shortage of as many as 30 million units.
HDFC's shares, which have gained 73 percent this year, fell 1.3 percent to 2,573.45 rupees at 12:06 p.m. in Mumbai.
'Not a Luxury'
"Housing in India is very different from housing in the U.S. or U.K. or Dubai," Mistry, currently vice chairman and managing director of the Mumbai-based lender, said in the interview with Bloomberg-UTV. "The penetration level is so very low that it's a huge requirement, it's a need, it's a necessity, it's not a luxury."
The Reserve Bank of India in October said it would ask lenders to set aside more funds to cover defaults on commercial real estate loans following a "large increase" in credit to the sector in the past year. Home loans increased at a slower pace than overall credit to real estate, limiting the risks of a bubble in residential prices, Mistry said.
The value of homes climbed as much as 29 percent in parts of India's commercial hub of Mumbai this year, and as much as 23 percent in segments of New Delhi, according to data from CB Richard Ellis.
Dubai Home Prices
House prices in Dubai, which dropped by more than 50 percent from its peak, will fall another 30 percent as new supply adds to a glut of homes, according to UBS AG.
Dubai World, a state-owned holding company, said Dec. 1 it is in talks to restructure $26 billion of debt, including a $3.52 billion Islamic bond of its property unit Nakheel PJSC due Dec. 14. Four other companies may join Dubai World in restructuring debt that could take total value of problem loans to $46.7 billion, Morgan Stanley said in a report Dec. 8.
Mortgages in India account for 7 percent of the nation's gross domestic product, compared with 80 percent in the U.S., Mistry said.
Residential supply in India is failing to keep pace with demand as rising incomes make housing more affordable, Mistry said. The cost of a home, on average, is about 4.8 times annual income, compared with 20 times in the 1990s, he said.
"The shortage of housing in India is massive," said Mistry. "As long as we are reasonably sure that the fuelling, the increase in real estate prices, has been brought about by the end users, and not by investors, not by speculators, I wouldn't call it a bubble."
To contact the reporters on this story: Chitra Somayaji in Mumbai at firstname.lastname@example.org