RBI concerned with Real Estate and SEZ Bubble in India

India's central bank, the Reserve Bank fo India expressed concerns over rising property prices in India. The property prices have doubled and in some cases tripled in just a span of 2 years. RBI has raised interest rates twice to cool the overheated property market. RBI has also raised the risk-weighting of housing loans to 150% to discourage bank lending, and has sought to keep out foreign venture capital funds wanting to get into Indian real estate.

However, the bigger bubble might arise somewhere else - SEZs. The Government has allowed some land(50%-75%) in every SEZ to be used for housing, schools, malls and entertainment. Reliance Industries, for instance, is the main partner in twin SEZs coming up at Navi Mumbai and Maha Mumbai, with a combined size of 35,000 acres. The phase I investment alone is reckoned at Rs 5,000 crore, and the ultimate investment has been estimated at Rs 50,000 crore in seven years or so. Reliance is also planning a separate IT SEZ which will also house all the corporate officers of Reliance Mukesh Group.

Adani group is also setting up an SEZ at Mundra, covering 30,000-35,000 acres, and it proposes to invest Rs 7,300 crore on infrastructure. The SEZ aims at a total investment of Rs 70,000 crore (including that by export units) over 10 years. DLF SEZs are coming up at Ambala (2,500 acres) and Gurgaon (19,880 acres) while Unitech plans one at Sonepat (10,000 acres).

I can shout at the top of my voice that the aim of these SEZs is to promote exports and not land values. No country has prospered with just land banks / real estate without any industrial and manufacturing base.

India's export potential is much higher today, and so the build-up should be much faster. But can it really be fast enough to fill 388 new zones? Just the infrastructure cost of developing these could be hundreds of thousands of crores. What is the advantage that inland locations like Haryana will bestow on export-oriented units? Just for Reliance's own retail dreams. No. The going will not be smooth with falling quarterly profits and rising oil prices. If SEZ developers spend huge sums on infrastructure and are unable to attract enough export units, they will quickly run into a financial crisis arising from over-building. The SEZ bubble will burst, and it will be a large explosion which RBI and Finance ministry wants to avoid at any cost.

Financing the SEZ:
There is a danger here for small shareholders, bondholders and banks. Small shareholders are currently excited by real estate prospects, and will probably rush to buy shares in SEZ companies. SEZ promoters will seek to raise bonds and bank loans that are several times as large as their equity. Risks are higher for inland SEZs so weigh every option before you invest your hard earned money. Recollect IT specfic mutual funds that came in 2000 and went in terrible loss and were able to breakeven only in 2005. As a small investor, stick to SIP in diversified Mutual funds rather than sector specific investments.