Real Estate Investment Trusts Closer to Reality in India

The Securities and Exchange Board of India (SEBI) has today released draft guidelines for REITs, with the following key features

1) Investors: REITs may be offered only to HNIs/institutions, resident as well as foreign. Initially, minimum subscription size shall be Rs 0.2mn.
2) Sponsors: It shall be obligated to maintain a 25% holding in the REIT for at least 3 years from the date of the listing of the REIT.
3) Which assets to own? Guidelines offer higher flexibility compared to guidelines issued in 2008, with 100% corpus can be invested in one project.
4) Size of REITs: Size of the assets under the REIT should be at least Rs10bn. Free float should be at least 25%.
5) Trading: REITs should be listed in a recognized stock exchange.
6) NAV declaration: NAV needs be declared twice a year.

While draft guidelines are a significant step forward towards domestic REITs, we believe following issues will require more clarity and can delay issuance of REITs: (1) Taxation. Whether business income earned by REIT be taxable and what will be taxation on dividend distribution, (2) foreign institutional investment into finished assets will require RBI approval, (3) Initial REITs may be of smaller size and hence illiquid, (4) how will principal valuer calculate NAV, and (5) what can be leverage at asset level

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.

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.

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.

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

Residential Sales Fall Across India

Tough macro finally appears to be taking a toll on demand for residential property, which has held up relatively well over the past 1-2 years. Residential property absorption in 11 key cities (Source: Propequity)
fell 10% YoY/ 20% QoQ in 1QFY14. The absorption had grown 7% in FY13. Commercial absorption in April-May 2013 fell 5% YoY (FY13 : -20% YoY)

Residential price rises continue due to high cost inflation and developers’ inability to cut prices. Residential prices are up 13% YoY / 1% QoQ in key cities. However, the All India House Price Index (Source: RBI), which is a more reliable but less comprehensive indicator, shows a 2.1% QoQ increase in residential prices in 4QFY13. This is the slowest pace of QoQ increase since 4QFY09 (except 3QFY11) and seems to be pointing to some cooling off in the pace of price rises at the margin. Commercial rentals remain flat YoY despite high inflation due to oversupply in most parts.

LoopHoles for Corruption in Real Estate Regulatory Bill of India

Atleast Half of the Members of Indian Parliamentary Democracy have Solid Criminal Background and Cases who are framing the Laws / Policies for the Civilized and Law Abiding Citizens. The Thugs in Indian Parliament stand united to overturn a Supreme Court Verdict banning Citizens with Criminal background from contesting in Elections. These Thugs are so united that they have left lot of holes in the Proposed Real estate Regulatory Bill and we highlight the same.

States have substantial leeway in deciding several key issues like the rate of interest payable by the developer, form and particulars of agreement, the details to be published and maintained on the regulator’s website, while the centre will only have an advisory role. This will lead to lack of consistency across states and dilute the power of the centre. [Give State Govt Money and they will make it favorable to Developers]

The bill has a provision of extension of delivery timelines of projects in case of delays. The developer is required to simply apply to the regulatory authority for the same. This provides the developers a leeway in delaying project deliveries. [Give Money and Seek Extension while leaving the Consumer at the Receiving End]

The bill has not stated the procedures and flexibility of changes in project plan post launches. Change in number of units or sizes are not dealt with in this act. The treatment of such changes is a key monitorable [Extortion from Builders by Political Thugs]

Though the mission of this Publication is to report on the Real Estate Developments in India, it is evident on How your Political Masters are functioning without any concern for the Citizen. So you decide who you should elect & who should frame laws for you, henceforth.

Provisions and Impact - Real Estate Regulatory Bill

The Real Estate (Regulation and Development) Bill of India, 2013 that was tabled in Rajya Sabha on 14th August, 2013 has been referred to a standing committee for discussion and review. Our analysis on the draft bill indicates that it is an important step forward to promote consumer awareness and bring in transparency.

 We do an Analysis on the Provisions and the Impact as below.

No developer shall offer area for sale in any real estate project, without registering the project with the Real Estate Regulatory Authority. Impact Ban on pre-launch sales will reduce the ability of the developer to accelerate cashflows and also undertake newer projects. Hence, it will lead to reduction in supply. It would also affect investor demand negatively.

