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Big, Big PocketsSala Kannan
A trip to a real estate agent's office in Chennai, India, was quite an eye-opener. We arrived five minutes early for our appointment. Outside the agent's office building, we saw a man in white pants and a white shirt. He was lazily pacing up and down, his white flip-flops slapping loudly against his feet. I rolled down our car window and asked him, "Is this Mr. Natesan's office?" "Natesan, yes," he replied in English. "Is he in? He's supposed to show us some properties." "Myself Natesan." OK, I thought to myself, flip-flop man here is our real estate agent. Natesan was a small man with an ample handlebar mustache. And his white flip-flops were at least two sizes too big. And really loud. "Follow me, madam, I show you land," he said. "Sure, but don't call me madam." "OK, madam," he replied, and flip-flopped to his motorbike. In just four decades, India will be the most populous nation on Earth. India's middle class alone will be 983 million strong by 2015. And already, one half of India is under the age of 25. Now that is a powerful dynamic. And India's demographics alone will be its greatest asset. This is a young and increasingly wealthy nation. Natesan will be selling a lot of houses. "See that house, madam? Big cinema star living there," Natesan explained as we stood on an empty plot of land under the afternoon sun. Many wealthy Indians and Indians abroad have bought land or built beachfront houses in this part of Chennai. "Everyone got big, big pockets, madam, plenty money. Business being good." Big pockets, indeed. India's net income has doubled in the last 10 years. Everything is more affordable. In fact, India is the second largest mobile phone market on Earth. It is also home to the world's second largest two-wheeler market. "Past years, clearing title not important, madam. But now we are being very careful. Lot of foreigners coming to live here." Natesan explained as we walked a sandy pathway by the beach to another property. In recent years, Natesan's trade has changed. Unclear titles, poor building standards and ridiculous tenancy laws have historically plagued Indian real estate. That is why foreign investors have stayed away. Today, Natesan maintains better records and goes to great lengths to ensure that the title on a property is clear. The government is even considering computerization of land records. Foreign direct investment is now allowed in real estate. And the sector is truly coming of age - financial institutions have filed for permission to introduce $1 billion worth of real estate mutual funds in India. Does all this activity mean the Indian real estate market is in a bubble? Scarred by the devastating collapse of the dot-com era, we in the United States like to cry bubble at any asset that's appreciating in value. But there is a difference between a bubble and a robust market. Let's compare India with the United States. Are Indians consuming more house than they can afford? No. In India, the ratio of the total value of mortgages to the GDP is only 2%, whereas it is 52% in the United States. That means in the United States, for every $100 we produce, we owe $52 as mortgage. Indians, however, owe just $2. Has Indian home buying sent prices through the roof? Hardly. Over the last 10 years, real estate prices have almost remained the same in India, with the exception of a few large cities like Bombay and Bangalore. Median real estate prices in the United States, however, have risen nearly 15% in the last 12 months alone. Are Indians taking out mortgages simply because rates are low? Interest rates are a healthy 4.3%, an 18% decrease from 2001. In the United States, interest rates were slashed a whopping 83% since 2001. Indians are using higher incomes (far more than lower rates) to buy homes. The Indian housing market, unlike the United States', is not thriving on an artificially propped-up fiscal structure. Growth in the housing sector has been mainly income driven and only partially interest-rate driven. Indian net income has increased nearly 100% over the last 10 years. As Marc Faber puts it, "The most overlooked asset class is Indian real estate, because it is so difficult to develop, given the regulatory environment. The world still has lots of opportunities, and real estate in some unusual areas is an attractive proposition." India is now trying hard to ease its regulations and encourage foreign direct investment. And the investment is coming. Driven by the information technology and outsourcing booms, more and more foreign companies are setting up shop in India. Five million square feet of retail space is being developed. And over $25 billion will be spent on urban housing. At the end of our meeting, I told Natesan I would keep in touch. He dusted the sand off his feet and perched on his motorbike. "This is better than America, madam," he yelled as he drove off. Regards, Sala Kannan P.S. Real estate is not the only overlooked asset class in India. I have found at least three other undiscovered and under researched investments in India. And these aren't the overvalued outsourcing and IT plays everyone is chasing after. I am working on a special report right now. Watch this space for more India insights... Editor's Note: From India and a graduate of the University of Cambridge, Sala Kannan boasts connections with economists and industry insiders worldwide. An expert on global economic trends, she's especially well versed in developing nations, such as India, Brazil, Argentina and China. Kannan Archives.
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