Mumbai - Good Recovery, but Rentals Slower

Spate of new launches in the last 2-3 months, well spread over the city landscape.

Based on the market feedback, we understand that the volume off take was quick at the lower end of these price bands and slow at the upper end. Primary sale prices have risen rapidly (10-20%) over the last 2-3 months, around 15% shy of end 2007 peak levels.

Story will be different this time around, and unlike the previous bull market (prices went up 3-5x) prices will rise gradually. Residential rentals, though up from the bottom, are still at 25-30% below the end 2007 peak level (due to new supply), we believe. Further, Real Estate across the World suggests that rentals are a better reflection of the underlying demand, which will ramp slowly in view of significant supply.

On all India basis, we continue to believe that F10 will be the year of volume recovery, leading to 10% price increase in F11.

Mumbai + Delhi Hottest Investment Destinations

According to a survey just published by Colliers Investment, Mumbai and Delhi are the hottest destinations. Here is a complete result of the survey
[City - Preference of Respondents, Upcoming Supply, %of Supply as Affordable homes, Price Trend]

• Mumbai - 75%, 56K Units, 8% affordable, Mild Upswing
• Delhi - 53%, 3.3K units, 2% affordable, Still near the trough
• Bangalore - 52%, 45K units, 2% affordable, prices at trough
• Pune - 42%, 22.5K, 45% affordable, prices at trough
• Chennai - 40%, 44K units, 33% affordable and prices at trough
• Hyderabad - 30%, 28K units, 7% affordable, prices at trough
• Kolkata least favored state due to political parties which have hampered growth - 17%, 8.8 units, 45% affordable, prices just off the trough

3 out of 4 respondents believed that residential prices would increase from 0% to 10% in the next six months.

Model Act + Regulations - Potential Problems

We studied the proposed Model Real Estate Act and here are some potential problems.

Prohibits development of land into a colony or construction of apartments for marketing without registration.

This will prove tough on small developers given its inflationary impact on project cost. The key concern here is whether licencing would occur at the Centre or State level licencing at the Centre level could prove detrimental.

Mandatory registration by a regulatory authority prior to each project launch; 36-month licence period; bank guarantee from developers

These steps would safeguard the consumer from false developer claims regarding carpet area, built-up area and flat development plan, as developers would be required to proffer these details to the registration authority prior to launch. Prices, however, may increase due to the bank guarantee clause.

Disallows the issue of advertisements or prospectuses inviting advances or deposits

This could have a negative impact on end consumers since the absence of advertisements would leave buyers in the dark about upcoming projects.

No deposit or advances to be taken by promoters without first entering into an agreement of sale

This will prevent any discrepancies in the sale agreement, thereby protecting the interests of end users. It will also discourage investor-buyers from entering into the market and fuelling price speculation.

The Big Question - How efficient this Regulator will be ? All Developers are Politicians or First / il-legal Blood of Politicians and hence the regulator won't be in a spot to pass orders like SEBI or RBI does.

Inventory of Residential Apartments

PropEquity has done an excellent job of taking stock of the residential apartment inventory across various cities in India [Mumbai, Gurgaon, Noida, Thane, Bangalore, Kolkata, Hyderabad and Pune] for projects priced around INR 3 mn. Here is the latest availability chart. [Expandable]

Volume recovery in the residential segment has primarily been driven by improved affordability on the back of aggressive price cuts and reduction in mortgage rate.

Affordable housing - Gripped by Fear of Excess

PropEquity research data highlights that developers who had hurried into this segment, to improve their cash flows at a time when high-end residential segment was suffering, are sitting with >40% unsold stock. Of ~0.1mn units that were launched between Nov08-Oct09, only 57% found buyers.

Already seems to be a crowded space; we believe this segment will always remain price sensitive and any steep price hikes will kill absorption, especially as competition is stepping up.

As many as 11 realty companies have filed their DRHPs with SEBI (of which three have filed in the last week) looking to garner ~Rs 190bn (US$4.1bn) from the primary markets.

The real problem is Market has not improved fully and Developers have to tone down their expectations.