The Shocking State of India's Real Estate Market

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Last month, I called the Taj Hotel chain, inquiring about the monthly rent for a tiny, 650-square-foot studio in a nice, corporate service building in the southern part of Mumbai. After reaching the booking agent, I was casually informed that the rate would be 4.5lacs per month, or 450,000 rupees -- or just over $10,000 per month.

She then asked me whether I was interested.

Yes -- please bill "The Motley Fool"
I was speechless. In a country where the average GDP is just more than $3,000 per year, how can an organization justify charging 3.3 times per capita GDP in a single month for one tiny studio apartment? That's analogous to a New York City studio apartment going for about $155,000 per month. Even in the most opulent buildings in the fanciest part of town, roughly zero people would pay that. Yet in India, they can and do.

When you spend time reflecting on this, you realize very quickly why so many Indians live in extreme poverty. Apartments in Taj Hotels are obviously an extreme example, but, in general, housing capacity in select cities runs extremely thin. This reality is only exacerbated by the vast canyons between those in India who "have" and those who "have not."

Very expensive by any standard
I'll be leaving the States in very short order and moving myself to India's thriving megalopolis, Mumbai. You can read my announcement article here, but essentially, I'll be in country for several months to learn as much as possible about the country.

One of my first missions is to secure housing. Even for an American earning a very healthy income and living in not-so-cheap Washington, DC, meeting rent in Mumbai is not a trivial affair.

The rates
I've been working with a few agents to find more "reasonable" accommodations, and this is what I'm finding. My only stipulations to these agents were that the place be 1-2 bedrooms, in a nice neighborhood, and in a reasonably nice building. That is all. Here is a sampling of what they found for me:  

Building BRs Sq. Ft. Rent in INR Rent in USD Rent x 200
Bandstand Apts 1 600 180,000 $4,000 $800,000
Valentina 2 1100 150,000 $3,333 $666,667
Nishat 2 1100 125,000 $2,778 $555,556
Shyam Niwas 3 1250 165,000 $3,667 $733,333
Ramakrishna Sadan 2 1200 150,000 $3,333 $666,667
Harmony 2 1000 125,000 $2,778 $555,556
Planet Godrej 2 1350 150,000 $3,333 $666,667
Kanti Bldg 1 650 225,000 $5,000 $1,000,000

There are a few things to note here. First, there is undoubtedly some chicanery involved in these numbers. The fact is foreigners don't pay what natives pay for things -- many foreigners, in fact, complain that they get screwed simply because they aren't Indian. I'm not sure how true that is, but I'm half Indian -- perhaps I only deserve to get half-screwed. Right?

Price to value
Native or not, I still can't help but marvel at these figures. These aren't hottest buildings in the city. They aren't even in the nicest neighborhoods. Mumbai is undoubtedly the most expensive city in the entire nation, but still. Either Mumbaikars (natives of the city) need to start building some new condos fast, or they're paying prices that are drastically lower than I'm seeing. The numbers simply don't add up.

Looking at that last column -- the monthly rent multiplied by 200, a useful shortcut to understanding whether you're looking at an inflated condo price here in the States -- I'd be inclined to suggest the presence of a bubble, especially considering that the average Indian earns about 1/16th what the average American does. But in this case, I don't think that is the reality. My own relatively uninformed opinion actually suggests that the opposite might be true.

There's such a massive amount of demand, and such a massive shortfall of supply, that barring a huge onslaught of new development, prices could even continue to intensify, thanks to the faster rate at which India is generating wealth. Plus, Mumbaikars have been used to these types of prices for generations -- I doubt there's any sticker shock. It's no surprise that according to at least one source, the Indian housing market is one of the fastest-growing in the world. SBWire reports that the luxury housing market is expected to grow nearly 30% per year through 2013.

How Fools can take advantage
Developers will be able to capitalize off this trend if they do business intelligently. Human capital costs are so incredibly cheap that one would assume that margins are pretty healthy on construction -- assuming steel prices remain reasonable. Unfortunately, I'm not aware of any Indian construction giants available to American investors. But players like Tata Steel and ArcelorMittal (NYSE: MT  ) should be working with a massive headwind under these conditions.

Investors could also try to play India's potential mortgage growth. I'd consider investigating mortgage banks such as HDFC (NYSE: HDB  ) and ICICI (NYSE: IBN  ) . Lending practices (especially in the home mortgage business) are still relatively conservative in India, and I think these banks and others should be able to sustainably capitalize on the boom in housing.

One Fool's story
As for me, I'm still on the hunt for the perfect apartment. But I'll let everyone know what I continue to find. You can keep up with this mission and all my other Indian adventures by following me on my official Twitter feed right here.

Fool Nick Kapur will be reporting live from India very shortly. You can join him here for free for the remainder of his journey. He owns none of the stocks mentioned above.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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