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Beware of the bulls

By Aseem Shrivastava

India is poised to see a massive real estate boom over the next decade. The market, already worth $20 billion, growing at 25%-35% per annum, is expected to rise to $90 billion by 2015. Can urban areas expand so much without affecting the fortunes of rural communities, especially since land reforms in India have gone into reverse gear since 1991 and the State has bent virtually every piece of protective legislation which had thus far stalled the accumulation of land banks by private corporations?

"In the last several decades, perhaps since World War II, there has not been this scale of opportunity anywhere in the world for the private sector to participate in upgrading a country's complete infrastructure."

-- Daniel MacEachron of Hines, a large US developer, invested in India



John Jacob Astor is known to business lore as the first millionaire in American history. After migrating from Germany via London towards the end of the 18th century he made his fortune in the fur trade. Later, he turned to the acquisition of property in New York City, when it was still emerging as a metropolis, becoming, by 1848, the wealthiest person in America. His lasting regret was that he did not buy every square inch of Manhattan.

Globally powerful realtors of our own time need suffer no such regret towards the end of their lives. The conditions that have been created in India thanks to reforms prompted by the IMF and the World Bank are perhaps unique in the modern economic history of nations. In India, big investors are buying by the acre and will be selling by the square foot. How has this transformation of the Indian land market been wrought?

Colonialism comes in many guises. One of them is the debt-leveraged imperialism being exercised upon the poor nations of the world by the so-called multilateral institutions, the IMF and the World Bank, since at least the 1980s. In line with the hundreds of conditionalities they have imposed on Indian economic policies since 1991, laws (pertaining to land, finance, banking, agriculture and a host of other things) are rapidly being changed to suit the desires of global finance and yield high returns not just to transnational firms and funds but also to their junior partners in India. Financial exclusion is only one of the many consequences of the change.

Engineering a real estate boom

It is true that there is an enormous need for housing around the country. There is also the burgeoning demand for commercial and office space. Demand for large-format retail space and hospitality space is also climbing rapidly, thanks to big moves by players like Reliance, Wal-Mart and others. But none of these factors by themselves is adequate to solve the riddle behind the real estate boom. The housing that is needed is mostly low-cost. The demand for luxury housing, hospitality and retail space has risen sharply only in recent years since there has been a big shift in income distribution in the country. The demand for commercial and office space has grown only after reforms were initiated in the 1990s.

There are other forces, operating usually behind the scenes, which underlie the Indian realty boom. The IMF and the World Bank have been active all along in pressurising successive Indian governments to alter the country's legal framework to enable the sort of investment that they want to encourage in the country.

Thanks to the removal of protective legislation (such as the Urban Land Ceiling Act, 1976) land has been and continues to be cleared in cities of slums in the name of upgradation and urban development, making way for realtors and property developers to make lucrative investments in very large properties. Secondly, in the countryside, laws have been and are being relaxed to make it easier to change land use and convert agricultural land to industrial and other purposes. This is having a strong effect especially in areas close to cities. Thirdly, the real estate sector has been "liberalised" by the Indian government since 2005, enabling 100% FDI in it through the automatic route (without ministerial clearance) by 2007. Foreigners as much as a minority of wealthy Indians and NRIs themselves are acquiring property around the country at a breathless pace, making investment in the Indian real estate market among the most lucrative in the world at this point of time, yielding returns of above 25% annually, and sometimes as high as 40%-50%, unheard of in recent memory in the West. Fourthly, banking provisions for lending in general, and for real estate investments in particular, have been relaxed under Bank-Fund pressures. (Bank loans for commercial real estate alone have grown 500% to $2.4 billion during the past four years, raising anxieties at the RBI.) Finally, building construction laws (such as the height of buildings) have been relaxed as well, greatly influencing the incentive to invest in real estate.

All these factors are combining to generate historically high growth in Indian real estate, even threatening to drag attention and investment from other, more productive sectors of the economy. Reports by leading investment bankers like Merrill Lynch, Morgan Stanley and others all point in the direction of a massive real estate boom in India over the next decade. The market, already worth $20 billion, is growing at 25%-35% per annum, drawing funds from all over the world and making several Indian players some of the richest billionaires on the planet. (A lot of large Indian players are investing substantial sums abroad as well: the outgo during April-November 2007 has been $7.2 billion in comparison with inflows of $11.2 billion.) The market is expected (planned?) to rise to $90 billion by 2015. (It is, of course, another discussion as to why so much attention is focused on real estate in particular. It has to do with the skewed growth process in the economy which leaves little purchasing power in the hands of the masses who might otherwise be in a position to demand a range of goods to help spur a widening of the industrial base. It bears reflection too that a real estate boom, based all too often on speculative, unproductive investment promoted by relaxed banking regulations, tends to generate destructive bubbles of economic activity.)