Mandatory for a developer to maintain a separate bank account for every project to ensure that the money raised for a particular project is not diverted elsewhere. Developers would have to keep aside 70 percent, or below, as prescribed by the authority. Impact As the percent to be kept aside is to be prescribed by the concerned state authorities, it will vary on a state to state basis.

Developers will be barred from collecting money from buyers before obtaining all necessary permits to start construction on the project. Builders cannot take more than 10 percent of the advance from buyers without a written agreement. Impact As the 'written agreement ' is to be defined by the relevant states, the need of a registered agreement may be circumvented.

Bangalore - Mumbai Residential Trends

Bangalore 2QCY13 saw new launches momentum continue at ~10,000 units for the third consecutive qtr. Historically, annual launches in B’lore averaged at ~26,000 units in last 3 yrs. However, if the current launches momentum continues, CY13 might witness ~40,000 unit launches. With rising unsold inventory, we believe this can become a concern going forward. Developers are launching new projects purely aiming at cash inflows when liquidity is poor. Timely execution is questionable outside organized developers and we advise caution.

Bangalore residential sales growth is flattening and current spurt is purely fueled by new launches by unorganized developers at reasonable prices and rising investor interest. Although affordability and expected softening of mortgage rates in CY13/14 are positives; execution delays and rise in number of investors are potential dampeners.

Residential prices in Mumbai are finally correcting! Prices in new launch projects across the city are lower than market averages by 10%. Discounts are deeper in areas where prices quote above Rs30mn per unit. Our calculations show that discounts via 20:80 schemes equate to ~10-12% cut in total acquisition cost. The
10 Yr CAGR growth in Mumbai resi prices was 14.7% in 2011 which has come down to 13.5% now as prices have either remained flattish or fallen across micromarkets. We foresee prices to remain under pressure for next 5-6 quarters till the 0 Yr CAGR comes to more acceptable levels of 11-12%.

Gurgaon’s loss = Noida’s gain - NCR Realty Trends this Quarter

Although demand was ahead of new supply once again in Gurgaon, absorption rate softened further for 4th consecutive quarter in 2QCY13. We attribute this trend to rising prices through CY12; weakening consumer sentiments; 1H has been historically weaker than 2H and slowdown in new launches by developers. Despite considerable fall in absorption rate from peak of 25.5% in Q1CY12 to 20% in 2QCY13, developers have held prices in primary market. If this fall in demand continues over next 2-3 quarters (likely), we foresee price cuts in primary markets to resurrect sales and cash flows.

Our conversation with brokers reveals considerable price softening in secondary markets (up to 15%) in Gurgaon as projects launched in 2008-09 get delivered in 2013 and investors look at exits. This has exactly been our worry for Gurgaon ‘cause the city houses large investor base who will continue to seek exits through 2013 as projects launched in 2010-11 (50,000 units) advance towards completion. We believe only change in sentiments supported by mortgage rate cuts and price cuts can reverse this trend.

Noida sustained its rise in absorption rate from a low of 7% in Q3CY11 (farmer land agitation) to 14% in Q2CY13. uptick in execution by organized developers such as 3C, Mahagun, Jaypee, ATS etc. and rise in investor interest as Gurgaon slowed down. Noida across its sub-markets offers housing at 30-50% lower prices than corresponding sub-markets in Gurgaon. For example – Prime Gurgaon trades at Rs15k-18k per
sq ft whereas Noida trades at Rs10-13k per sq ft. New Gurgaon trades at Rs5k- 6k per sq ft whereas upcoming Noida trades at Rs3.5k-4k per sqft.

Noida will continue to witness far lower migration than Gurgaon leading to suppressed housing demand from end-users. Investor interest has risen purely due to its affordability as compared to Gurgaon and vicinity to Delhi. However, slow execution and slower than expected capital appreciation in prices will keep further rise in investor interest at bay. Market dynamics in Greater Noida is even worse compared to Noida.

