The Indian economy is “like a car from 15 years ago,” according to Aniruddha Joshi, executive director of U.K.-based Hirco Group, a developer of residential properties and mixed-use townships in India. Lacking the modern, highly complex asset securitizations that have sunk developed economies, its moving parts are still recognizable and easy to fix, he says. During an interview at the recent Knowledge at Wharton Real Estate Forum, Joshi discussed how the country’s real estate market has fared over the past year, and what lies ahead for Hirco and real estate investors.
An edited transcript of the conversation follows:
Knowledge at Wharton: You spoke with us during last year’s Real Estate Forum. What changes in the global real estate market have surprised you the most over the past year?
Joshi: Well, let me restrict my comments to India. I know more about India than I do about the global real estate market. But if you recall last year’s podcast, I had actually expressed a fairly high level of confidence in how I saw the Indian economy in general and [about] the Indian real estate market coming out of the recession. In fact, one of the visitors to your web site had written some comments about my podcast; I think he had some doubts about the confidence that I had [expressed]. But looking back on the past year, I think a number of comments that I made a year ago have fortuitously proved to be correct.
[In December,] the Indian government announced the last quarter GDP growth, which came in at 7.9%, and that certainly was a very pleasant surprise. I think people were not expecting the economy to [recover] at such a fast pace. The other thing that has been a surprise is the anticipated crisis in the commercial real estate market, which we haven’t seen. People have referred to it as the other shoe dropping. Even [during the Forum] this morning, there have been references to the commercial real estate situation. And I certainly don’t think we’re out of the woods. We may yet face some issues….
Knowledge at Wharton: On the whole, what do you think has buffered the Indian market the most?
Joshi: A friend of mine who has a mechanical bent said to me once that 10 to 15 years ago, you looked under the hood of a car and you knew pretty much how everything worked and how you could fix it. But now, of course, if you look under the bonnet, it’s all microprocessor controlled and software controlled, etc. So it’s very hard to make out what it is. In some ways, the Indian economy is like the car from 15 years ago — you can look under the hood and fix it. It doesn’t have the complexity, if you like, that the U.S. or European markets have. We didn’t have mortgage securitization; we didn’t have mortgage bank securities; we didn’t have any kind of asset securitization. Mortgages account for maybe six percent of [India’s] GDP, so it’s a very small proportion. In terms of complexity, it was probably a much easier economy to manage, to steer through this storm.
But of course you need the political will to do that and the knowledge to fix the problems. We have been very lucky, in that we actually had a government come in with a clear mandate. We have gone through a period of coalitions with the last election, [meaning there has been] a clear majority for the Congress party, which meant that we had the political will to address the issues. And we saw [for example] with the Satyam fraud case [that] the government acted very swiftly and fixed the issues.
And the other side of it, of course, is the knowledge. A lot of credit must go to the way the financial market regulators and the government have steered the economy through the crisis.
[Also,] the Indian economy is much more dependent on private domestic consumption. When an American consumer walks into Wal-Mart and buys something, the Chinese economy benefits. Whereas, when an Indian consumer walks into a shop in Mumbai or in Delhi and buys something, that’s where the Indian economy’s growth comes from. So having that major driver within control — private domestic consumption, as opposed to depending on exports and depending on services — has also helped the economy substantially. In fact, you see a kind of de-linking between the stock market and the real economy, because the stock market obviously depends a lot on capital flows in and out, portfolio investments, etc. So, the stock market was affected, but the real economy was shielded by these two factors — good management and basically a strong domestic demand base.
Knowledge at Wharton: Would you say there are still some lingering risks for investors in the market?
Joshi: Certainly. I think that the risks in India are probably very similar to the risks in the U.S., in that we are also faced with very high budget deficits, which is a major challenge. [Also,] because we are a net oil importer, we are susceptible to what happens to gas prices and energy prices, and growth has to be fueled by energy imports by and large. I think those are two potential issues to worry about.
Another area that investors need to be cautious about is obviously what is happening with regulatory changes. The country is becoming more transparent. In fact, a New Companies Act is coming in very soon, replacing something that goes back to British times. The government has also put forward a model for real estate regulation, which is long awaited and would introduce transparency into the market and much more certainty. But on the other hand, one hopes that it doesn’t simply just introduce additional bureaucracy as far as the real estate firms and developers are concerned.
Knowledge at Wharton: A number of investors, global real estate investors, talk about the red tape that’s involved when entering a market like India. Is that changing at all in your opinion?
Joshi: Well, I think yes and no. One has to realize that India is a very large country and it has a federal structure, which is very similar to the U.S. Therefore, you are subject to federal laws, or what we would call union laws. You’re subject to state laws. And you’re of course subject to the local municipality laws. And that leads to a lot of complexity and a lot of red tape. But that’s just a reality of the geography. It’s not like investing in Ireland or Belgium or somewhere like that — a much smaller country [and a] smaller economy.
Certainly, the bureaucracy poses a challenge not just for foreign investors, but also for Indian investors. But the advantage that Indian investors have is that they know how to navigate through the system — [they know] what is required to be done. And I think that’s where the value of a local partner for a foreign investor becomes critical.
