‘The grave dancer’, US tycoon Samuel Zell, was in a mood to spoil a two-year-long party when he told a gathering of Indian property executives this week they were ‘on the brink of excess’ and their boom would end in tears. The developers and fund managers could only agree.

The man who earned his nickname, and a US$4.5 billion fortune, picking up cheap offices in the 1990s US downturn and packaging them into a property trust sold last year for US$39 billion, said it was ‘mental masturbation’ to believe there were endless riches for investors in India’s one billion person market. Only a top sliver of the population can afford to buy the homes being built.

‘India’s greatest asset today is everyone’s imagination,’ Mr Zell said. Many in the audience nodded in assent. The only difference of opinion among some of India’s leading property professionals at the conference in Mumbai was how far property prices would drop, probably at some point in the next year - 10 per cent or 40 per cent?

The last time a property bubble burst in India, prices slumped by as much as 70 per cent between 1995 and 2001. But this time around, a raft of global funds raised by the likes of Citigroup, Morgan Stanley and Credit Suisse are likely to step in looking for bargains and cushion the fall.

‘Our expectation is that sometime in the course of this year you’ll see a 30 to 40 percent drop in prices,’ said Ajit Dayal, chief executive of fund manager Quantum Advisors. An estimated US$10 billion was raised internationally for Indian property funds last year. But rising mortgage rates and a doubling of property prices in major cities in the past two years will lift home prices beyond the reach of even the 40 million richest Indians that developers are targetting, he said.

Since 2004, 10-year bonds have risen around 300 basis points to 8 per cent, as the central bank seeks to control inflation in an economy that is estimated to have grown by 9.2 per cent in the year ended March 2007, its fastest pace in 18 years.

The price of a 100 sq m Bangalore flat has jumped 60 per cent in two years to US$100,000. Prime residential prices in Mumbai and New Delhi have doubled in that time to about 20 per cent lower than Shanghai and 40 per cent below Singapore and Hong Kong.

‘It’s very scary, prices are sky-high,’ said Aditya Bhargava, an executive at fund manager Trikona Capital, which is raising a US$400 million fund for Indian property. ‘I don’t know when the correction will happen, but there’s significant overheating.’

Source: The Business Times, 26 April 2007