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The Most Exciting Real Estate Market in Asia

By Chris Mayer, editor, Capital & Crisis
Saturday, November 24, 2007

I just returned from my latest research trip to India, where we were always on the move...

Our journey started in the bustling port city of Mumbai (Bombay), home to Asia's oldest stock exchange. Then we moved on to visit high-tech campuses in Bangalore and Hyderabad. The latter is only miles from the ancient city of Golconda, once renowned for its diamonds. From there, we were off to green Kochi on the Malabar Coast, with its many coconut trees, rice paddies, and slow-moving rivers. We wound up the trip in the north – traveling to Jaipur, in hot and dry Rajasthan, then to Agra to see the Taj Mahal and, finally, to the dusty capital city of Delhi.

In Delhi, I walked through the old market of Chandni Chowk, which I had read so much about. Once it was a destination for camel trains from Kashgar, traders carrying jasper and sardonyx, cinnamon logs from Madagascar, and much more. Today, it's still a busy market, lined with shops where you can buy just about anything.

I feel I got a good taste of what India's all about - our itinerary was so packed it would take pages to tell you everything I saw and did. Of course, I also met with money managers and private equity firms operating in India. That's how I learned some interesting – and surprising – things about investment opportunities in India.

For example, did you realize that India suffers from an acute shortage of hotels?

Our group stayed at wonderful hotels during our trip, such as the Rambagh Palace in Jaipur and the Oberoi Amarvilas in Agra. Still, the room rates were so out of whack with everything else. The supply-demand balance is so tight that the average room rates in some cities have reached the $400 level. Overall, room rates in India are higher than current average room rates for New York, London, and Singapore. It was one of the most stunning economic facts of the trip. That $400 goes far in India, which is not true of the dollar in too many places of the world these days.

Hard to imagine paying that much for a hotel room in India, isn't it? But take a look at this chart, which I found pretty amazing. It shows you the total number of available rooms in India compared with those in the U.S. and several U.S. cities. The entire country of India has fewer hotel rooms than the city of Orlando!

Get a Room! (Hard to Do in India)
Get a Room! (Hard to Do in India)

This is why we had to book rooms nearly two years in advance to get the hotels we wanted. It's not a situation that's going to get a lot better anytime soon. The number of tourists visiting India will likely increase 10% per year through 2012, according to the World Travel & Tourism Council. That would make India one of the fastest-growing tourist destinations in the world, to say nothing about the business travelers. Some companies have gone ahead and put up their own hotels on land they already own. They run these hotels for employees and business visitors. They can't afford to sit around and wait for government approvals to build new hotels.

So investment opportunity No. 1 would be to develop and run hotels in India. Unfortunately, there is no way for you as an investor in publicly traded stocks to do that. We heard a couple of developers talk about hotel and resort projects they have on tap. These were attractive, I thought, promising 30%-40% annual rates of return on modest assumptions for hotel occupancy and room rates. They also have recent success stories, such as a 250% gain on a project started in January 2006. The people on the trip with me will have a shot at investing directly in these projects if they choose.

The real estate market is hot in India all around, and it's attracting some mega money flows. Goldman Sachs calls India "the most exciting real estate market in Asia." Overseas funds have raised $2.4 billion through September to invest in Indian real estate. There's another $1 billion ready to come on in the last quarter of the year. According to Private Equity Intelligence, investors will pour another $4 billion-$6 billion in 2008 into property funds with an Indian focus. All told, the market could grow from $15 billion to $90 billion by 2015. Kind of mind-boggling, isn't it?

Even something like office space is in short supply. Commercial property space has doubled from 2002. Estimates call for another 150 million square feet over the next five years, and 500 million-650 million square feet over the next 10 years. That's a lot of real estate.

In addition to real estate, there are many parts of India's domestic economy that are attractive. Unlike China and the Southeast Asian economies, India's economy is not so dependent on exports. See the table below:

Exports as a % of GDP

The explosive growth in India's economy is mainly a grass-roots-driven trend. There are about 200 million participating consumers in India, with tens of millions added annually. Needs are everywhere – for power, water, basic infrastructure.

Unfortunately, yet again, many of these opportunities are off-limits to public equity investors. This was a common frustration as I traveled in India. It's just not an easy place to invest. Foreigners cannot own Indian shares directly. Only institutional investors can. You can participate directly in certain projects, as I mentioned above, but that's not helpful for our purposes here.

The easy way to invest in India is to buy the polite merchandise. That is, the ready-made off-the-shelf-goods on the NYSE – listed Indian companies such as Tata Motors or Sterlite Industries, or even an Indian mutual fund (the India Fund is a favorite). The problem is that the Indian stock market just went bananas while I was there. On Oct. 29, the Sensex – the common benchmark for the Indian stock market – topped 20,000 briefly. Over one 10-day stretch, the market rose 14%. For perspective, the Sensex was only a little above 12,000 earlier in the year. Some sectors were even hotter. Between Sept. 18-Oct. 11, Bombay's realty index soared 27%.

I can't put money into a market running that hot. Especially given India's penchant (as with most emerging markets) for nasty corrections that lop off one-quarter or one-third of value in months. I'm inclined to wait. Certainly, it's not in my best interest to go on expensive trips on my publisher's dime and come back empty-handed as far as specific investment ideas go, but that's where I am.

Therefore, while I remain bullish on India's long-term prospects, I'm a bit fearful about the short term. I realize that the crack in the Sensex might not come, in which case, I'll have missed out on a chance for good gains. But that's OK. I always invest by first thinking about what I can lose. The gains will come. That approach works for me, and I'll stick with that.

So we'll pass on India for now, but I'm watching it carefully. I recommend you do the same.

Good investing,

Chris Mayer

Market Notes


This November marks the third anniversary of one of the biggest ETF launches in history... the streetTRACKS Gold Trust (GLD).

The first U.S. commodity-based ETF, GLD allowed investors to own gold without having to take possession of or storing the stuff. It's been a huge success for both shareholders and the fund administrator, State Street Global Advisors.

It's no surprise that the rise in gold prices made headlines this year. What may surprise you, however, is the extraordinary growth in the amount of gold under the GLD banner right now. As our chart shows, gold under management has increased from 2.95 million ounces since GLD's first reporting period to 14.9 million ounces as of the most recent reporting period. It's approximately a 400% increase in business.

This chart speaks volumes about two things:


We are living in the ETF era. Providing the attributes of both stocks and mutual funds, ETFs have captured both institutional and retail attention as an investment tool. The number of U.S. ETFs now numbers 538... a more than fourfold increase since 2004. Another 400 await regulatory approval.

2) The world is waking up to gold's value as a crisis hedge, and a way to move wealth into real assets.

Expect these two trends to continue for a long time.

– Brian Hunt

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