In March this year, the Haryana Urban Development Authority (HUDA) announced sale of 5,200 freehold plots, and how many people queued up to buy? 50,000? 100,000 or perhaps 500,000? If you picked the last figure, you'd still be off by a huge margin. A staggering 2 million applicants thronged HUDA's offices and bank branches where the forms were being sold. HUDA, on its part, can't stop grinning. It made a cool Rs 10 crore just selling the forms, and expects to make another Rs 600 crore from interest income on the earnest money.

In March too, the Delhi Development Authority (DDA) put up sites on the outskirts of Delhi for sale, including Jasola, Okhla, Rohini, Motia Khan and Shahdara Central Business Districts. As made evident by its total reserve price for all the sites, DDA thought those pieces of real estate were worth at least Rs 533 crore. How much did DDA end up with? Surprise: Rs 943 crore. It helped that there were as many as 20 bidders jostling for some of the plots. The Emaar-MGF Land (Emaar is a Dubai-based realty giant that is building Burj Dubai, which could become the world's tallest building when completed in 2008) combine bought two adjacent plots in Jasola for Rs 388 crore; DDA's reserve price for them: Rs 118 crore.

Gurgaon In Gurgaon and Noida, prices have jumped by as much as 200 per cent. The cheapest DLF apartment in Gurgaon (among the newer projects) costs Rs 1 crore	Mumbai In Mumbai, rates of residential properties in places like Cuffe Parade have shot up from Rs 11,500 per sq. ft three years ago to Rs 25,000 now
Sonepat The property boom has rapidly spread across small town India. Drive by places like Sonepat, Coimbatore, Jodhpur or even Vijayawada, and you'll see new buildings coming up	Chandigarh The planned nature of Chandigarh has always had an appeal. And now with the city being preferred by IT companies, there is a spurt in real estate demand

Earlier in February, a consortium comprising Maytas Properties (that's Satyam spelt backwards), Nagarjuna Construction Company and ICICI Venture made real estate history when it plonked down Rs 335.25 crore for 5.8 acres of land in the city's upmarket Jubilee Hills. The price per square foot works out to an astonishing Rs 13,000-plus. The buyers apparently plan to build a luxury hotel on the site.

What's happening? In a country that boasts of the seventh-largest land mass in the world, why are buyers behaving as if land is running out of supply? Make no mistake, though. The real estate mania, as illustrated by the preceding examples, is hardly the ailment of a few buyers in a handful of cities. Over the last three years or so, the real estate market has simply exploded. In Mumbai, rates of residential properties in places like Cuffe Parade have shot up from Rs 11,500 per sq. ft three years ago to Rs 25,000 now. In Delhi's satellite cities of Gurgaon and Noida, prices have jumped by as much as 200 per cent. Bangalore's realty has surged too (see Pay Dirt). But what's not so intuitive about the property boom is its rapid spread across small town India. Drive by places like Sonepat, Ludhiana, Coimbatore, or even Jodhpur and Vijayawada, and you'll see new buildings coming up all around (see Cities Of Joy on page 134). Says Sanjay Verma, Jt Managing Director of Cushman & Wakefield, a real estate consultancy: "The development in Tier II cities such as Pune has accelerated at such a pace that some of these cities are graduating to Tier I grade."

"The current price rise is a bubble fuelled by developers. Where else do you see prices rising like this? Present buyers (of residential properties) are unlikely to be end users" Deepak Parekh Chairman/ HDFC

What's Behind The Boom?

To answer in a word, demand. Underlying it, though, are some key macro-economic reasons. One, the country's growth. The economy has been growing at over 7 per cent over the last three years (including 2005-06, where the estimates point to an over 8 per cent growth), boosting not just business confidence, but also consumer sentiment. A number of sectors such as it and ITEs, retail, hospitality, healthcare, and entertainment have grown rapidly, gobbling up acres of land. To add to it, interest rates have actually come down from high teens to about 9 per cent, giving rise to an EMI (equated monthly instalment) economy, where even a Rs 30-lakh apartment is affordable to a large number of households. Besides, the real estate inventory built up during the previous boom of the mid-90s has declined. "Low interest rates and retail loan boom have turned the latent demand in many of these cities into a real demand," says Gaurav Dalmia, Chairman of Landmark Holdings and also a director on the board of a real estate fund, Fire Capital India.

