Removing bottlenecks could see Indian real estate soar

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Property developers in India, analysts agree, need to raise large sums of money to ease the shortage of everything from office towers, warehouses and shopping malls to apartments, multiplex cinemas and hotel rooms.

The financing itself shouldn’t prove very difficult.

At $400 billion a year, domestic savings in India now represent a significant source of funds for any profitable enterprise, including construction. There's also ample interest globally, including from hedge funds and buyout specialists.

Lenders such as ICICI Bank Ltd are seeking billions of dollars from investors in North America, Europe, Japan and the Middle East to invest in property projects in India.

Yet, Indian real estate can absorb a lot more capital than is currently flowing into it — if only policy makers can fix a few basic loopholes in the laws governing property titles, taxation and creditor rights.

Failure by lawmakers and regulators to set clear rules on property rights and ownership will only widen the demand-supply gap that’s pushing rents to an intolerably high level.

Office rents in Nariman Point, Mumbai’s central-business district, rose 14 percent from the previous three months in the first quarter of 2008, Cushman & Wakefield Inc., a real-estate services firm, said recently in a research report.

At Rs 550 ($13) per square foot per month, Nariman Point is already as expensive as Singapore's financial district.

And even then, there's no shortage of demand: The average vacancy rate in Mumbai’s central-business district was as low as 1% last quarter.

Bankruptcy code

The shortage isn't limited to office space: Industrial property rents in Mumbai rose at the fastest pace in the world in 2007, New York-based Cushman said last month.

Among the bottlenecks affecting the flow of debt capital into Indian real estate is the absence of a good bankruptcy code.

A developer who takes a loan from a state-run bank would typically mortgage the property to the lender and agree to deposit part of the rents paid by tenants — or a share of the purchase price paid by the buyers — into a special account. The money held in escrow is to be used only to service the debt.