This column was originally published on RealMoney on Nov. 15, 2007 at 11:49 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
This is the first column in a series highlighting the Indian real estate sector, which has been booming. I believe it will continue to boom going forward. First, I'll cover the residential housing sector trends and my favorite play on them,
Unitech Corporate Park
(listed on London's Alternative Investment Market (AIM) under the symbol UCP, in addition to its home listing in India). Don't miss my follow-ups on commercial real estate and more.
Indian Real Estate
I know, it's a scary time for Americans to even consider investing in real estate stocks given the subprime mess that's still unfolding. But the housing and credit situation in India is completely different. Subprime simply isn't a factor: Indian banks don't have holdings in U.S. subprime, and credit is given only to very high-end consumers. You need to have verifiable income 7 to 10 times your monthly loan payment and have 30% of the asset's purchase price in liquid accounts. Mortgages max out at 70% of the asset's value.
Currently the rank-and-file Indian citizen just can't get interest-only loans or a loan for 100% of a house's purchase price, and I foresee that being the case for several decades going forward. Realize that the credit culture in India is very different from ours right now this is a credit-conservative country. The national savings rate is 25% and I don't see that changing soon (again, defined as decades).
Population is the key driver of the ongoing boom in the Indian real estate sector. India has the world's second largest population, numbering 1.12 billion people, behind only China. The National Commission on Population (NCP) has forecast that India's population will increase at a compound annual growth rate (CAGR) of 1.14% and will reach 1.4 billion by 2026 and cross China's population by 2030. This population growth is the main reason we're seeing such explosive growth across all the stock sectors in India, but especially in the real estate sector.
For the five years between 2007 and 2011, India's population is expected to increase by 64 million, which will lead to aggregate demand for 24 million housing units in the period, or 4.8 million units a year, on average.
At the end of 2006 there were 130 million housing units in India. Forecasts call for the number of housing units to increase to 154 million by year-end 2011. This demand will be driven by the troika of growing population, rising income levels and the increased rate of urbanization in India.
In addition, India's young population bodes very well for sustainable strong demand in the residential sector for decades to come. Per the National Commission on Population, India's working-age population grew by 260 basis points to 60.4% from fiscal year 2001 to fiscal year 2006. The NCP expects that portion to further increase to 64.3% by 2026.
Furthermore, at the end of fiscal year 2007, the median age of India's population was 23.9 years; it'll be up to only 31.4 years by 2026. At present the median age of the Chinese population is 33 years and Japan's is 43 years.
Urbanization in India is being driven by the fundamental shift in the primary source of livelihood and employment, away from agriculture and to services and industry. In 2000, the agriculture sector accounted for 25% of GDP and 56.7% of employment. At the beginning of 2007, agriculture contributed 18% to GDP with just 7% to incremental GDP and employed 51% of the working population.
The number of people employed in the industrial sector grew from 18% to 20% in the same period, while the services sector employed 28% of the working population, up from 26% in 2000. India's National Urban Housing and Habitat Policy draft for 2005 said that by 2011, the industrial sector is forecast to employ 27% of the working population, while the service sector would account for 35% of the working population. Agriculture sector employment is expected to drop to around 30% of the working population in India by 2011.
The secular and fundamental shift away from agriculture to the services and industrial sectors will lead the urban rates to increase at a rate of 2.7%-2.8% per year between 2000 and 2020, then decline to rates of 2.3% per year by 2030. The rural population in India is forecast to decline by 80 bps every year from 2000 to 2030. In 2000, 28% of India's population was urban; it's currently 30%. Forecasts call for the urban population to increase to 34% by 2026.
Finally, the increased availability of home loans and low interest rates has also led to the increased demand for housing. Total loan disbursements for home loans have increased from INR 240 billion at the end of 2002 to INR 1 trillion at present.
These trends will lead to continued demand for residential housing in India for well beyond two decades.
Unitech Corporate Park
One of the best ways to play the Indian residential sector boom is through Unitech Corporate Park PLC. It's listed on London's Alternative Investment Market (AIM), as well as in India. Unitech is one of India' largest listed real estate companies, with a land bank (land holdings) of 472 million square feet across 10 Indian cities. The company focuses on developing complete townships in the suburbs of these 10 major cities.
Unitech will deliver 7 million square feet of developed space in the year ended March 2007, and current estimates are for 16 million square feet in fiscal 2008, 28 million square feet in fiscal 2009 and 46 million square feet in fiscal 2010. Quite the growth rate, no?
Unitech focuses mainly on middle- and higher-income group housing. Of its total land bank of 472 million square feet, 67% is expected to be developed for those two segments. Residential projects also require less working capital, because most of these developments are presold to homebuyers.
The company has developed 1,200 acres into five townships in the NCR region outside India's capital, New Delhi. I have seen most of UTC's already developed properties (and own of one of their homes in the NCR region) and can say they are on par with, if not superior to, high-end properties out here in the West.
From 2007 to 2010, Unitech is expected to see a 68% CAGR in revenue. Analysts currently expect the company to do $1.5 billion in revenue and earn 33 cents a share for the year ending March 2008. For fiscal 2009, current expectations are for revenue of $2.48 billion and earnings of 55 cents a share. For fiscal 2010, current expectations are for revenue of $4.11 billion and earnings of 89 cents a share. (Estimates are based on a foreign exchange rate of $1 = INR 39.42.)
Unitech currently trades at the equivalent of $9.36/share in India and at 110 pence on the AIM. Unitech's current market capitalization is $13.95 billion.
I really like Unitech for the next few years.
Until next time, happy investing.
Next: How to Play India's Commercial Real Estate Boom
At the time of publication, Somaney was long Unitech Corporate Park in India, although positions may change at any time without notice.
Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback;
to send him an email.