As home prices fall, developers eye masses

Developers such as DLF Ltd and Parsvnath Developers Ltd have listed on the Mumbai stock market to raise funds for expansion and annual property investment is projected to double to $90 billion by 2010. But a drop of around 20 per cent in residential transactions since January — as rising interest rates and soaring prices put India’s new rich off buying — has persuaded many developers to take a second look at their business models. Prices have fallen 15-20 per cent in Delhi and Punjab, and have paused in Mumbai after sharp rises.

Most developers have been targeting the roughly 1 million families bringing in $25,000-$50,000 a year — for example, middle level accountants, or software programmers. Another million families are expected to join their ranks over the next three years, according to an economic think-tank, while the number of “super-rich” families with an annual income of more than $250,000 is set to triple to 141,000.

But with fierce competition to build high-margin apartments for the rich, some investors are starting to target the 53 million families earning $2,500-$5,000 a year — where the much-vaunted figure of a 20 million home shortfall originates. An estimated 22 million families should be lifted out of poverty and into this segment of society by 2010. Gross margins for the mass market are around 20 per cent, rather than the 30 per cent for high-end housing. But developers can forge healthy businesses by building huge townships on non-prime land that is more easily acquired.

“Our view is that building residential units for the lower middle class is pretty recession proof,” said Eredene Capital chief executive Alastair King, Bank exposure to housing loans tripled in three years to around $60 billion in 2006, but that was only about 6 per cent of GDP — so industry players are unconcerned about any US-style mortgage default crisis.