'Mature market won't have 4 malls in proximity'

It is Joe Valente’s second visit to India and ever since he arrived in Delhi from London, the global head of research at real-estate consultancy DTZ has been holed up in meetings.

Though he hasn’t had the time to go and check out the ground realities for himself, he is aware of the frenetic construction activity going on in south Delhi’s Saket, a stone’s throw from Sheraton hotel where he’s sitting.

“I can’t think of another example where four malls are coming up within a half-kilometre,” Valente says, adding, “That’s not to say they won’t succeed. But it would never happen in a mature market.”

Valente is not alone in being circumspect about this development as well as other aspects of the real estate party that, despite high interest rates and rising property prices in a few key centres, seems to be sustaining itself on hype.

DTZ’s recent report, “Money Into Property, 2007”, tracks the insatiable appetite that investors seem to have for real estate. It estimates that investment transactions world-wide in the sector hit a record high of $600 billion in 2006 and that there was so much capital coming into the sector that as much as $4 of capital was chasing $1 of investible real estate.

The corresponding ratio for India, ranked second after China, with transactions of $12 billion last year, is even more startling — $8 to $1.

But Valente isn’t worried. “During the peak of the cycle, the ratio was $20 to $1 in China and Germany, so 8:1 isn’t atypical,” he observes.

Such large capital flows naturally cause distortions in the market, especially in the pricing. Valente acknowledges that the recent inflated valuations in some markets like Mumbai, which have become as expensive as London or Sydney or New York, are unsustainable.

On the other hand, Valente feels that as a growing market, in India the price correction could be put off for another five to seven years. “After all, there is some catching up to do, given that India is an emerging market and people need houses, shopping centres, offices,” he adds.

Also, mistakes, says Valente, happen every time there’s a boom in capital flow. “They remain hidden and by the time you see them, it’s too late.”

As for now, DTZ is bullish on India. The consultancy, which came to India four years ago, began with two people on its research team. “We have 13 people today and are looking to recruit another three to four even as we speak,” says Valente.

But the one thing that Valente feels would greatly help investors is greater transparency.

“An investor is looking for an element of certainty — how certain am I of getting utilities, how certain am I of actually owning it. The returns in the Indian market are about 11 per cent, and the cost of capital is 12 per cent. An investor can withstand that, but if he can be more certain of his investments in, say, Bangkok or Shanghai, why should he come here? The competition, remember, is not between Mumbai or Delhi or Chennai, it is global,” he warns.

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