Trade sanctions against India may stop real estate project

By Kenneth V. Smith

Owning real estate requires a long-term view, but the smart investor always keeps an eye open to the sometimes volatile and rapidly shifting tides in global economics and international politics. Whether the property is a small flat or the tallest office tower, decisions to loan or buy are based on the assumption of stability in government and monetary policies.

However, even smart professionals with the best laid plans can be caught by unanticipated and uncontrollable events. When there's chaos, real estate values drop quickly. The recovery of real estate values always takes longer than the fall because lenders and investors wait for signs of renewed stability.

Last week in India, government officials proudly announced that a World Trade Centre would be built in Bangalore near an international technology park that would become a computer software development hub. The center is part of a residential and commercial township of 139 acres.

The center was to be financed by loans guaranteed by the US and several other countries, including Japan and Australia. The Bangalore center will cost US$75 million.

With a well educated, English speaking untapped pool of skilled programmers and technicians, India is increasingly capturing the attention of global corporations. India has been aggressively seeking foreign investment as part of a massive national program to reduce unemployment. Unlike other undeveloped countries, India has job seekers with college educations and advanced technical training in English.

As an indication of global interest in Indian real estate, LaSalle Partners, a major commercial real estate firm with headquarters in Chicago, last month announced the opening of an office in New Delhi, India.

LaSalle CEO Stuart L. Scott said the expansion into India "is of great importance to our firm as we continue to broaden our global reach." He named David J. Fowler as CEO of LaSalle Partners (India), saying Fowler has 14 years of international real estate experience with the last three years in India. Fowler will head a team with both international experience and local knowledge of Indian real estate.

Until this week, analysts saw the Indian real estate market as being in its infancy with some growing pains, but overall very healthy. Narayanan Edadan, a senior consultant to the Indian National Institute of Public Finance, wrote recently in the Financial Express of India that Indian real estate is close to becoming a commodity deal making market.

But, this week India conducted underground nuclear tests that the US and many other countries view as a violation of international treaties. The reaction from President Clinton was swift. From Germany where he was meeting with Chancellor Helmut Kohl, President Clinton notified Congress that he is imposing sanctions on India, as required by the Arms Export Control Act, after its government conducted nuclear tests.

The sanctions include the denial of any credit, credit guarantees, or other financial help by any department, agency or instrumentality of the United States government. Another part of the sanction prohibits U.S. bank loans or credit to the Indian government, except for the purchase of food or other agricultural commodities. And, in another bit of bad news for the proposed center in Bangalore in the software development hub is the sanction prohibiting the export of high tech products and technology.

Japan, Sweden, Germany and Denmark have also cut aid to India in the wake of the nuclear testing.

It is too early get reports of the impact of the sanctions on real estate in India, but it would be a safe bet to say that property values are significantly less today than one week ago.

There was more bad news for India and other countries in Asia this week. Meeting in Geneva, Switzerland, international money managers considered the reports of India's nuclear testing as additional evidence of the region's instability.

"Asia has got everything going against it at the moment," said Terence Mahony, managing director of TCW Emerging Markets Equities. "In Asia, we're moving into another down turn -- the eye of a storm. Asia's problems are going to last two to three years" he said.

The money managers at the Geneva meeting were concerned about India, but they are more worried about Indonesia, Malaysia and the Philippines. They have already pulled their money out of these countries, and they are reducing their exposure in traditionally stable Singapore.

Because of hyperinflation, high unemployment, and an increasing number of riots, there has been a tremendous loss in the value of real estate. Recently in the Indonesian capital of Jakarta, 334 luxury residential flats were selling for an average $18,000 each. They sold for $200,000 each before the crisis.

The Singapore Business Times reported this week that the regional crisis is causing a credit squeeze in Singapore. Banks are now closely scrutinizing mortgages and business loans that would have been granted easily a year ago. In real estate loans, Singapore banks now will go no higher than 50 percent loan to value.