May 2, 2008 / 9:31 AM / 9 years ago

Talk of mass housing trendy as India property slows

MUMBAI, May 2 (Reuters) - Indian property investors are targeting lower- to mid-end houseowners in the booming economy now that sales of plush apartments have slowed.

With the number of families earning more than $5,000 a year set to double to around 20 million in the next two years, demand for small and simple apartments is set to mushroom.

"We haven't touched the tip of the iceberg," Niranjan Hiranandani, founder of Mumbai-based Hiranandani Group, said about the potential demand for homes.

"Young people don't have housing open to them," Hiranandani told a property conference in Mumbai this week, where talk of mass housing was a hot topic.

The property market has boomed since India eased rules on inward investment in the construction industry in early 2005, partly fuelled by pledges by foreign investors that they will pump up to $20 billion into the country.

But government figures show only about $2 billion has actually been spent in the last three years. Real estate prices have cooled in the last six months.

Developers had piled into the top-end of the housing market where profit margins are highest, for example, building 2,000 sq ft apartments in New Delhi suburbs that sell for $250,000.

But a young couple working in the media or software industry, who together bring in $25,000 a year, would need something half that price.

Developers are targeting the young workforce in a country where double-digit salary hikes are common in sectors such as real estate, information technology and financial services.

About 2.5 million new graduates stream out of universities each year.

"It's become trendy to talk about affordable housing," said Rajnish Changrani, vice president for research and investment at private equity fund Red Fort Capital that has invested about $300 million in Indian property.

"What's on the market so far isn't satisfying demand," he said. "It was a rising market so people didn't think. Developers have been overpaying for land, making the wrong product and not doing their research."

Analysts say the strong supply of high-end apartments in many areas, including Bangalore and New Delhi, is likely to hit prices. Developers are giving away freebies to lure buyers, with one even including a car in the package.

Tip of Iceberg

Some developers are already starting to look beyond the 0.6 percent of India's 1.1 billion population whose family income exceeds $100,000 per year.

India's biggest property firm DLF (DLF.BO) is changing its designs for apartment blocks in New Delhi's suburb of Gurgaon to squeeze in more two-bedroom units, along with four-bedroom homes.

Land prices have quadrupled in many areas over the last three years but many in the industry expect prices to drop anywhere between 15 percent and 50 percent in the coming year.

Developers hope authorities will allow them to build taller blocks by raising a measure of building density called the floor space index (FSI). The Maharashtra state government made such a move last month to ease a housing shortage in Mumbai.

"Every developer is talking about low-cost housing because there is demand there," said Anshuman Magazine, managing director of CB Richard Ellis in India. "But there's a need to reduce land costs, increase FSI, build infrastructure first."

"In India we tend to build houses for 100 years and I don't think we need to," said Arun Nanda, vice chairman of Mahindra Lifespace Developers (MALD.BO).

"We can build for fifty years because our grandchildren will want to live in something completely different. It's a volume game, but it's still three to five years away." (Editing by Anshuman Daga)

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