Knowledge at Wharton: And what advice would you give to investors looking to move into the Indian market? What sort of key things do they need to keep in mind?
Joshi: I think the age-old rule of location, location, location applies to Indian real estate as much as it does to any [market]. In fact, because India is so large, the rates of growth are diverse. If you look at a state like Gujarat in India, for example, it has been growing for the past 10 years at a rate of 12% per annum in GDP. That’s a faster pace of growth than China. On the other hand, there are parts of India where growth rates have been much lower.
So, the country, the selection, the area that you focus on is critical. You have to choose strongly growing micro markets. You also have to look at states which have more transparent regulation, more understandable processes. Some of the states in the south and the west have much higher quality regulation and much higher quality processes. And you have to focus on finding a local partner who is experienced — has a track record, has a brand name — because Indians are very brand conscious, and when a foreign company enters India, they do not have a brand presence, so partnering with a local, strong local brand, is critical. So I would say these are three things to look at — the location, the choice of state and the choice of a partner.
And then lastly, obviously, the asset class. There are investment opportunities in India in a variety of asset classes: residential, commercial, hotels, hospitals — an area which is growing — educational establishments and service apartments. The opportunities are many and depend on the investor’s appetite and his investment thesis.
Knowledge at Wharton: And are there a lot of government programs right now that are helping regular citizens to afford housing and homeownership?
Joshi: Yes. The government has done quite a few things. First of all, a large chunk of the banking industry in India is actually owned by the government. Some of the major banks in India are owned by the government. And these banks typically have targets given to them by the government as to how much they must advance by way of mortgages to home borrowers. If you look at State Bank of India, which is the largest bank, their current target for mortgages is 20 billion rupees monthly. So, about almost half a billion dollars every month they’re expected to lend in mortgages.
The government is making credit available easily. The government has also come up with schemes for allowing mortgage interest to be written off of taxes. It has also come up with schemes which allow developers certain benefits when they build affordable housing.
Knowledge at Wharton: And are there certain patterns of behavior in Indian consumers that are changing, that are enabling more homeownership now than in the past? How are the government and the industry convincing people to put their money into homeownership, as opposed to renting, for instance?
Joshi: I don’t think that’s such a challenge in India because traditionally, Indians have viewed property and gold as two key investment asset classes. And they’ve always had them in their portfolio. If anything, it’s only recently that Indians are getting used to the idea of buying stocks or buying bonds. So property and gold have always been very important investment avenues. But there are certain [key] trends, especially the development of the nuclear family, because traditionally Indian families have clustered together in large groups: aunts, uncles, grandparents, etc. But increasingly with urbanization, you get the husband and wife and two kids type of family setting where you do need a home of your own. And I think that is driving quite a lot of the growth — the development of the nuclear family and the migration to the cities. Indian cities are growing rapidly. And of course people, when they move from the villages to the city, want to buy a place to stay.
Knowledge at Wharton: What about the reverse direction? I know that there are some programs that are working towards affordable housing in rural areas. Is Hirco involved in any of those kinds of projects? Or do you mostly stick to the metro areas and to the large cities?
Joshi: Hirco actually is focused on what I would call an area in between rural and urban, because, you know, we try to be near the urban metros simply because we want to leverage — and our customers want to leverage — the existing connectivity that the urban centers have — for example, airports, railway stations, roads, seaports, etc. But at the same time, we tend to stay away from the city centers or the city proper, because obviously we can do large green field projects well outside the city limits. So if you look at our project in Chennai it’s about 60 kilometers from downtown Chennai. It’s in a virgin green area 500 acres. But it has the advantage of being able to leverage the existing infrastructure of Chennai, [including] the second airport that’s coming up, the national highway network. If you go right out into the country, obviously you’re faced with challenges of infrastructure.
Knowledge at Wharton: So infrastructure would be the major [concern] — where the infrastructure stops, the development stops, in a sense?
Joshi: Effectively. That’s probably the biggest bottleneck as far as the Indian economy is concerned. The quality and the availability of public infrastructure — everyone recognizes that as the major challenge. Even in the major Indian cities, roads, power, sewage — all are challenges.
Knowledge at Wharton: And aside from infrastructure, are there any other major challenges you foresee for the industry in India?
Joshi: There’s one area that needs to be addressed, which is the recognition by the government of real estate as an industry, which would make things much easier. The recession, ironically, has actually helped the real estate industry in India because it has brought down the prices of cement, steel and other essential commodities that go into the construction business. And I think that’s going to be a key area — what happens to oil prices and what happens to the prices of these commodities.
Knowledge at Wharton: Any thoughts on the outlook for 2010 for the industry in general?
Joshi: Well, I came back from Mumbai on Tuesday, and on Sunday night I was at dinner at a restaurant. And I actually had someone come up to my table and say, “Are you guys done because we’re waiting for a table.” That tells you about the state of the economy. When you are in Mumbai, you feel, “What recession?” You know, traffic is bad, people are out buying stuff. Everyone feels very confident. The stock market is booming. Companies are lining up for IPOs. So I’m very positive as far as 2010 is concerned — as long as something doesn’t happen on the international front, such as with oil prices. I think certainly the domestic economy is positioned very well to continue on its path of growth.
