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.