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Dalal Street


Housing for All by 2022

Monday, July 03, 2017

Volume growth is the key growth driver this decade, versus Asset Price Appreciation in the previous decade.

The government's efforts towards Housing for All by 2022 implies multifold increase in supply, which is yet not visible. Cement demand is a good leading indicator for the property sector, according to the panelists.
Demand for completed projects is high due to low execution risk. In the past few quarters, there has been an increase in interest in lower ticket size apartments.

Affordable housing has significant underlying demand (and hence a big opportunity for developers). Plus, multiple incentives announced by the government have resulted in many prominent developers entering this space.

Most of the states are yet to notify RERA rules despite the set deadline of July 30, 2017. Grade A
developers are likely to benefit from RERA due to their stable balance sheet (ability to comply with 70% escrow requirement), good execution capability and better corporate capability to comply with new rules.

Residential Real Estate - Affordability alltime high now

Tuesday, June 27, 2017

With property prices rangebound / downward across major markets, improving incomes + reduced mortgage rates have improved affordability levels to 10+ year highs. Mortgage rates are now near seven year lows. Historically, whenever mortgages have come close to the 8% mark (vs currently at 8.5%), residential markets have seen a significant boost upwards. Customer confidence on end delivery is lacking and we think once RERA comes in that will get addressed over a 23 year view.

 The latest data points from various primary market sources (Prop equity / JLL) show that unsold inventory across markets has started to come down. This data point was consistently trending up since 2009 and hence we believe a reduction marks a seminal change. Further, new launches falling off 50-80% across markets and the structure of deliveries showing large declines from 2018 onwards implies that market supply is going to be challenged from 2018/19 onwards, in our view. As the RERA bill comes through this unsold supply number we think will have even higher downside risks as we expect many new projects to be simply cancelled as many developers find the economics unviable.

Looking at private market actions, we think the private investor focus is moving into residential real estate either via credit/equity strategy and fund flows have increased. Also reflected in increased lending appetite in many NBFCs as well. Further many other senior long cycle executives/ leaders in the business we note too have quit to start owned ventures in the residential realty business.

RERA registrations in Mumbai Sluggish

Friday, June 16, 2017

As of June 15, 2017, only 16 Mumbai projects (plus 4 in Thane; 32 overall Maharashtra) are displayed as registered on the Maharashtra RERA website, which we believe are those approved by the regulator. While there is likelihood that more projects may have been registered but not approved as yet (hence not displayed), total approvals appear quite low versus the quantum of ongoing projects—800 plus, we estimate. In our view, the poor registration statistics could be due to developers taking time to understand process details and aligning their internal processes with RERA's provisions.

Channel checks with GPL, Oberoi and SRL (exposed to Mumbai residential market) indicate that they are in an advanced stage of background preparation for registering their projects under Maharashtra RERA. This, according to them, is a time consuming process and are seeking expert guidance to adhere to the regulations. They expect to begin the registration process over coming weeks and are confident of meeting the July 31 deadline; they do not anticipate any disruption in their project sales. Failure to meet the deadline will prevent them from advertising & selling unregistered projects.

In view of the poor registration momentum in Mumbai, we see risk of a meaningful proportion of ongoing projects remaining unregistered at the end of the deadline. New launches in Mumbai have slowed down pending RERA registration and we expect this to continue for coming few months until developers align themselves with RERA requirements. We, hence, expect new sales to slowdown in the Mumbai market post the deadline, with steady recovery in ensuing months as registration of ongoing projects and new launches pick up.

Govt Housing Benefits only for Low Income Groups

Sunday, March 26, 2017

The credit-linked subsidy scheme (CLSS) under the Prime Minister Awas Yojana (PMAY) will help reduce the IRR on home loans by about 100 bps or imply 2-10% discount on purchase of new property, higher benefit at lower ticket sizes. The scheme alone may not be a catalyst for making a purchase decision; better employment opportunities and improving affordability will have to play a greater role, in our view.

The MIG segment will be included in this scheme from FY2018 to provide the following: (1) 4% subsidy for loans up to Rs0.9 mn and (2) 3% for loans up to Rs1.2 mn. Interest subsidy is credited upfront to the loan account of beneficiaries through lending institutions (banks/HFCs) resulting in reduced effective loan liability. The calculated subsidy for loans across categories is Rs0.23 mn. This benefit is only available to first-time buyers.

The CLSS for the MIG saves around 5-8% on Rs3-4 mn/unit home. With increasing ticket size, the impact of such subsidy reduces. While household income cap of Rs1.8 mn/annum can allow homes between Rs7-9 mn/unit, the benefits of the subsidy don’t stand much (about 3%).

 Most units offered by listed developers in metros are above Rs5 mn/unit and hence the benefits of such schemes are limited. We expect more developers to launch homes up to 60 sq. m. carpet in FY2018 (to gain benefits under 80-IBA), which could increase volumes; but value contribution will be limited considering the share of such units to the overall area under-construction. Most developers under coverage offer limited affordable housing homes today.  

CLSS is most beneficial for borrowers in loan of about Rs2 mn A high income cap provides relief to a large proportion of borrowers though, at the higherend would imply just about 3% benefit. The implied discount is meaningful at 5-8% in case of loan of Rs2-3 mn, which comprises about 25% of total loans of housing finance companies. With increasing ticket size, the impact of such subsidy reduces; it's about 3% in the higher-end.

Investment / Speculation Made Less Attractive in realty - Budget 2017

Friday, February 03, 2017

Real Estate investors / speculators in India historically benefitted from full offset available on house property income loss (property rent -  home loan interest). However budget 2017 has capped the loss offset to Rs 0.2mn inline with self-occupied interest exemption.

Based on our analysis, the move increases funding cost by 30% with investors return lowering by 3-5% in the first year. In addition clause introduced on reducing holding period for long term capital gains from 3 to 2 years will reduce the exit cost for investors.

We believe these provision will significantly impact investor demand (already declining) and increase supply in secondary market as house economics worsen materially (4% capital appreciation required to break even) leading to headwind on property pricing. For completed unsold apartments, developers have been given an year’s exemption for tax on notional rentals.

Affordable Housing Darling of Government
Government gave infrastructure status to affordable housing which will result in better access to funding (including land funding), longer tenure loans and lower cost of funding. In addition tax incentives for affordable projects were made inline with practice as 1) size definition changed from built up to carpet.  2) period of completion of project for claiming deduction increased from existing 3 years to 5 years (more realistic timeline in our view). We expect more players to focus on this segment as these clauses could improve return profile by 15-20%.

Market slowing down, managing repayments and construction the key

Wednesday, December 28, 2016

The Real Estate market has slowed after showing steady trends for two years on volumes. In Bangalore too, local issues drove negative sentiment, but organized developers held on to their volumes. Gurgaon remains an aberration for large developers as well - sales remain weak. We expect launches to drop further as developers look to sell from ongoing projects. We don’t expect new launches form listed developers in Mumbai and Gurgaon over next two-three quarters, while Bangalore might report launches in certain pockets.

Any potential fall in pricing is unlikely to boost volumes as sales usually don’t pick up in a falling price environment. But we don’t expect a major correction in pricing in the western and southern metros as prices have remained stagnant for the past three years and affordability has been improving in certain markets. Transaction prices are usually 80-85% of the quoted prices for the past three years and could see some discounts / offers.

Slower volumes worry us more than drop in pricing, as lower volumes will reflect in lower collections resulting in slowing construction and servicing of liabilities. Market-wide volumes could correct over the next 2-3 quarters, by 10-30%. This will delay projects of several unorganized developers further, as availability of credit is limited to organized developers.

Real Estate Industry in India - Shift towards Transparency

Tuesday, December 20, 2016

Real estate industry is at a cusp and there is clear shift that is happening for positive in the long term.

Looking ahead, there is a tectonic change that is going to happen to the industry, for which we feel that the next three to five years are going to be a different scenario for the real estate space in India. The Real Estate (Regulation and Development) Act, 2016 (RERA) coming into place, is a historic event in itself, an era whereby the industry is going to get institutionalized, which will make it consumer friendly along with enhanced transparency. The Benami Transactions (Prohibition) Amendment Act (PBPT) will ensure that undeclared money which was chasing the real estate industry will be impacted. Third is the Land Act
which is currently under discussion, and is long drawn, but when it happens and whatever time frame it takes, will eventually give a huge supply to the industry.

With consumers becoming more technology savvy, the online real estate platforms are pushing the industry
towards a consumer‐driven market. In the downward interest rate regime, we have already seen rates coming down from 11% to 9 % and the anticipation of another percentage drop seems perfectly plausible.

India can’t be much different from any other country. REITs as an assets class is the requirement of specific set of investors for long term; these investors look for a mix of both ‐ regular returns and a reasonable level of capital appreciation. Majority of the foreign capital in last 3 years has been pumped into the commercial real estate space to lock Grade‐A space.

All markets move in cycles, and the real estate market is no exception, where we have already witnessed the down turn. Post 2008 and more so post 2010, we have seen a general uptick for the industry followed by another bout of sales slowdown, untimely deliverables. A correction phase began almost three years ago, in the residential space, while the market almost bottomed out in the commercial space.

Real estate being a cyclical industry, we should consider investing with a long term horizon of 5‐6 years, and going forward we see better returns than other asset class. We feel this is the correct time to be in the sector, when you have all the regulations coming into place, with expected inflows of institutional capital in the sector, a low interest rate regime, backed by a robust and growing Indian economy.

Excerpts from Aditya Birla Real Estate Fund CEO M. Yadav

Real Estate Price Correction Inevitable for Industry Sustainability

Monday, December 19, 2016

The Indian real-estate demand will fall meaningfully as lack of currency slows down the black economy: NIPFP estimates black money is 40% of real-estate demand. Real-estate as the favoured repository of black wealth is the reason India’s rental yields are the lowest among major economies despite high interest rates.

Given its large contribution to GDP globally, falling real-estate prices have either accompanied or driven a recession. India may also see a sharp slowdown, as first slowing transactions and then falling prices affect construction. Falling prices would thus affect discretionary consumption as well as borrower health, with its own downstream implications.

Like many other effects of demonetisation, falling real-estate prices for India can help the economy over two to three years. India needs more housing stock, and its construction can boost output and create jobs: this was stalled by high clearing prices. However, for now we do not expect investors to look through the impending weakness, particularly as the slowdown in demand could be protracted by a buyers' strike. Eventually when prices have corrected by, say, 20% and mortgage rates have fallen by, say 2 percent points (implying EMIs fall by ~15%), the cost of ownership could actually be down by nearly ~35%.