Stubborn Mumbai Residential Price - Demand Affected

Residential prices in Mumbai continue to remain sticky.  Average prices are up by 49% since March 2010, which is higher than the national average increase of 41%, and are now 1.7X national average. We believe the price increase was on account of: (1) investor buying; (2) curtailed supply due to slower approval process

Sustained higher prices have led to lower affordability and consequently tepid demand. Volume absorption in March was lower by 25% yoy, while rolling 3-month average absorption has dropped by 15%. Recent absorption has fallen by 65% compared to peak level in Nov-2010. We estimate 15+% price correction is required in Mumbai to drive demand. 15% price correction along with lower interest rates/ marginal salary hike will improve affordability.

We have seen several developers offering structured schemes or reducing size of apartments (thus reducing ticket size) to boost sales. 20:80 subvention schemes are one of the most popular mechanisms to propel demand, in which the buyer has to make 20% upfront payment and balance after defined period/possession. Most developers are charging 2%- 3% higher prices on these schemes, but they offer customers an interest
savings of around 15% over a construction period of 3-4 years

Real Estate Regulation Bill - A Landmark Legislatio​n

Indian Cabinet today cleared the Real estate (Regulation & Development) bill.  This bill in our view is a land mark development and will necessitate wide business practice changes across the industry.

Key features of Real Estate Regulation and Development Bill

Project launch only after all approvals in place – It is mandatory for developers to launch projects only after acquiring all the statutory clearances from relevant authorities. Under its provisions all relevant clearances for real estate projects would have to be submitted to the regulator and also displayed on a website before starting the construction.

Sales only after sourcing of clearances- Under the proposed new law, developers will be able to sell property only after getting all necessary clearances.  Registrations of projects with the regulatory authority is a must. This means developers cannot offer any pre-launch sales without the regulatory approvals. Moreover the authority must approve or reject projects within 15 days

Project Escrow to be ensured- The bill seeks to make it mandatory for a developer to maintain a separate bank account for every project to ensure that the money raised for a particular project is not diverted elsewhere. Developers will have to keep aside 70% of the buyers’ funds in a separate bank account to ensure timely completion of projects.

Curb on Misleading advertisements-The proposed legislation has certain tough provisions to deter builders from putting out misleading advertisements related to the projects carrying photographs of actual site.

Written agreement a must- Developers cannot take more than 10% of the advance from buyers without a written agreement.

Tribunal setup in the interest of Consumers - The bill also seeks setting up of a real estate appellate tribunal for adjudicating disputes. The tribunal will be headed either by a sitting or a retired judge

Gurgaon - Launch Activity Picking Up

Launch activity has remained high in Gurgaon over the last 6 months. Recent key launch includes – Tata housing launch in Dwarka expressway at Rs11K psf levels which saw good response. Phase V also witnessed launch of much awaited luxury project. Additional launches in the pipeline include – IBREL and GPL launch around Dwarka expressway and impending super luxury launch in Phase V (Camilias). Absorption trends have improved with new launches witnessing good response. Pricing in the market has remained strong. Months of unsold inventory (at 11 months) has come down with the pick-up in absorption. Gurgoan market is expected to see large deliveries in CY13.

Project approvals in Mumbai finally gain pace

Residential market has witnessed high launch activity across key markets since the beginning of this year (CY13). New project approvals in Mumbai have finally gained momentum and launches have increased significantly over the last few months, after a lull of more than 2 years. Pricing in Mumbai has seen some softening; while prices in other key markets have been firm. Pick up in launch activity in Mumbai/Gurgaon has met with good response; while Bangalore/Chennai markets have maintained their steady run rate.

Number of large new launches have happened in Mumbai over the recent past. Key launches include Indiabulls’ new launches in South Central Mumbai (Sky, Sky Forest, BLU), L&T’s launches in Powai & Parel, Lodha's launches (BLUE MOON) in Parel, Kalapataru and Shaporji launches in suburbs (see table below for details). Most of these launches by reputed developers (Shapoorji, L&T, Lodha etc) have
garnered good response aided by some price discounting and last 2 years pent up demand.

Number of projects in the city are offering 20:80 schemes, which is essentially pre EMI waiver for the buyers till the possession of the unit. Unsold inventory has come down marginally (to 27 months). Deliveries last year were very low given approval delays. However, this year is expected to see some large completions in the suburbs (Oberoi Grande, DB Orchid Woods, HDIL Andheri etc)

Noida: Maintain –ve outlook

1QCY13 saw slowdown in new launches but demand remained steady averaging 11,500 units per qtr for FY13. We believe the residential market in Noida is witnessing polarization wherein certain developers are launching and selling well such as 3C, Mahagun, Jaypee, ATS etc. whereas many others continue to struggle in terms of sales, approvals and execution. We reiterate that timely execution will be the differentiating factor in Noida in near future.