Talk to builders and they'll assert that the boom has just begun. If the Indian economy accelerates growth to, say, 9 or 10 per cent, there will be greater demand for commercial real estate, in addition to the millions who still don't own a home. "Currently, there is a need for 22 million dwelling units in India, and till this gap is bridged, there is no reason for the demand (for residential units) to abate," says Sushil Ansal, Chairman, Ansal Properties & Infrastructure. Ansal isn't the only one betting on the boom. Thanks to key changes in foreign investment policy in real estate (see FDI Friendly), there's a flood of wannabe investors in everything from residential units to townships to special economic zones. "The next four to five years will see annual inflows of $2-3 billion (Rs 9,000-13,500 crore) into India," says Cushman's Verma.

"Currently, there is a need for 22 million dwelling units in India, and till this gap is breached, there is no reason for the demand (for residential units) to abate" Sushil Ansal Chairman/ Ansal Properties & Infrastructure

But like in private equity, funds actually invested may be much smaller than the money raised, and in real estate more so due to certain peculiarities of the Indian market: Transaction costs are high, rules and regulations are not just varied, but cumbersome, and the builder community is still largely unorganised. So, investors may want to invest only in properties that are relatively risk-free. Still, if they are queuing up with their cheque books, it's for a simple reason: "Yields on real estate at 8-10 per cent and returns on investment at 17-18 per cent are the most attractive among all Asian markets," points out Anuj Puri, MD, Trammell Crow Meghraj, another real estate services firm.

The entry of institutional investors, as against individual investors, promises to profoundly impact the structure of the industry. Besides transparency and liquidity, it is expected to bring in economies of scale as project sizes increase. "Most visibly, I think, the practice of viewing each project as an independent balance sheet will give way to a more transparent and consolidated method of accounting, where investors and buyers look at the company as a single entity," says Prakash Gurbaxani, MD, TSI Ventures India, a joint venture between Tishman Speyers and icici Venture. At present less than a fifth of the real estate market has even begun adopting this system, but given the growth and evolution of the market, things could change soon. For instance, DLF Universal and Ansal Properties have plans of launching their initial public offerings (IPOs). While Ansal is talking of raising over Rs 1,000 crore either via a private placement or an IPO, DLF is said to be mulling a $2-billion (Rs 9,000-crore) float.

Bubble Ahead?

Despite the flow of money and clean-up in the industry, it is evident that real estate prices cannot keep rising at the rate they have over the past few years. So, a slowdown is inevitable, but is a price crash a possibility? A general market crash doesn't seem likely at this stage, but it is almost certain that some developers and investors will be hard-pressed to justify their investment. Take the case of Emaar-MGF, which paid Rs 388 crore for the two plots in Jasola at the recent DDA auctions. That works out to a whopping Rs 19,793 per sq. ft. The site has been zoned for a hotel, but allows a quasi-mall too. The high acquisition cost means that Emaar-mgf has two options: Either charge astronomical room rentals and risk pricing itself out of the market, or not do that but prepare for a longer break even of the project and lower returns on investment. "Mixed use of the site with retail thrown in would possibly justify the high amount paid," says Manav Thadani, Managing Director, HVS International, a hospitality consultancy.

Retailers themselves aren't that sure. Kishore Biyani, the man behind Pantaloon and Big Bazaar, says that all businesses must pay for themselves eventually, and the retail industry, where profit margins are thin and volume is the name of the game, cannot help sustain the current price levels. "Everything (prices) is illogical," quips Biyani. Pantaloon, for instance, has an internal benchmark rental price of $1 (Rs 45)/sq. ft, which it tries not to breach while negotiating leases. What's true of Pantaloon is true of other retailers as well. They cannot lock into high-rental deals when there's no guarantee on revenues.

