I just returned after spending a few weeks in New Delhi, India. The incredible pace of growth in India inspired me to see if I can participate in the growth by investing. India does not allow direct investment in equity markets for non-resident Indian citizens (and definitely not not foreigners). I do invest in US-listed ADR (like Infosys) and exchange traded funds (or ETFs like IFN) but I wanted to invest directly. One option available is real-estate.
The numbers when it comes to real-estate just don’t add up though. Real-estate in India is incredibly expensive and not just by Indian standards (with per capita GDP of US$ 700 per annum). Here are some numbers:
- Condos in New Delhi, India: 2-bedroom, 1000 sq ft apartment for $200,000. [$200 per sq ft] (Source: 99acres.com)
- Condos in Chicago, USA: 2-bedroom, 1000 sq ft apartment for $400,000 [$400 per sq ft] (Source: Google Housing)
Now, remember that the median income in Chicago is 50 times more than that of New Delhi. Why Chicago? Because New Delhi can grow in all 4 directions much like Vegas can (and Chicago can in 2 directions) as compared to Manhattan and San Francisco that are geographically restricted.
Next, look at agricultural land prices.
- Agricultural land in Faridabad, Haryana (adjacent to New Delhi much like New Jersey is to New York): $250,000 per acre (source: 99acres.com)
- Agricultural land in New Jersey: $12,000 per acre (source: USDA, and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)
One may argue that Haryana is too close to Delhi. Land in Dehradun is available at only $100,000 per acre while its much cheaper at only $20,000 per acre in villages in Himachal Pradesh. All at prices way higher than Florida or California. Commercial land is even more expensive.
The issue of population density pops up every time I discuss this. Let me be clear, the population density of India is much higher than USA. But, when you compare New Jersey and India – New Jersey is actually slightly more densely populated. And New Jersey is much more densely populated than Haryana, India.
The next issue that comes up is one of regulation and availability. Yes, real-estate is regulated in India with laws that prevent easy buying and selling and land records that are poorly maintained. This simply means that the prices can be artificially inflated in the near term (that could last several years) but in the long-term must return to rational values.
Will someone please explain this to me? How can farmers that make less than $1000 per annum continue to own land that is valued (notionally) at several $100K? Are the low rental yields (2-5%) indicative of the bubble?
Update: Today, Wall Street Journal writes about a trader that made billions betting against the real-estate bubble.
“Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond,” Mr. Paulson says. “Mortgage experts were too caught up” in the housing boom.
In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn’t enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, “you can’t short houses.”
I heard the same arguments repeatedly in India – house prices never go down etc. We shall see!
Update (Oct, 2008): Time reports Mirroring the US, India’s Real Estate Sector Melts Down – here is excerpt:
Over the past few years, increasing demand had pushed up prices, with speculators jumping in to further inflate the market. Eventually, inventory piled up when buyers refused to pay unrealistically high prices. “So many transactions were taking place between speculators and investors that no one bothered to find out what the end user, the family who would eventually live in the house, would be willing and able to pay,” Shukla says.