The Real Estate market has slowed after showing steady trends for two years on volumes. In Bangalore too, local issues drove negative sentiment, but organized developers held on to their volumes. Gurgaon remains an aberration for large developers as well - sales remain weak. We expect launches to drop further as developers look to sell from ongoing projects. We don’t expect new launches form listed developers in Mumbai and Gurgaon over next two-three quarters, while Bangalore might report launches in certain pockets.
Any potential fall in pricing is unlikely to boost volumes as sales usually don’t pick up in a falling price environment. But we don’t expect a major correction in pricing in the western and southern metros as prices have remained stagnant for the past three years and affordability has been improving in certain markets. Transaction prices are usually 80-85% of the quoted prices for the past three years and could see some discounts / offers.
Slower volumes worry us more than drop in pricing, as lower volumes will reflect in lower collections resulting in slowing construction and servicing of liabilities. Market-wide volumes could correct over the next 2-3 quarters, by 10-30%. This will delay projects of several unorganized developers further, as availability of credit is limited to organized developers.
Wednesday, December 28, 2016
Tuesday, December 20, 2016
Real Estate Industry in India - Shift towards Transparency
Real estate industry is at a cusp and there is clear shift that is happening for positive in the long term.
Looking ahead, there is a tectonic change that is going to happen to the industry, for which we feel that the next three to five years are going to be a different scenario for the real estate space in India. The Real Estate (Regulation and Development) Act, 2016 (RERA) coming into place, is a historic event in itself, an era whereby the industry is going to get institutionalized, which will make it consumer friendly along with enhanced transparency. The Benami Transactions (Prohibition) Amendment Act (PBPT) will ensure that undeclared money which was chasing the real estate industry will be impacted. Third is the Land Act
which is currently under discussion, and is long drawn, but when it happens and whatever time frame it takes, will eventually give a huge supply to the industry.
With consumers becoming more technology savvy, the online real estate platforms are pushing the industry
towards a consumer‐driven market. In the downward interest rate regime, we have already seen rates coming down from 11% to 9 % and the anticipation of another percentage drop seems perfectly plausible.
India can’t be much different from any other country. REITs as an assets class is the requirement of specific set of investors for long term; these investors look for a mix of both ‐ regular returns and a reasonable level of capital appreciation. Majority of the foreign capital in last 3 years has been pumped into the commercial real estate space to lock Grade‐A space.
All markets move in cycles, and the real estate market is no exception, where we have already witnessed the down turn. Post 2008 and more so post 2010, we have seen a general uptick for the industry followed by another bout of sales slowdown, untimely deliverables. A correction phase began almost three years ago, in the residential space, while the market almost bottomed out in the commercial space.
Real estate being a cyclical industry, we should consider investing with a long term horizon of 5‐6 years, and going forward we see better returns than other asset class. We feel this is the correct time to be in the sector, when you have all the regulations coming into place, with expected inflows of institutional capital in the sector, a low interest rate regime, backed by a robust and growing Indian economy.
Excerpts from Aditya Birla Real Estate Fund CEO M. Yadav
Looking ahead, there is a tectonic change that is going to happen to the industry, for which we feel that the next three to five years are going to be a different scenario for the real estate space in India. The Real Estate (Regulation and Development) Act, 2016 (RERA) coming into place, is a historic event in itself, an era whereby the industry is going to get institutionalized, which will make it consumer friendly along with enhanced transparency. The Benami Transactions (Prohibition) Amendment Act (PBPT) will ensure that undeclared money which was chasing the real estate industry will be impacted. Third is the Land Act
which is currently under discussion, and is long drawn, but when it happens and whatever time frame it takes, will eventually give a huge supply to the industry.
With consumers becoming more technology savvy, the online real estate platforms are pushing the industry
towards a consumer‐driven market. In the downward interest rate regime, we have already seen rates coming down from 11% to 9 % and the anticipation of another percentage drop seems perfectly plausible.
India can’t be much different from any other country. REITs as an assets class is the requirement of specific set of investors for long term; these investors look for a mix of both ‐ regular returns and a reasonable level of capital appreciation. Majority of the foreign capital in last 3 years has been pumped into the commercial real estate space to lock Grade‐A space.