The first target of global capital has of course been the metros and the Tier I cities of the country. Old mill sites and depopulated slum lands are being auctioned off, making way for malls, multiplexes, hotels, commercial high-end office space and luxury housing. Rural, usually agricultural, land around big cities and ports is being acquired for SEZs, townships and IT parks with the active help of state governments, often unjustly deploying the anachronistic Land Acquisition Act of 1894. The State, (ab)using its privileged eminent domain status, has been busy helping large companies acquire land under the "public interest" clause of the 1894 Act. All such acquisitions, as even a casual glance at the reception by the stock markets indicates, are leading to rapid upward financial valuations of companies, adding to their land banks. (For instance, when the Adani group did the IPO for the Mundhra SEZ last November, it reaped such a bonanza that it became richer than the Birlas overnight. Little wonder, since thousands of hectares of land acquired at throwaway prices of Rs 2 or 3 a square metre from the Gujarat government are being leased out for as much as Rs 1,000 a square metre.)

It is not just the Tier I cities that are being eyed with avarice. So too are Tier II and Tier III cities. As property markets in the metros have, for the time being, peaked, land sharks have been advising both Indian and foreign developers and investors to acquire and develop properties in younger land markets in towns and cities as far afield as Sonepat in Haryana and Siliguri in West Bengal.

Thus, last summer, the largest developer in the Middle East, Emaar, entered into a partnership with Delhi's MGF to build projects worth $4 billion (Rs 16,000 crore, the size of the central government's entire allocation for 600 districts under the Rural Employment Guarantee Scheme in 2008-09). These will be not just in large cities like Delhi and Hyderabad but also in more modest places like Chandigarh, Jalandhar, Ludhiana, Rajkot and Aurangabad. Cities like Amritsar, Indore and Nagpur, to name but a few more from a growing list, are all attracting investments by American and other foreign real estate transnationals. The typical form of acquisition (as in the case of Emaar-MGF) is through different levels of tie-up between a foreign and an Indian company, using the local knowledge of teams of willing agents and touts from the area. Some of the more publicised tie-ups are between Dubai's Nakheel and DLF, which are building two integrated townships of 40,000 acres in Gurgaon and Goa. American Tishman Speyer is investing over $1 billion in Karnataka with ICICI and Nagarjuna Construction. Nagarjuna Construction has also managed to attract significant equity investment from Blackstone, a private equity firm. Morgan Stanley has invested $75 million in Mantri Developers. Other big collaborations are between the Ansals of Delhi and Malaysia's UEM, between Indiabulls and a string of Wall Street firms, and many others. It is a win-win arrangement for big investors and real estate developers. While the former can hope for high and quick returns, the latter get cheap credit.

Here are only some of the international players making investments in Indian realty:

Transnational firms and funds making investments in Indian real estate (aggregated figures)


Investment plans of overseas investors

Citigroup-Blackstone Indian
Infrastructure Fund

$5 billion

Royal Indian Raj
International Corporation

$2.9 billion

Plaza Centers NV

$1.2 billion

Blackstone group

$1 billion

Goldman Sachs

$1 billion


$1 billion

Emaar Properties

$1 billion

Red Fort Capital

$675 million

Citigroup Property

$525 million

Merrill Lynch

$377 million

Kotak India Real Estate
International Fund

$200 million

Sun Apollo

$190 million

Pegasus Realty

$150 million

Lee Kim Tah Holdings

$115 million

Salim group

$100 million


$100 million

Alony Hertz Properties

$100 million

Oregon Public Retirement

$100 million

Lehman Brothers

$80 million

Morgan Stanley

$70 million

GE Commercial Finance Real


$63 million

Source: Assembled by the author with the help of the ASSOCHAM report, 'Study on Future of Real Estate Investment in India'. and postings at Indian Realty News

Many of the firms listed above are undertaking joint development ventures, indicating their confidence in the stability of the policy regime provided by the government. Other transnational firms and funds making significant investments in Indian properties include Warren Buffet's Berkshire Hathway, J P Morgan, Colony Capital, Starwood Capital (set up by DLF and Hilton), and Farrallon.