Despite being the most affordable city among tier I cities, Noida’s absorption rate has remained subdued and unsold inventory continues to rise since year 2010. We attribute this trend entirely to flurry of new launches in year 2010 followed by farmer land unrest in 2011 leading to poor execution and tepid price appreciation.
Thus investors fled the market. Market dynamics in Greater Noida is even worse compared to Noida. We maintain a –ve outlook on Noida/ Greater Noida as we believe developers will struggle more in terms of timely execution than sales.

Mumbai: Discounts & launches perk-up demand

Prices in Mumbai city have appreciated by CAGR of 14% over last 10 years. We believe this trend is unsustainable and prices in Mumbai will have to correct and remain subdued over next 2-3 years. This will allow improvement in affordability as income levels catch-up with resi prices. Today, the most affordable project within Mumbai city quotes at >10,000 per sq ft which translates to Rs15mn for a 2BHK apartment. Further analysis shows, households with annual income > Rs3.5mn will be able to afford such an apartment.

No developer has officially cut base prices as yet. However, they are offering discounts through 20:80 schemes, stamp duty waivers, floor rise waivers and other freebies to attract buyers. Most new launches in 1Q have been at a discount to avg. market prices. Projects announced by renowned brands such as L&T, Lodha witnessed robust sales in 1QCY13.

Bangalore: New launches momentum continues

1QCY13 saw new launches momentum continue > 10,000 units. This is only the third time since year 2008 wherein Bangalore witnessed > 10,000 unit launches in a qtr. The previous two instances were Q4CY12 and Q1CY11. All three instances have been in 2H of respective fiscal years confirming our theory that Real Estate sector is more active in 2H (Diwali and local New Year qtrs) compared to 1H.

Bangalore witnessed highest number of residential sales in a quarter since year 2008 led by 1) flurry of new launches; 2) affordability as Bangalore prices have risen by CAGR of 8.5% in last 10 years; 3) rise in number of investors in Bangalore; 4) softening of mortgage rates expected in CY13 and 5) end-users
becoming comfortable with job security and salary hikes in CY2013.

Gurgaon: Is demand slowing ‘coz of price rise?

1QCY13 was the third consecutive quarter to see demand slowing in Gurgaon. However, demand once again was ahead of supply. We believe the prime reasons for this trend in demand are 1) slowdown in new launches as developers focus on execution and inventory clearance; and 2) rising prices. Absorption rate in Gurgaon is slowing but is still the highest in the country among tier I cities indicating robustness in the market. We believe Gurgaon residential markets will continue to show strength on back of rising number of end-users and investors.

Prices of on-going residential projects in Gurgaon continued to move northwards despite weak macro indicators and slowing demand trends. Avg. pricing in 1Q rose by 4.5% across Gurgaon projects. We attribute this trend to – 1) lack of new launches by renowned developers; 2) Gurgaon has lowest unsold inventory in the country and 3) high speculative market. We believe this trend of relentless rise in prices could prove a dampener in the future. The unsold inventory (represented in # of quarters required to exhaust unsold inventory) remained at 3 quarter.

Chennai Hisotrical Demand vs Supply in Residential

Absorption activity in Chennai has seem some moderation; however overall trends remain healthy. Launch activity also has increased again and most southern developers (PEPl/SOBHA/PVKP) are looking to expand their presence in Chennai via JDA tie ups or new land acquisition. This given strong response to their launches last year. Unsold inventory has remained largely stable in the market (at 14 months) as demand is largely in balance with the supply. Pricing has witnessed marginal appreciation over the last few months. There are large project deliveries coming up in the market in CY13 from DLF, Puravankara, etc

Bangalore Residentia Demand Vs Supply - Historical Data

Bangalore continues to witness steady absorption trends and high launch activity. This is seen in the strong operating trends reported by Bangalore based developers (Sobha/PEPL/PVKP). Additional launch pipeline also remains strong going into CY13 which should keep the absorption trends healthy. New launches last month include Purva Sunflower (Magadi Road at Rs6.5K) and Sunworth (Kengeri) and Sobha’s launch in Rajaji Nagar (at Rs10.5Kpsf). Prices in the new launches however have been fairly high. Overall prices in the market have appreciated meaningfully in the market, which could constrain affordability ahead. Unsold inventory has remained largely stable at 18 months as strong absorption is also accompanied with big launches.

