The Shocking State of India's Real Estate Market

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.


Read/Post Comments (17) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2011, at 2:09 PM, deepakshenoy wrote:

    Nick,

    1) Check out www.magicbricks.com or www.99acres.com - I see fully furnished 600 sq. ft. studios in south mumbai for 45,000 rupees per month. South Mumbai is very expensive - you can find places in other parts of town - Andheri/Lokhandwala, Wadala, Bandra etc. for substantially lesser.

    I lived in Navi Mumbai which is a suburb (about 40 km. away, about as far as Bethesda from DC. Nice place, much less crowded, but a little far away from town and we got a 1800 sq. ft. apartment for Rs. 20,000 per month.

    2) Real estate in Mumbai and Delhi is ridiculously overpriced. It has little to do with supply, a lot of apartments are bought by investors and hoarded. Mumbai is terrible for renting because it has always been so - you pay 2 months of rent as broker commissions, you pay upto 10 months of rent as a deposit, you get really bad construction even if you pay a lot, etc.

    3) Real estate's gone through a correction - most Indian listed stocks are down 75-80% from highs. The business is very opaque. Companies are bleeding after tons of accounting gimmicks; even our central bank has allowed banks to hide defaults by real estate developers by allowing them leeway in restructuring loans.

    4) You're seeing interest rates in India going up. A sensitive like RE is going to get really badly hurt.

    5) HDB only sources mortgages; the loans are held by it's parent called HDFC (without the "bank" suffix). IBN on the other hand has reasonable RE exposure.

    All the best with your search!

  • Report this Comment On January 14, 2011, at 2:00 AM, nagpalmanoj wrote:

    Nick:

    A very informative and lucid article. Since I have decent enough insight into the real estate market I am taking the liberty of sharing some data to make your search easier.

    1. The average rentals in a good location (Bandra, Prabhadevi) for a good unfurnished apartment in Mumbai are in the range of Rs. 80-Rs. 100/- per sq ft. For a fully furnished apartment the rentals would be around Rs. 130/- per sq ft.

    2. For a premium marquee apartments similar rates would be in the range of Rs. 125-175/- per sq ft.

    3. The rates you have quoted are fairly off the mark and as you have rightly pointed out that it may be due to the fact that as a foreigner coming to India, the rates quoted to you are off the mark.

    4. Another aspect to hightlight is that the standard thumb-rule used in Mumbai is 400 times the monthly rent to assess the property outright sale price!!! Whoa!!!

    5. www.magicbricks.com would give you more realistic rental prices (which again are negotiable).

    If you need any support, would be happy to help.

    Cheers and Welcome (back) to India!

    Manoj

  • Report this Comment On January 14, 2011, at 6:15 AM, dag154 wrote:

    The idea correct but the numbers are questionable.

    Building and management costs are cheaper in India that in the US, but certainly not by a factor of 200. Since the clients are foreign, the income of Indian nationals is irrelevant.

    Safari lodges in Africa cost between 300$ and 3000$ per night. Does that mean that a safari lodge in a US national park would cost 250,000$ per night? Of course not.

    To get the right numbers (for what they are worth) you should reconsider the equation.

    Assume for the sake of argument that in India building is 40% cheaper and management is 60% cheaper, then the Indian prices should be doubled in order to do a like-for-like comparison with the US.

    You would get numbers similar to those in NYC.

    Other than that I do agree with the article.

  • Report this Comment On January 14, 2011, at 11:38 AM, anuragupta wrote:

    Nick,

    Nice article.

    Mumbai real estate is not representative of Indian real estate though. It has always been expensive as it has been India' most industrialized state with highest population density. The scenes from slumdog millionaire - the movie are characteristic of Mumbai region and not the rest of the India.

    Anurag

  • Report this Comment On January 29, 2011, at 11:05 AM, navinp wrote:

    Nick,

    Point 1: The total number of rooms (hotels/motels) in whole of India are less than the number of rooms in Las Vegas.

    Point 2: There are business events, delegations, trade fairs been organized every day in cities like Mumbai.

    So, demand-supply is the factor in the equation, which builders and other influential community is trying to exploit.

    A middle class Indian or lower is not the target market but expats like yourself.

    In a country where 80% of the people earn less than $2 a day, it is shameful to see the state of real-estate market.

    Navin Pathak

    Senior Parnter

    www.entryindia.com

  • Report this Comment On July 06, 2011, at 3:02 PM, rahumish45 wrote:

    Super article Nick. I liked it so much that I put up an excerpt of it on our little Indian real estate blog. We provided a link there as well so loads of people can enjoy your write up. Bring it on.

    Here is the link:

    http://www.indianrealestatefordummies.com/2011/07/worth-read...

  • Report this Comment On July 13, 2011, at 12:38 AM, rishi69 wrote:

    A lot of the problems with real estate in India is due to the unaccounted and illegal money of politicians, govt. servants and industrialists finding a parking place. Think of the typical 30 year old professional, working for India's largest companies and drawing a princely salary of Rs.25 lakh per annum ($60,000), you can still not afford to buy a two bed room apartment for your wife and kid within 25 kms of India's largest cities!

  • Report this Comment On November 17, 2011, at 7:55 AM, chandrabhandeora wrote:

    for the purpose of selling or buying property in mumbai or other cities of maharashtra , the company perfectghar provides you the best information about real estate business.

    for more information please visit to : http://www.perfectghar.com

  • Report this Comment On April 27, 2012, at 9:25 AM, jonaestate wrote:

    That was great! Nice post! keep up the good work!

  • Report this Comment On September 24, 2012, at 1:11 AM, rupyafan wrote:

    Dear Nick,

    This is an awesome article.

    If you get a chance, kindly update the $/INR rates as per present.

    You can check latest rates here http://www.remitmoney2india.com

    Do you think will Rupee reach back to its under 50 levels?

    Thanks,

    Rupyafan

  • Report this Comment On September 28, 2012, at 4:01 AM, saanvisharma20 wrote:

    Mumbai is economical capital of India and the property rates in Mumbai are highest as compare to other metropolis cities in India.you really shared very informative article here.I would like to suggest here real estate portal where anybody can compare property rates in different cities.Visit http://www.thecompletepropertystore.com/

  • Report this Comment On October 09, 2012, at 3:01 AM, rakheshnarula wrote:

    hi

    its a best site for searching commercial/aparments Project.keep it up.Please visit:- http://www.techoneearth.com/

  • Report this Comment On October 31, 2012, at 12:20 PM, sakkal wrote:

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  • Report this Comment On January 02, 2013, at 12:59 AM, lipsaherry wrote:

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  • Report this Comment On January 05, 2013, at 3:52 AM, sichermove12 wrote:

    There is one more good property portal in India visit http://www.sichermove.com

  • Report this Comment On January 17, 2013, at 4:27 AM, Maddy4971 wrote:

    Studio apartments have fast gained popularity in the Indian market. However, the reality portrayed is definitely quite saddening as buyers are being fooled like anything. The article is definitely an eye opener for those who are looking forward to invest or rent out a studio apartment.

  • Report this Comment On January 20, 2013, at 10:38 AM, amisha77 wrote:

    Even i have heard http://estanite.com is also an good online real estate portal. It from the same company who owns http://deviceadda.com

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