As a consequence of such hectic activity by foreign firms in the real estate sector, the latter's role in FDI (that is, excluding purely financial investment through such instruments as private equity) in the country has been rising rapidly:

Share of real estate in Foreign Direct Investment (FDI) coming to India (in US$ billion, $1 billion=Rs 4,000 crore)



Share of real estate in FDI










2006-07* (estimated)



* Estimated

Source: ASSOCHAM op cit
The money coming in to SEZs via such secured forms of institutional investment as private equity, is particularly large. Over 150 private equity funds have made investments in Indian realty, many of them drawing returns of 35%-50% every year -- figures unheard of in the Western world today. During 2007, India topped the list of Asian nations, attracting $10 billion in private equity funds (largely for real estate) through 290 deals. According to a November 2006 ASSOCHAM report, real estate developers are developing 130 SEZs, constituting nearly half the total area under them. Emaar Properties alone is building no less than 10 SEZs across India.

Approved SEZs as a whole will be taking up 2,000 sq km of land around the country, an area equal to that of the city of Delhi within the National Capital Region. (It is misleading to say that the fuss over land acquisition for SEZs is unjustified since they constitute a very small proportion of arable land in the country. A policy's overall impact can never be evaluated in the incipient stages of its implementation. With the passage of time, and after some "success" perhaps, one might well see a "zone fever" of the sort that overtook China in the early-1990s and which led ultimately to a scrapping of the SEZ policy there. In the meantime the damage to the livelihoods of millions would have been done.)

There is a huge amount of money being made in the real estate sector, best symbolised by the fortunes of Unitech. One of the largest real estate firms in the country, Unitech reported net profits of Rs 452 crore during the third quarter in 2006, as compared to Rs 13 crore during the corresponding period in the previous year, a 3,190% jump. Its share price skyrocketed between March 2004 and December 2006, raising its market capitalisation from Rs 324 crore ($72 million) to Rs 37,784 crore ($8,396 million) -- a jump of 11,561%! The realty boom helps unravel the secret of money-making among Indian billionaires.

Such a boom is being fuelled further by the fact that Indian cities are expected to grow at a furious pace over the next decade and beyond, as the table indicates:

Expected growth of areas in booming Tier I cities in India

Figures in sq km

Current area

Future area

Growth (%)





















Greater Noida




# Includes Navi Mumbai

* Includes areas up to 50 km from city centre

Source: Indian Realty News

In an infrastructure-poor country like India, even a little investment in developing the land fetches a disproportionately high premium in the real estate market. Yet, given the attendant risks of unproductive investment and speculative lending under relaxed banking provisions (not to forget that a significant 50% of the land in multi-product SEZs does not have to be devoted to industrial development), the RBI has understandably classified loans for SEZ investment as "real estate lending," requiring higher rates of interest on loans for SEZs.

How are cities going to expand so much without affecting the fortunes of rural communities and farmers in the countryside? The view being propagated by the government and the corporate media is that it's a "win-win" proposition when someone is willing to pay large sums of money when the land is not worth much to farmers (once the land use is changed it rises in value dramatically). Let's investigate this in a brief digression.

There are severe problems with such a view. Firstly, the argument is a solipsistic one: not everyone views land as a commercial asset to be bought and sold according to market forces. Many, if not most, farmers around the country still view land as the only source of ultimate socio-economic security and status they have. (This has been repeatedly confirmed to me in conversations with scores of farmers in at least a dozen Indian states.) Hence all the resistance to land acquisition in recent years. If things were as the government and its economists claim, then voluntary exchange would make everything quite smooth in a "win-win" world.

Secondly, if money has gone out of agriculture only some of the blame lies with growing farming populations (causing sub-division of land into economically sub-optimal plots). Most of the responsibility lies with successive governments which have starved agriculture of investment and credit over the past 17 years, inducing a rash of farmer suicides. While 60% of the population still lives by agriculture, it has received only 5% of planned investment during the past decade of reforms. This has affected complementary investments by farmers (in tubewells, for instance) because the State has not been investing (in irrigation and power for agriculture, for example). Moreover, priority sector lending by nationalised banks to rural areas (operational since 1969) was withdrawn after 1991 under Bank-Fund dictates, subjecting farmers to usurious moneylenders (and now only slightly less rapacious arrangements like self-help groups, which still have to pay 20%-30% annual returns).