Gurgaon Property Supply Absorption

Launch activity has picked up meaningfully in Gurgaon over the last 2-3 months and the trend should continue. Key launches in the pipeline include – DLF’s luxury launches around the Golf Course (5msf+), IBREL’s launch on the Dwarka Expressway, and additional launches by GPL. Absorption trends have also been improved as evinced in good response to recent launches (Sobha/GPL/DLF/Tata Housing’s projects). Pricing in the market has remained strong especially in New Gurgaon market. Recent launch by DLF in the micro market has been done at Rs10K psf levels (Ultima). Months of unsold inventory has come down to 10 months vs. 13months in Sep-Q with the pick up in absorption. Gurgoan market is expected to see large deliveries in CY13.

Gurgaon Supply and Absorption Chart as shown below

Noida Property Supply vs Absorption Levels

Absorption levels in Noida/Greater Noida have picked up meaningfully over the last 2 quarters. Launch/sales activity has shifted to Greater Noida. This comes on the back of notification of Greater Noida new master plan and launch of Yamuna Expressway. Unitech’s launches seem to have done well in Noida, while Jaypee and other local developers have registered good pre sales in expressway/Greater Noida launches. Overall absorption run rate is trending back to 2011 levels, after a lull in CY12. Prices in Greater Noida / sectors surrounding have seen a sharp appreciation. Unsold inventory has come down meaningfully in the market. Deliveries in the market are about a year away, which will be the true test of the market.

Key Property Projects in Tier - I Cities

Key Property Project Launches across Tier-I Cities and their Prices in Indian Rupees as shown below in the table

State of Realty in major Indian Markets

RBI cut the repo rate by 25bps and left the CRR unchanged on 19/03/13. Bankers stated that this will not induce them to cut mortgage rates. Both consumers and realtors were disappointed with RBI’s hawkish view on future cuts.

Mumbai property market is immune to mortgage rate movements. Once again, we reiterate our belief that Mumbai is gearing up for a price correction (15-20%) or time correction (stable prices for next 2/3 years), as projects receive approvals and get launched through CY13. More recently, the market has witnessed signs of weakness, with more realtors announcing benefit schemes, such as the 20:80 scheme (equivalent to 8-10% discount), floor rise waivers, etc.

Gurgaon will continue to surprise positively on new sales momentum in CY13 as well as the high presence of investors and end-users from five neighboring states. Prices, however, are expected to remain under pressure in locations outside prime areas, such as Golf Course road

Bangalore and Pune residential market is the most correlated to mortgage rates among tier I cities. If mortgage rates don’t fall below 10% in 2013, we expect annual residential sales to remain flat YoY.

Office & Retail segment – Potential recovery in 2H13
Enquiries for office properties have increased significantly. Further, a change in trend that could be
observed is that companies are actually buying land instead of taking it on lease. About 40% of the demand
is from the IT sector, 30% from manufacturing, 10% from BFSI and 20% from other services.

Rents likely to trend up in the near term. He expects absorption to increase for almost all cities by 10%.
Office rentals in Bengaluru are close to their previous peak, whereas in Mumbai they are still off by 35-40%
compared to their previous peak

Residential Comprises 60% of Indian Property Market

The residential sector will continue to account for more than 60% of Indian property market in terms of construction activity, sales & revenues and investments. Anuj believes there is perennial need for residential development in India within the sweet spot of Rs3mn to Rs10mn per apartment (up to Rs20mn for Mumbai alone). All supply within this price bracket has seen robust sales.

 Mumbai - Analyst foresees an oversupply in resi space in Central Mumbai as more than 5,000-6,000 units (starting price of USD750k/unit) have been launched with promised delivery over next 4-5 years

Gurgaon market has puzzled all with its relentless robustness in the residential sector. This can be attributed  to rising aspirations of property ownership from 5 neighboring states for educational & medical reasons, significant presence of speculative monies, improving infra and affordable pricing (units < Rs12mn).