All markets move in cycles, and the real estate market is no exception, where we have already witnessed the down turn. Post 2008 and more so post 2010, we have seen a general uptick for the industry followed by another bout of sales slowdown, untimely deliverables. A correction phase began almost three years ago, in the residential space, while the market almost bottomed out in the commercial space.
Real estate being a cyclical industry, we should consider investing with a long term horizon of 5‐6 years, and going forward we see better returns than other asset class. We feel this is the correct time to be in the sector, when you have all the regulations coming into place, with expected inflows of institutional capital in the sector, a low interest rate regime, backed by a robust and growing Indian economy.
Excerpts from Aditya Birla Real Estate Fund CEO M. Yadav
Monday, December 19, 2016
Real Estate Price Correction Inevitable for Industry Sustainability
The Indian real-estate demand will fall meaningfully as lack of currency slows down the black economy: NIPFP estimates black money is 40% of real-estate demand. Real-estate as the favoured repository of black wealth is the reason India’s rental yields are the lowest among major economies despite high interest rates.
Given its large contribution to GDP globally, falling real-estate prices have either accompanied or driven a recession. India may also see a sharp slowdown, as first slowing transactions and then falling prices affect construction. Falling prices would thus affect discretionary consumption as well as borrower health, with its own downstream implications.
Like many other effects of demonetisation, falling real-estate prices for India can help the economy over two to three years. India needs more housing stock, and its construction can boost output and create jobs: this was stalled by high clearing prices. However, for now we do not expect investors to look through the impending weakness, particularly as the slowdown in demand could be protracted by a buyers' strike. Eventually when prices have corrected by, say, 20% and mortgage rates have fallen by, say 2 percent points (implying EMIs fall by ~15%), the cost of ownership could actually be down by nearly ~35%.
Given its large contribution to GDP globally, falling real-estate prices have either accompanied or driven a recession. India may also see a sharp slowdown, as first slowing transactions and then falling prices affect construction. Falling prices would thus affect discretionary consumption as well as borrower health, with its own downstream implications.
Like many other effects of demonetisation, falling real-estate prices for India can help the economy over two to three years. India needs more housing stock, and its construction can boost output and create jobs: this was stalled by high clearing prices. However, for now we do not expect investors to look through the impending weakness, particularly as the slowdown in demand could be protracted by a buyers' strike. Eventually when prices have corrected by, say, 20% and mortgage rates have fallen by, say 2 percent points (implying EMIs fall by ~15%), the cost of ownership could actually be down by nearly ~35%.
Friday, November 18, 2016
BlackMoney Real Estate - End of an Era
We Congratulate the Narendra Modi Government for taking the boldest step to eradicate the nuisance of Real Estate mafia with Corrupt & BlackMoney in the Mainstream Economy of India.
Investments in Real Estate and gold would be the most impacted as these asset classes were the favourites to park unaccounted cash savings. Home improvement stories may also face collateral damage as the real estate sector goes through another leg of downturn.
Demonetisation of higher denomination Indian rupee notes Rs 500 & Rs 1000 mostly held by Corrupt Bureaucrats and Politicians will reduce land transactions and asset values in general, specifically in tier 2/3 towns and cities, where the proportion of unaccounted money in transactions is higher.
Curbs on the use of high denomination notes is likely to hit land transactions hard especially in the NCR region and tier 2/3 towns in India. Investor demand is generally the highest in the NCR region and thus it should be hit the hardest. We think a recovery in the NCR / Mumbia Metro Region property market will be delayed further.
Near-term sales velocity should decline due to uncertainty. Developers with higher reliance on plotted sales could see more slowdown compared to the ones selling flats. The unorganised segment (with lower tax compliance) of Indian real estate will be more hit than the organised one. Similarly, we expect more slowdown in the secondary market, versus primary sales, owing a higher proportion of cash transactions. This could lead to some slowdown in primary sales especially from the buyers that look to upgrade by selling old houses and buying new ones.
We think the discount to NAV in the India real estate sector is likely to increase as sales velocity could come down in the short term.
First Time Home Buyers
Be prepared with 25% Down Payment Cash and rest for Housing Loans. You will get your dream home cheaper, at least 20% discount to prevailing prices before demonetization.