Thirdly, thanks to poor and unjust agricultural policies (again, under WTO agreements), farmers have been subjected to unfair subsidised competition from Western agribusinesses which are gradually extending their control over the Indian foodchain. Fourth, input costs have risen dramatically thanks to the removal of subsidies (again, under Bank-Fund pressures) and the entry of multinationals like Monsanto, which are now selling patented seeds to farmers, reaping high royalties in the process.

The list could go on. Governments and multilateral institutions will have a lot to answer for in the years to come as smallholders are priced and pushed out of agriculture, swelling the ranks of distress migrants and the unemployed.

Reverse land reforms

When China adopted market reforms in the early-1980s, one of the first things it did was to distribute land to the peasantry and give them capital to create town and village enterprises. This, and not globalisation (which, in actual fact, only emerged in the country in full force in the 1990s), is the secret behind the significant reductions in poverty that the reforms brought about in China. In other words, land reforms were actually a key aspect of poverty reduction efforts.

In India, land reforms have gone into reverse since the early-1990s. Not only have age-old promises since 1947 been set aside, successive governments at both the Centre and the states have merrily ceded ground to Bank-Fund dictates and the increasingly powerful lobby of property builders and real estate developers -- who include not just well-known names like DLF, Ansals, Unitech and Hiranandani, but indirectly also involve the financial interests of politicians, other businessmen, film stars, cricketers, bureaucrats, officers from the armed forces, and virtually anyone with spare capital to invest. Land ceiling Acts applicable to cities as well as the countryside have been repealed in order to enable big sharks to accumulate huge land banks.

Every significantly large Indian company today has a real estate strategy. Given the business environment -- in which the highest and quickest returns are being made in the real estate and financial sectors -- every company almost needs to do this just to stay competitive. In SEZs, it is very common for an IT company to tie up with a real estate major. Thus, for instance, Infosys has struck deals with the Rahejas to build several SEZs, especially in south India. According to some real estate consultants, companies like Infosys may become major real estate players in the future, their main line of business (IT) perhaps taking second place to their real estate concerns.

How long will the party go on?

Some other final observations are in order.

1 The Bretton-Woods institutions, the IMF and the World Bank, together with the WTO, have been acting successfully in concert to apply pressure on the Indian government to mould the economy to the tastes of global finance. The Fund and the Bank have been acting virtually as external agents of financial markets. This necessarily involves the promotion of the real estate sector by, for instance, easing banking regulations and lending norms. It also dovetails nicely with other Bank-Fund policy conditionalities, pertaining to areas as different from each other as urban development and housing.

Consider just one instance of the manner in which World Bank pressures work to the distress of the poor. In so many urban development schemes backed by the World Bank around the country, the poor are evicted from slums in order to move them to more respectable ("upgraded") locations, where urban services are available. As long as they are able to pay the rent and service charges, they stay. But all too often they have been evicted a second time for failure to pay (for services that they never asked for in the first place!).

Meanwhile, the erstwhile location of the poor has conveniently served the purpose of adding to some realtor's kitty of prime urban land on which high-value real estate can be developed to post profits and lift the markets. It leaves little room for doubt that the latter has been, in fact, the undisclosed goal of urban development policies all along. (The construction of the Commonwealth Games village in New Delhi is a case in point.) The commodification of means of subsistence (such as water, shelter, fodder) and extension of private property has never worked in the interests of the poor (since the days of the British Industrial Revolution, in fact). However, blindness to this fact is part of the systematic cognitive disorder that allows the Bretton-Woods institutions to persist with what are all but transparent imperial policies in the name of development.

2 India is the preferred Asian destination for large foreign investment in real estate. There are several reasons for this. Unlike China, which legalised freehold private property only last year, India suffers from no such inhibition to the operation of a smooth land market. This is further facilitated by a comprador State which has bent or banished virtually every single piece of protective legislation which had thus far stalled the accumulation of land banks by private corporations. In particular, under pressure from the Bretton-Woods institutions, it has got rid of the land ceiling Acts. Such has been the scale of the corporate onslaught on public and other lands that, under the central government's flagship programme for urban development, the JNNURM (Jawaharlal Nehru Urban Renewal Mission, launched by the prime minister in 2005), the allocated funds (roughly Rs 2,000 crore per city, for 63 cities) are not released till the Urban Land Ceiling Act has been repealed. Finally, the regulatory structure of finance is more developed in India than in places like China.

3 The entire story of large-scale land-grab in the country, especially in the urban setting, cannot be understood satisfactorily unless one understands India as one of the chief cultivated destinations of global finance today, the IMF and the World Bank having played the pivotal role in this transformation.

