March 16 (Bloomberg) — George W. Bush got it wrong this month when — perhaps feeling a bit flush with the success of his maiden trip to New Delhi — he urged Americans to view India as a land of opportunity.
If U.S. investors want to make money in India, they should tweak their president’s counsel a little and see India as one big opportunity — minus the land.
A growing shortage of good-quality urban real estate in India is beginning to act as a dampener on many businesses that might otherwise have strong prospects.
Take organized retailing, which is set to triple in size to $23 billion by 2010, according to KPMG International.
Wal-Mart Stores Inc., which is anxiously waiting for India to allow global retailers to set up shop, will need anywhere from 100,000 square feet (9,290 square meters) to 200,000 square feet for each of its bigger stores. So would Carrefour SA.
Where will they find that kind of space in Mumbai, New Delhi or Bangalore? Not in the main shopping areas.
“Supply of vacant space of the desired size in prime locations is extremely limited,” economist Amitendu Palit said in a recent study on the challenges that global retailers can expect in India. “While New Delhi and Mumbai are expected to acquire additional retail space of around 30 to 40 million square feet over the next few years through new retail formats, the bulk of this is to be located in satellite or suburban areas.”
The Indian property market is extremely fragmented, thanks to zoning laws that specify land use based on pre-World War II British notions of what cities should look like.
A legal “conversion” — using a vacant factory or farm for, say, retail or housing — is so difficult and time-consuming that many individuals and businesses cut corners, and bribery is rampant. It’s only when the judiciary insists on a faithful enforcement of the zoning norms that one gets to understand just how oppressive the laws really are.
That’s what happened last month when the Delhi High Court ordered municipal authorities to demolish more than 18,000 unauthorized structures. As part of the drive, two shopping malls on the southern fringes of the city were bulldozed. Overnight, the flourishing businesses of some of the city’s best-known fashion designers were grounded because they were operating from a zone reserved for “villagers.”
If business is unwelcome on the outskirts of the city, the center is out of bounds, too.
A dearth of designated hotel land in central business districts is already showing up in an acute shortage of rooms. Average rates have shot up to about $160 a night in New Delhi and $242 in Bangalore. With such high room charges, India will struggle to build a tourism industry.
The other obstacle is that Indian planners dislike tall buildings, and this has very little to do with aesthetics.
The logic goes something like this: The taller the building, the more people who will be working or living in it. That means the authorities will have to provide wider roads to avoid traffic snarls. They will also have to supply piped water at a higher pressure to satisfy the occupants on top floors.
The municipality will have to collect garbage every day from taller buildings, whereas it can leave smaller heaps of refuse to rot for a few days in suburbs scattered over a larger area.
Since both the revenue and the technical capabilities of Indian municipalities are limited, town planners impose a very stringent limit on the floor-space index, which is computed by dividing a building’s total floor area by the size of the land occupied.
This is essentially a limit on a building’s height. In most Asian cities, floor-space index readings range from 5 to 15. In India, it is 1.6.
City Must Shrink
The floor-space index “should be raised significantly in central business districts to create affordable office space and make these areas accessible to small and mid-sized businesses,” N.R. Narayana Murthy, the chairman of Bangalore-based Infosys Technologies Ltd., said in a speech last month.
A recent experiment by the Mumbai authorities to provide decent housing to the 600,000 residents of Dharavi, Asia’s largest shantytown, has evinced strong investor interest because there’s talk of allowing a floor-space index level of as high as 4, Daily News and Analysis reported Jan. 30.
The floor-area restrictions push people away from the city center. In 2003, Alain Bertaud, a World Bank consultant on urban planning who is based in New Jersey, and economist Jan Brueckner at the University of California at Irvine estimated that if there were no such limits in Bangalore, India’s Silicon Valley, the city would shrink and commuters would save money.
A large chunk of India’s prime real estate is being held to ransom by existing tenants who are using archaic rent-control laws to pay rates that were fixed 60 years ago.
In Mumbai, real estate supply is constrained by the Maharashtra state government’s Urban Land Ceiling Act more than six years after the federal government repealed the draconian statute and advised states to do the same.
Almost five years ago, McKinsey & Co. warned that India was losing as much as 1.3 percentage points of economic growth because of distortions in the land market. Since then, the size of the economic opportunity knocking on India’s doors has increased, and so has the pressure on urban real estate.
Land is getting scarce in the land of opportunity.
To contact the writer of this column:
Andy Mukherjee in Singapore [email protected]