Opaqueness; We Want to See Through You – Indian Property

Opaqueness; We Want to See Through You – Indian Property

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Investment commentators continue to have doubts about the Indian real estate market and investors’ dissatisfaction with the lack of transparency in the market is, not surprisingly, coming to the fore.

There are concerns about the regulation of real estate ventures in India, the absence of title insurance, the complexity of real estate investment propositions and the effect of the bureaucracy on infrastructural development and (contingent) property developments.

Probably the most serious lack of transparency is to be found right at the start of the chain in land valuations by Indian real estate developers. That M Damodaran, chairman of the Securities and Exchange Board of India has seen fit to draw attention to failings in this area suggests that the authorities have significant concerns about how the issue is covered in annual reports and public offering prospectuses. One issue is the habit for property companies to report land for which they have signed a memorandum of understanding but which they have not purchased as being within their land bank.

Land banks play a crucial part in property company valuations and this practice prevents investors from making assessments on the basis of current values and to use potential values instead, ones that are entirely dependent upon property developments taking place. In the event of a serious downturn in the property sector the value of some developers would collapse at double speed because of this.

In the light of the difficulty of valuing land banks it would seem that individual investors should carefully check that the information to hand comes validated by accountants or property professionals of international reputation. For a good comprehensive survey of the current level of risk in the Indian property market Deutsche Bank published an in-depth report last year (download report here (pdf)) which highlights the need for ‘more professional due diligence and valuation institutions.’

The most recent high profile instance of over-valuation was when DLF Universal tried an IPO in 2006, only to have to postpone it because its $27bn valuation of itself was called into question. The company’s hopes of raising $2.4bn in an offering that valued it at $23bn were vindicated last week (12th June).

Ironically, property developers tendency to ‘all talk and no trousers’ on the subject of land assets is mirrored by their investors among whom a worrying trend to promise more than they end up committing has been detected. Aashish Kalra, MD of Trikona Capital (parent of Trinity Capital) estimates that inward investment in Indian real estate was only $1bn in 2006.

On the plus side there is a growing level of discrimination in the market between the different types of property investment. Categories of property have become more clearly defined with investors distinguishing, for instance, between the major cities and ‘tier II’ ones. The overall picture is of a possible over-supply of office space but strong fundamentals for the residential sector. The Daily Telegraph reports 3i and Blackstone being interested in the real estate opportunities and, particularly, infrastructure.

The disappointing performance of Indian property vehicles on London’s Alternative Investment Market over the last year – most of them are trading below their offering price – should probably be seen in the global context of investors’ search for higher and higher quality assets as equities are increasingly see as being near to a peak rather than a vote of ‘no confidence’ in Indian real estate specifically.