 One has to see the whole enterprise from the point of view of powerful fund managers occupying the skyscrapers of Manhattan and London. They are looking for quick and high returns. Returns in financial markets are contingent on the outlook for underlying growth in the real economy. Only, they are much higher than in the latter case. For funds headquartered in these places, markets in the West are already saturated. In other words, growth in them is all too modest. Growth of 2% or 3% per year in a typical Western economy simply does not compare with that in an "emerging market" like India or China, growing at 8%-10%. As a result, it was no surprise when a recent study reported in the Times of India pointed out that average annual returns on stocks in India (at 43%) are the highest in the world (Wall Street only yielding 15%).

Speculative global finance has been "playing" with the asset markets of many countries around the globe during the past three decades. Major financial crises, like the ones in Mexico (1994), in South East and East Asia (1997-98), in Russia (1998), and in Argentina (2001) are results of policies of financial liberalisation instigated at the beckoning of the IMF and the World Bank. This is facilitated in no small measure by a currency convertible into hard currency, enabling speculators to bring in and take out large sums of money from an economy, tax-free, at will, regardless of the consequences for the real economy. (The Indian government is seriously contemplating making the rupee convertible on the capital account, a step which will have massive repercussions in the future, since large sums of money could then be brought in and taken out at great speed by financial investors and speculators, adding to the woes generated by the movement of "hot" money flows.)

The typical trajectory of events in relation to a country whose policies are being written and directed by Bank-Fund conditionalities is:

1 A country with problems in foreign payments (not able to generate enough export revenue to pay for required imports) is offered a loan by the IMF to tide over its difficulties. In exchange for this the country is subject to many "conditionalities" which require it to make its economy accessible to Western transnational firms. It is argued that this is necessary to get the economy back into balance, through greater competitiveness and efficiency. This is referred to as "structural adjustment". The country is subjected to "market discipline" in order to be in a position to pay back its loans and ultimately become a source of high returns to global capital.

2 In this way the IMF and the World Bank get a country (like Indonesia or Thailand) to "liberalise" their economies, allowing not just market access for the products of transnational firms but also "opening up" the country to foreign investment, especially to financial investment from funds in the West.

3 Growth rates go up. Transnationals are able to expand their business in the "liberalised" economies. The larger domestic firms within the country do well (survival of the biggest). This is readily "sold" to the public as "development", the poor meant to benefit from the "trickle-down" effect which will happen in an ever-receding future. Growth of real estate and the construction sector is a part of this boom. (India is experiencing this right now.)

4 As growth rates in the real economy rise, returns in financial markets (stocks and bonds) rise even faster. Financial interests in the West are pleased. In this way, developing economies help to solve a problem for global finance -- low and slow returns in the saturated markets of the West.

5 The growth in the financial sector frequently leads to "bubbles" of speculative activity which lead to exorbitant returns in the short term, a phenomenon that we have been witnessing recently in the dizzying rise of Mumbai's Sensex. But one day the bubbles begin to burst and investors withdraw their capital at great speed, moving them to alternative destinations, causing currency crashes, recession and unemployment. South East Asian economies experienced the crash in 1997-98. Ultimately, given new foreign payments crises, the already indebted country has to rush to the IMF again. The classic debt trap results and the cycle resumes afresh.

In this context, it is sobering to reflect on India's future. Will it be like Indonesia and Thailand, where the bursting of the real estate bubble, compounded by a currency collapse brought on by the exit of speculative capital, led to massive recession, loss of output and unemployment? (Some recent studies, such as one done by an international consultant, DTZ, together with Businessworld, show that the real estate forecasts which have formed the basis for investments thus far are excessively optimistic. Office space, for instance, is going to be in great oversupply in a year's time.)

Or will India have the courage and independence to be like China and Malaysia, where the government did not allow easy conversion of domestic into foreign currency, thereby largely escaping the economic disasters that Asian economies underwent in 1997-98? The lesson for India should be obvious: forestall at all cost any attempt at rupee convertibility by financial interests.

However, if avarice and impatience conspire to avoid this wisdom, the latter scenario is the unlikely one. Speaking at a recent national business convention, Union Minister of Industry and Commerce Kamal Nath spoke of the realty boom as "the changing face of the nation". Should such a fatal misunderstanding of the prevailing economic realities continue past the next general elections it is improbable that India will not ultimately succumb to the speculative raiders who precipitated misery for millions of East Asians in 1997-98.

(Aseem Shrivastava is an independent writer and economist.)

InfoChange News & Features, April 2008