"Many of the smaller cities do not have the requisite aspirational values to sustain too many projects, and even if that aspiration exists, the spending power does not" Shravan Gupta Managing Director/ Emaar-MGF Land

On the residential side, people buying their first home or apartment have little to fear. For them the property is not an investment on which they need a return, but it is a necessity: After all, they need a house to live in. It's the people buying their second or third apartments on easy EMIs that need to fear, because what they are doing in effect is opting to invest their disposable income in real estate instead of, say, stocks or debt instruments. Often the calculation in such investments is that rental income will partly fund the EMI, besides which the bet is on capital appreciation. But what happens if the rentals are low compared to the price of the property (which seems to be the case at present) and capital appreciation isn't fast enough to justify the investment? The investor will sell. That's when prices will come under pressure. "Present buyers (of residential properties) are unlikely to be end users," says Deepak Parekh. He ought to know. He is the Chairman of India's biggest housing loan firm, hdfc. According to both Parekh and Ansal of Ansal Properties, such investors may start cashing out in another year to year-and-a-half. That's when the sustainability of current prices will be put to test.

Here are some other reasons why a selective price crash in some areas and properties may be inevitable. For one, the top builders are not building plain vanilla apartments anymore. Instead, they are building apartments that are aspirational, with facilities like swimming pools, tennis courts, gymnasia, club houses, etc. The cheapest DLF apartment (among the ongoing projects) you can book in Gurgaon today, for instance, costs Rs 1 crore. Mumbai has always been expensive, but even in cities like Bangalore, new-age apartments with bells and whistles are either nearing or have crossed the Rs 1-crore mark. Although developers like Niranjan Hiranandani of Mumbai-based Hiranandani Developers attribute the price rise to rising land prices and input costs, and say that there is not much of speculative buying any more, the person buying an apartment for Rs 1 crore isn't obviously buying his first apartment. He is buying it for investment purposes.

For another, demand in smaller towns may not be deep enough to justify the rash of projects coming up. Agrees Shravan Gupta, MD, Emaar-MGF: "Many of these smaller cities do not have the requisite aspirational values to sustain too many projects, and even if that aspiration exists, the spending power to back it does not." To make matters worse, industry watchers say that many fly-by-night developers are flipping assets by buying land (and sometimes not even that), pre-launching projects and raising money. What they are doing in effect is passing on the project risk to unwary customers. "A slowdown in the economy and softening of real estate prices could lead to a resurgence in the level of non-performing assets with the banks and threaten the entire financial sector," warns the head of a public sector bank.

The central bank seems to be concerned as well. In August last year, it increased the risk weightage on banks' real estate assets by 25 basis points. In its November report on Trends in Banking, the Reserve Bank of India points out that credit to the real estate sector shot up by more than 90 per cent in 2004-05, compared to a decline of 5.4 per cent in 2003-04 over the previous year. Housing loans alone were up 44.6 per cent in 2004-05. At last count, which is up until March 2005, banks were sitting on housing loan assets worth Rs 1,34,653 crore. During 2005-06, they may have added another Rs 60-65,000 crore.

HDFC's Parekh, for one, is clear that the industry is flirting with disaster. "The current price rise is a bubble fuelled by developers. Where else do you see prices rising like this?" he asks. Others like Dalmia of Landmark say while it is unlikely that India will face a Japan-like situation, where the bursting of the real estate bubble pushed banks over the edge and the economy into a long recession, the real estate euphoria does raise concerns. Says Dalmia: "In 1999, the underlying sentiment with the tech entrepreneurs (read: dotcommers) was that they were cat's whiskers and the rest were idiots. It is exactly the same posturing that one sees in the real estate tribe, and that is scary."

The moral of the story is simple: Some investors in real estate will almost certainly come to grief. Whether you'll be one among them is entirely in your hands.

-additional reporting by Ahona Ghosh in Mumbai, E. Kumar Sharma in Hyderabad, Rahul Sachitanand in Bangalore, Archna Shukla in Delhi and Ritwik Mukherjee in Kolkata