Hirco Group’s Aniruddha Joshi: ‘Long-Term Drivers of India’s Growth Have Not Changed’

What impact has the global financial crisis had on India’s real estate market? According to Aniruddha Joshi, executive director of Hirco Group in Britain, which develops residential properties and mixed-use townships in India, the credit crisis has affected portfolio allocations. Still, Hirco’s strategy toward property development in India will not change, Joshi told Knowledge@Wharton in an interview during the recent Knowledge@Wharton Real Estate in Emerging Markets Forum. “We believe that the long-term India story and the fundamentals are still intact.”

Knowledge@Wharton: What is your view of the world financial crisis and its impact on real estate? Since Hirco is active worldwide, but you also have significant operations in India, could you tell us about the impact that the crisis has had on Indian real estate?

Aniruddha Joshi: The crisis that we have been experiencing over the last several months can be described as a credit market crisis. But credit drives a lot of activities including real estate. So it is not really a real estate market crisis in the sense of oversupply or a bubble, it is just a credit market crisis that has had an impact on real estate. The crisis is essentially Western in origin — it began in the U.S., UK and parts of Europe, and it was transmitted through certain conduits to the rest of the world. Let us look at those conduits that transmitted this crisis to India and what they mean.

Clearly, one major conduit was portfolio allocation. If the Western markets are dropping, companies have to sell their holdings in other countries in order to rebalance their portfolios. So a lot of selling pressure exists as far as the Indian equity markets are concerned. This produces the opposite of what is called the “wealth effect” — people feel poorer. Even though they may not be poorer, they feel poorer. Therefore, they are less willing to commit to long-term purchases of big-ticket items. That is one conduit.

The other conduit — which has impacted India relatively less — is the foreign ownership of banking assets. For example, if Lehman Brothers in the U.S. is in trouble, then in order to generate cash it will have to sell its assets, wherever they may be in the world. If it has a lot of assets in India, then it would sell those, which would drive prices down.

Fortunately, foreign banks do not own a significant proportion of banking assets in India. Most banking assets are in the hands of Indian banks. What becomes critical is looking at how the Indian banking system is operating. A lot of people find it surprising that even today banks in India are happily lending money against property. The mortgage market is working quite well.

The ownership of Indian banks is critical because a number of the major banks are owned by the government. Banks therefore act as channels for implementation of government policy. So the Reserve Bank, for example, was able to persuade the banks to drop their interest rates by as much as 1.5%. What you have is a domestic credit market which temporarily did have some issues but which now appears to be functioning smoothly again and is in fact lending money to domestic borrowers.

Knowledge@Wharton: You don’t see the kind of credit squeeze that you see elsewhere in the world, especially in the U.S.?

Joshi: You do — but you see it in a different way. You see it with corporate borrowers because Indian companies have been borrowing money abroad over the last few years since the market opened up. The ability of Indian companies to borrow in Western markets has declined dramatically. Many of them are turning to domestic markets to raise money.

Generally speaking, the Indian banking system has been managed very conservatively. If you look at, for example, the asset-liability ratios for the banking system, assets are less than 80% of liabilities, which means the banking system is able to finance all its assets through its customer deposits. If you compare that with, say, the UK, the figure is 200%. That means half of the assets of British banks are funded through borrowing in the interbank market. As a result, they are much more affected by what happens in the credit market than Indian banks are.

Knowledge@Wharton: In addition to these financial factors, in recent times we have also seen a political dimension with terrorist attacks in Mumbai. The political effects of those attacks have included the resignation of the Home Minister and also the Chief Minister of Maharashtra. What impact are these factors likely to have on investment, including real estate?

Joshi: I do not think there will be any significant impact on investment that originates from Indian investors. Clearly, foreign investors will think about whether they want to invest in India or not. Even prior to these incidents, foreign investment was drying up pretty fast because of the credit problems in global financial markets. I do not think that what happened with the terrorist attacks will exacerbate what was already a pretty bad situation as far as global investment is concerned.

We have had terrorist attacks in Mumbai in the past — in 1993, and then again in 2006. What is different about the attacks this time is that the earlier attacks were typically on trains, buses and vehicles used by the common man. And if I was a cynic, I would say that the reaction was muted. Now, you have had attacks on the Taj and Oberoi [hotels] which are the watering holes of the elite, including the media. Although I might sound a little callous, in terms of body count this attack has not been as bad as the previous ones. Yet, the response from the population, really driven by the media, has been quite angry and quite strong.

Hopefully, the response will lead to something creative in terms of an improvement in the situation in the policing and in the way that these things are handled. But the reality is that Indian cities are under strain. Bombay, a city of 19 million people, has only 7,000 policemen protecting it. You have a very large population which is increasingly putting strain on not just water, electricity, sewage and the roads, but also on public services like police, ambulance and so on.

That speaks to a lot of issues around planning. To give you one example, I have a one-acre property where I live near Philadelphia. I was thinking of dividing it into two and building two small houses, one each for my son and for my daughter. So I talked to the local township office and they said, “No, the lot size and the zoning in your area is one acre per house.” What they do through those regulations is to determine the potential demand for public services. In Indian cities, you do not have that kind of capacity planning. Immigration into the cities is rampant, and you can have 10 people living in a room, illegal construction and so on.

One of the areas that will need to be tackled is how to balance the government’s obligation to provide public services with the strain that we as citizens through our own decisions put on those various services. If the public anger that erupted after the terrorist attacks leads to some soul searching, and some improvement in these areas, that would be very good for the country in the long run.

Knowledge@Wharton: Based on the financial and political environment you described, how do you see Hirco’s strategy going forward? Where do you look for new opportunities?

Joshi: The Hirco strategy is not going to change. We believe that the long-term India story and its fundamentals are still intact. The long-term drivers of growth in India have not changed. They are no different today than they were two months ago or three months ago. They are not going to go away easily. They are well known: They include the rise of the middle class, the rise of a knowledge-based economy, greater deregulation, a greater demand for Western lifestyle and affluence.

We will continue to focus on our basic strategy, which is building complete, mixed-use townships near large metros in India. Currently, we have two projects, one near Chennai, one near Mumbai. Other projects that we are currently evaluating include Ahmedabad, Pune and Nashik. If you look at demand for real estate in India, especially on the residential side, typically you have three categories of buyers. You have what we call primary demand — people that are looking for a home. You have investors — people who want to include real estate in their portfolio as a long-term investment for rental income or for capital appreciation. And you have speculators.

These short-term ups and downs impact the third category — that is speculators. But the long-term investor demand as well as the primary demand, both are intact. The other thing that we notice is that there is what I would call a flight to quality. When you buy a home in India, typically you buy off of plan, which means you are trusting your money to somebody in the hope that that person or that company is going to build the home and deliver on time and the quality that you expect.

In the last few years, the industry has seen the entry of a lot of new players who have neither the track record nor the experience for delivering on projects. In tough times like these, we expect that a number of projects will remain unfinished or be abandoned, which means the customer is increasingly going to be choosy about the kind of developer with whom he or she is willing to invest or entrust their money.

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