Godrej BKC Selling Price Rs 25000 / SFT - Prestigious Commercial

Godrej Properties Ltd [GPL] the launch of Godrej BKC, a prestigious commercial project in BKC – a rapidly developing business district located in Central Mumbai. The project comprises of 1.3msf of saleable area (2.5-acre plot area) and would entail strata sale. It has been launched at ~Rs25,000psf (base selling price) and is expected to be completed in three years. GPL expects a good response to the project once demand for office space revives in Mumbai and estimates revenue of Rs35-40bn from it. Skidmore, Owings and Merill (SOM) are the lead architects for the project, while Larsen & Toubro will carry out construction.

Godrej BKC is to be developed by an SPV – a 50:50 (profit share) JV between GPL and Jet Airways. Jet Airways bought the project plot from MMRDA in 2006 for Rs8.3bn and the development SPV was formed in August 2011. The JV took over Rs3.6bn of debt obligation from Jet (toward land purchase) and
paid an additional Rs1.35bn to Jet.

GPL can sell the project at an Average Selling Price of Rs30,000/sft over the next three years and project cost of ~Rs11,000/sft

Chinese Govt Officials on Panic Property Selling - Anti Corruption Drive

After the Chinese Central Government started the anti-corruption campaign at the end of 2012, many news articles discussed panic selling by government officials in major cities' secondary housing markets; for example, Xinhua News reported in late January that Guangzhou and Shanghai saw Government officials selling within a month 4,880 and 4,755 housing unit, or 81% and 27% of each city’s December 2012 transaction volume (assuming 100 sq m per unit here; if assume 150 sq m per unit, the percentage for Guangzhou is >100%), respectively.

Data shows continued decrease in both secondary housing prices and rentals in major cities, but relatively stable transaction volumes. This shows that home buyers' sentiment remains weak and it is affected by the news on anti-corruption campaigns and Policy to clean the official machinery of Corrupt Officials.

Like secondary housing selling price, secondary housing rentals also decreased in all five major cities.

How does Indian Real Estate Rank Compared to Rest of World ?

Given that the Real Estate sector now accounts for ~10% of India’s GDP, demand for regulating the sector has increased significantly. The Cabinet has already cleared a draft real estate regulatory bill which is likely to be presented in the Parliament in the Budget session.

Indian real estate sector is considered to be semi-transparent when compared to the Rest of the World

We believe this draft has some excellent provisions including a time-bound mechanism for grievance redressal, dispute resolution (between customers/ authorities) and appeal – similar to the telecom sector. The registration of a detailed plan of the project with timely updates on execution and sales booking will also increase transparency and accountability, in our view.

Developers have already raised objections to the bill citing their disagreement over several provisions. It’s understandable, given that it shakes their status quo and introduces pro-customer provisions.

Developers to be pained in the near term? Two aspects of this bill will have the greatest impact for developers.

• All approvals have to be in place before the launch of construction and sales; and 
• 70% of customer advances have to be placed in an escrow dedicated for use in the project. This would help potentially slow or stop diversion of early stage customer advances for land purchases, debt repayment and other projects

Bangalore Property Market Grows - Mumbai and Gurgaon

Among the key residential markets, only Bangalore showed a growth in TTM sales run-rate (7% y/y to 63mn sq ft), compared to the steep decline seen in other large markets: Mumbai (-46% to 19mn sq ft), Gurgaon (-20% to 48mn sq ft) and Chennai (-15% to 34mn sq ft). The reasonable ticket size, strong demand for the right product and a conducive regulatory and execution environment contributed to strong numbers.Bangalore saw sharp growth in launches throughout 2012 (72mn sq ft), keeping inventory high, which ensured pricing in the market remained competitive validating our thesis on a virtuous cycle of demand-driven rather than speculative growth in the Bangalore market.Bangalore witnessed 13% y/y rise in pricing by October 2012.

We believe that Bangalore will remain the best play in India real estate during 2013. This will reflect in the impressive growth across all segments – residential (premium/ mid-income), office, retail and hospitality.

Our analysis of the latest property market data (October 2012) paints a resilient picture of the Bangalore market versus the dismal conditions elsewhere, especially in other key markets such as Gurgaon and Mumbai.