FDI Regulations to be Relaxed for Greedy Developers

As per press reports, there is expectation that current regulations on FDI into the sector could be relaxed on two fronts (1) clarification that the three-year lock-in is applicable to only minimum capitalization (US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners) versus the current interpretation that the entire capital invested is locked in for that period and (2) reduction in minimum project area (for FDI investment) which, at present, is 10 hectares in the case of serviced housing plots or 50,000 meters in case of construction – development projects.

This means the Lazy Fat Developers who are ready to suck you will get more capital and won't sell the stock until you meet their unrealistic expectation. It is a pathetic situation that an organization like RBI is a puppet in the hands of the central government which will just keep quiet paving way for the Rich Developers to get Richer at the cost of Hard Working Indians Like You.

Chennai - Hyderabad - Apartment Prices / Sales Trends

The volume trend in Chennai after falling in Feb and Mar 2010 has recovered in Apr and May 2010 to resume its flattish trend. Average monthly volumes between Apr 2009 and May 2010 are at 1.5mn sqft, lower than the 1.8mn sqft between Jul 2007 and Jun 2008. Inventory with developers continues to decline with unsold stock at 18.7mn sqft. In terms of months of sales, it is at 11 months, which indicates levels usually seen in late 2007 and early 2008.

Hyderabad is the worst performing city among the top 6 urban agglomerations in India. Sales have consistently declined since Aug 2009 and they are now close to the 2008 crash lows. This follows the Telengana statehood issue and the consequent lack of clarity on Hyderabad’s status as the capital city. Although inventory with developers is declining, it is also very high at 50mn sqft and 30 months of sales. New launches have also reduced significantly since Aug 2009. We expect residential volumes in Hyderabad to remain muted in the medium term if the Telengana issue is not resolved.

Gurgaon - Greater Noida - Residential - Prices vs Sales

Gurgaon is in a similar situation as Mumbai with volumes, which were falling till Apr 2010, reviving to some extent in May 2010. Prices in Gurgaon have now moved up 20% y-y on average and volumes are not likely to show any significant upward movement in the medium term, in our view. Unsold stock with developers at 29mn sqft has come down 44% from the peak, while inventory is down to just 6 months of sales which is the lowest since this data is available. We believe that prices could move up further in Gurgaon unless launches pick up pace and we expect this to start from Sep 2010.

In the past 6 months, Noida and Greater Noida have recorded cumulative volumes in mn sqft, which are equal to cumulative volumes in the past two years. The number of units sold in the past 12 months (May 2009 to May 2010) is 4 times that of the units sold between Jul 2007 and May 2009. This large jump has not been led by any noticeable increase in employment activity in the region or any fall in pricing.

There is a lot of investor activity in this market, especially in projects on the Noida-Greater Noida expressway and the new Noida extension area. Large projects are being launched in Noida, leading to inventory levels moving up in absolute terms, although in terms of months of sales it is extremely low at 4 months. The actual inventory in the system though would be much higher because of the warehousing of these projects with the brokers. We believe that the model of sales to brokers is not a sustainable one and is likely to result in significantly large receivable issues for some of these developers going forward if the market takes a downturn.

Mumbai Property Price Vs Sales Trend

Residential volumes in Mumbai have moved down since Dec 2009, and in Apr 2010 volumes were down almost 35% before recovering somewhat in May 2010 to about 5mn sqft. Pricing increases of 35% y-y have stalled the recovery in volumes, although prices could still be considered reasonably healthy.

Inventory with developers has started moving up again as new launches have shown a sharp increase in the past two months with almost 14.5mn sqft of projects being launched. Inventory in terms of months of sales, at 9 months currently, has gone below the 2007 boom time levels, which we believe has led to the continued increase in prices.

We believe that volumes are unlikely to see an upside from current levels till prices move down, which may not happen until inventory increases significantly from here, especially in relation to demand. We believe that prices in Mumbai may stay high for another 9 to 12 months before increasing inventory starts pulling down prices.

Bangalore Residential Price Trends

Bangalore property market is showing steady signs of improvement on the back of a pick up in hiring activity and wage growth returning to the IT sector. Managements’ confidence in the physical market has markedly improved as seen in aggressive new launch plans for FY11 which are now being announced after a gap of almost 2-3 years. Most companies are launching projects that are 3-4x their historical sales levels in FY11 as unsold inventory levels have started to decline.

Our recent trip to Bangalore involving site visits and meetings with listed and unlisted developers/brokers/financiers shows that while the recovery is as yet nascent it is expected to pick up steam going into 2H. Transaction volumes in the residential segment have picked up noticeably over the last few quarters and the trend seems to be holding. Affordability both for residential and office segment remains healthy and this should propel volumes as demand returns.

Affordability in Bangalore’s residential market is healthy as pricing has not picked up materially, even as wage growth of 10-15% has started to return. Transaction volumes in the market have increased by 25% Y/Y over 2HFY10 and the trend seems to be holding. Our interactions with HFCs suggest that Bangalore is the only market which is showing growth in new customer acquisitions. Office rentals too seem to be bottoming out and leasing transaction is picking up driven by large MNCs.