Feb. 9 (Bloomberg) -- Shares of Unitech Ltd., India's largest real-estate developer by market value, soared 26,869 percent during the past three years. Anant Raj Industries Ltd., a competitor, leapt 39,548 percent.

Both have dropped at least 5 percent from peaks in November and December and further losses may lie ahead. The highest interest rates in four years, tighter lending requirements and seven share sales this year are hurting real-estate stocks. Those companies had rallied as a property boom pushed apartment prices in southern Mumbai to near-Manhattan levels.

``Property stock valuations are approaching bubble territory,'' said Parameswara Krishnan, who manages $150 million at DNB Nor Asset Management in Chennai, India. ``We should see some correction.'' He said he is avoiding real-estate shares.

Indian developers are among the BSE index's most expensive members on a price-to-earnings basis. Unitech trades at 31 times expected earnings, while Anant Raj, a New Delhi-based developer in which billionaire George Soros bought a stake last year, is at 67 times. That compares with 21 times for the BSE-500 and 19 times for the eight stocks in Bloomberg's Asia-Pacific Home Builders Index.

Average home prices tripled over the past three years, buoyed by the world's second-quickest growth rate among major economies after China.

A comparable apartment on the Upper East Side of Manhattan would cost between $6.5 million and $8 million, said Jonathan Miller, president of Miller Samuel Inc., a real-estate appraisal firm in New York.

India's developers also look expensive when their share prices are measured against the value of the land they own for construction, Jhunjhunwala says. Though he bought an expensive apartment to live in, he's avoiding real estate stocks.

``Land bank valuations by developers are unrealistically high,'' he said. The valuations may not be justified because the projects will take five or six years to complete, he said.

Rising incomes and easy financing have driven demand for housing among India's 1.1 billion people. Average salaries in India rose 13.8 percent last year, the fastest growth in the Asia-Pacific region. They may rise as much as 15 percent this year, according to Hewitt Associates Inc.

Mumbai's office rentals are now the third highest in the Asia-Pacific region after Hong Kong and Tokyo, a survey by property adviser DTZ Debenham Tie Leung Ltd. showed. It costs annually $88.2 per square foot to rent office space in Mumbai, compared with Tokyo's $97 and Hong Kong's $141.

The central bank is moving to cool the market. The Reserve Bank of India on Jan. 31 raised its overnight lending rate for the fifth time in a year to 7.5 percent and asked lenders to double provisions for commercial real estate loans to 2 percent in an attempt to curb defaults.

Housing Development Finance Corp., the country's second- largest mortgage lender, raised its rates four times over the past year to 9.5 percent.

``The continued high credit growth in the real estate sector, is a matter of concern,'' the central bank said.

Colliers International India Property Services says average property prices across the nation may drop as much as 20 percent over the next two years as more homes are built.

Still, demand for homes and offices mean any drop in property stocks will probably be a correction and not a rout.

``While a decline in housing affordability and potential oversupply could weaken prices in the near term, the long term outlook remains attractive on strong demand,'' analyst Mahesh Nandurkar at CLSA Asia Pacific Markets wrote in a Jan. 25 note.

Commercial and residential construction in India, Asia's fourth-largest economy, will surge to $50 billion by 2010 from $12 billion in 2005, according to a Merrill Lynch & Co. report. India will need as many as 10 million new housing units a year by 2030, according to estimates by the Asian Development Bank.

Initial share sales, though, will be competing with existing listed real estate companies for investor funds. Seven property companies have sought regulatory approval for IPOs so far this year, up from just two last year. The largest will be billionaire Kushal Pal Singh's DLF Ltd., which aims to raise about $2 billion, expected over the next couple of months.

As more supply of paper hits the market, valuations and returns will come down to more stable levels,'' said Krishnan, at DNB Nor Asset Management in Chennai. ``Companies may not be able to get the pricing they want.''