Monday, March 15, 2010

Real Estate in Gurgaon Is Peaking, Optimism Reigns, I Am Shorting S&P 1150

I am in the land of the optimists.  Indians are truly an optimist populace.

But tell me what I am missing.  A friend of mine rented a 4 bedroom luxury condo in Gurgaon, India.  For those of you that are unaware of Gurgaon, it is an IT and BPO hub, probably the largest in India outside of Bangalore.

Here's what the building looks like:

Now you can buy a unit in this building for Rs 1,54,00,000.  Or $342,000.
Or you can rent for Rs 45,000 per month.  Or $1,000 per month.
A back of the envelope calculation suggests the cost of ownership is roughly $2,300 per month at 10% down, not including taxes and maintenance, which I am guessing is another Rs 10,000 per month minimum, or $250.

Two things come to mind.  The market is overheated as is obvious to any real estate investor/owner living currently in the U.S.  Second, the actual cost of ownership is still pretty cheap to be able to rent a 4 bedroom luxury apartment with all amenities for under $1,000 a month.

Now the lack of  rental pricing pressure tells me that these greedy developers will keep developing until the marginal cost of development and sucking in preconstruction investors is exceeded by the risk.  There is no shortage of land around Gurgaon.  Nor for that matter in Bangalore, Pune, and other IT hubs.  And they will keep developin this until buyers are exhausted, unwilling and uninterested.  And the cycle will turn. 

While there is a purchasing power advantage in India, I think it is deflation in the U.S. that will eventually bring the U.S. to parity with India.  Either way, color me somewhat skeptical about India's emerging superpower status.  India has enjoyed tremendous advantages in terms of costs when offering BPO services to U.S. corporations. 

It has been a story driven by cost advantages.  Indian workers and Indian infrastructure is not more efficient than the U.S. 

India also has the benefit of a young work force with some 60% of the population under the age of 40.  But I am guessing there will be a lot of older guys willing and able to work in the U.S. for  a long time to come.  Sad but true.

As far as the market goes, the average retail investor is now growing ever more confident and complacency is rampant.  As we all know, it is precisely times like these that the market serves up a cruel reminder.

1 comment: