Friday, September 27, 2013

Real Estate Affordibility Curve in Highly Unaffordable Region

Property sales in India have traditionally been driven by investors, especially in Mumbai and NCR. Among the key markets, Bengaluru and Chennai have been the key exceptions. But, in the past five years, the sales dynamics have changed with increasing participation from the white-collar segment.

Property sales volumes have moderated, project launches have remained healthy (but limited launches in the affordable segment), and incremental appetite of investors seems to be shrinking fast on weak sentiment. Thus, we believe end users are now key to new sales growth. Also, many investors are stuck with their prior investments, so incremental participation from them will likely be limited.

Property prices have risen by an average of 18% since FY12, while the recent measures by the RBI have led to a 25-50bps increase in interest rates. Salaries have grown just 11% (versus the past five-year average of 16%), due to macroeconomic slowdown and due to the pressure on corporates to reduce costs to protect profitability.

Our analysis of affordability --which we define as monthly loan payment to net income- indicates a significant deterioration in the last 1-2 years with the interest-rate cycle reversing (trending towards higher interest rates). We expect the affordability ratio (a function of interest rates, property prices and salary) to worsen over the next six months unless prices correct.

Wednesday, September 25, 2013

Festive season is the Key for Residential Real Estate

Launch activity has taken a breather at the margin across markets, after a fairly active 1H. This trend is expected to continue as we enter a seasonally weak period and given the onset of monsoons.

Gurgaon witnessed the successful launch of DLF’s golf course project (250 units sold in few days of launch). It has additional luxury project planned around Golf Course post September. Bangalore/Chennai continue to witness healthy sales momentum, aided by NRI demand given sharp rupee depreciation. However, we
expect the activity to moderate over the next few months.

Anecdotal evidence shows, unsold inventory up to 8 qtrs is manageable. As per JLL data, unsold inventory across major cities stood at Mumbai (12 qtrs), Bangalore (8.5 qtrs) and Gurgaon (3 qtrs) as of 2QCY13. Gurgaon is low ‘cause of high investor demand. We expect inventory figures to worsen in 3QCY13.

Overall absorption is marginally down on Q/Q with Mumbai, G Noida and Bangalore registering a positive trend. This was however offset to some extent by moderation in absorption in Gurgaon and Chennai.
Gurgaon has seen spot prices fall by 10% as investorsstarted to panic. Forward prices (primary mkt) has softened in Mumbai (down 10-15%); started to weaken in Gurgaon (down 5-7%) and flattish in Bangalore.

Unsold inventory is rising slowly as there is no improvement in absorption trends. Deliveries are expected to
see significant scale up over the next few Qs with large project completions across key cities. This could shift some activity to the secondary market.

Wednesday, September 11, 2013

Real Estate - Real Demand Slumps , Inventory Rises

We expect near term sector performance to remain muted driven by an unfavorable environment, liquidity concerns, stressed balance sheets, defaults in the system, high inventory levels, high investor involvement, weakening demand and the overhang of elections.

Mumbai - Sales volumes show signs of softening after 2 successive quarters of improvement. Inventory months remain elevated (~42 months). Given the uncertain environement and high inventory levels, we expect a ~10% cut in prices in FY14.

Delhi NCR - Sales volumes fall sequentially due to  seasonality, stable on a YoY basis. Inventory levels continue to be elevated (~41 months) Price - volume equation likely to remain subdued in face of
upcoming elections. Expect a 10% softening in prices in FY14

Bengaluru - Sales volumes improve sequential ly and reverse decl ining trend noticed for the past 3 quarters.Inventory levels (~31 months) have picked up sharply during the quarter led by strong launches during the quarter. Accordingly, we expect a ~5% price cut in FY14.

Chennai -  Volumes fall marginally on a sequential basis. Market remains stable. Inventory levels have
increased sharply (44 Months). We expect launch momentum to ease and volumes to stabil ise at sl ightly lower levels. Buyer incentives may come in.

Pune - Volumes fall sequentailly and are weak on a YoY basis as well. Inventories (~21 months) have built up fol lowing successive quarters of launches exceeding sales volumes. A stable volume market where launches have outstripped absorption capacity. Inventory overhang to take a year to clear.

Hyderabad - Resolution of Telengana issue wi l l provide a boost to prices and volumes.

Thursday, September 05, 2013

RBI frowns on 80:20 housing loan schemes

RBI has advised banks that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses and upfront disbursal should not be made in cases of
incomplete/under-construction/green field housing projects. While yesterday's notification talks only about banks, we believe that it will be applicable to nbfcs and housing finance companies as well.

  • ICICI Bank said that such schemes are only ~2-3% of their total home loans.
  • LICHF has said that they do not finance any such schemes as in their view these are akin to developer financing and they are not doing any developer financing at the moment.
  • HDFC says that they sanction loans based only on the borrower's ability to may and all their disbursements are construction linked and they do not make upfront disbursements. HDFC had highlighted this as risk for the industry in their 2013 annual report.
RBI has issued a notification with reference to certain innovative housing loan schemes introduced by banks in association with developers/builders where in upfront disbursals are made of sanctioned individual housing loans to the builders without linking the disbursals to various stages of construction of housing project and / or interest/EMI on the housing loan availed of by the individual borrower is serviced by the builders during the construction period/specified period. These loan products are popularly known by various names like 80:20, 75:25 Schemes