Investments in Real Estate and gold would be the most impacted as these asset classes were the favourites to park unaccounted cash savings. Home improvement stories may also face collateral damage as the real estate sector goes through another leg of downturn.
Demonetisation of higher denomination Indian rupee notes Rs 500 & Rs 1000 mostly held by Corrupt Bureaucrats and Politicians will reduce land transactions and asset values in general, specifically in tier 2/3 towns and cities, where the proportion of unaccounted money in transactions is higher.
Curbs on the use of high denomination notes is likely to hit land transactions hard especially in the NCR region and tier 2/3 towns in India. Investor demand is generally the highest in the NCR region and thus it should be hit the hardest. We think a recovery in the NCR / Mumbia Metro Region property market will be delayed further.
Near-term sales velocity should decline due to uncertainty. Developers with higher reliance on plotted sales could see more slowdown compared to the ones selling flats. The unorganised segment (with lower tax compliance) of Indian real estate will be more hit than the organised one. Similarly, we expect more slowdown in the secondary market, versus primary sales, owing a higher proportion of cash transactions. This could lead to some slowdown in primary sales especially from the buyers that look to upgrade by selling old houses and buying new ones.
We think the discount to NAV in the India real estate sector is likely to increase as sales velocity could come down in the short term.
First Time Home Buyers
Be prepared with 25% Down Payment Cash and rest for Housing Loans. You will get your dream home cheaper, at least 20% discount to prevailing prices before demonetization.
Monday, October 17, 2016
Mumbai Residential Wait for market equilibrium continues
MMR real estate market witnessed a marginal increase (4%) in pricing over last year, based on our visit to developers in the exhibition. More than 50% projects in our survey had a delivery schedule in FY17 and FY18 while 30% should be available for delivery in less than a year (Exhibit 1). Handover has been delayed by 6 months on an average over last one year.
Developers are using discounting in the form of subvention schemes, stamp duty/floor rise/maintenance bill waiver and freebies (furniture, gold coins, and holiday trips) to improve sales velocity. However, bulk of these discounts offset the marginal price increase taken by the developers. We continued to observe higher discounts available on execution of deal (10-15%) which remains a preferred way of giving discounts than cut in declared property rate.
We observed higher participation by housing finance companies (HFCs) which were offering home loans starting from 9.3%. However the latest RBI rate cut was not yet incorporated in the rates offered. In addition HFCs were funding upto 100% of contract value if market value exceeded contracted value. Approval process timelines varied from 5 to 15 days. First half of FY17 has seen improved funding from banks to developers (10% YoY in Aug’16) as NBFCs continued to gain market share in the sector (1QFY17 growth at 25-30% YoY
With sales exceeding launches over last 6 quarters, market is in a self-correcting phase. This process could be accelerated by improving affordability- higher disposable income or price correction. However with high under construction inventory, we expect capital value improvement to take 12-24 months. Improving transparency (Real Estate Regulator) will improve the customer confidence thus aiding in recovery.
Developers are using discounting in the form of subvention schemes, stamp duty/floor rise/maintenance bill waiver and freebies (furniture, gold coins, and holiday trips) to improve sales velocity. However, bulk of these discounts offset the marginal price increase taken by the developers. We continued to observe higher discounts available on execution of deal (10-15%) which remains a preferred way of giving discounts than cut in declared property rate.
We observed higher participation by housing finance companies (HFCs) which were offering home loans starting from 9.3%. However the latest RBI rate cut was not yet incorporated in the rates offered. In addition HFCs were funding upto 100% of contract value if market value exceeded contracted value. Approval process timelines varied from 5 to 15 days. First half of FY17 has seen improved funding from banks to developers (10% YoY in Aug’16) as NBFCs continued to gain market share in the sector (1QFY17 growth at 25-30% YoY
With sales exceeding launches over last 6 quarters, market is in a self-correcting phase. This process could be accelerated by improving affordability- higher disposable income or price correction. However with high under construction inventory, we expect capital value improvement to take 12-24 months. Improving transparency (Real Estate Regulator) will improve the customer confidence thus aiding in recovery.
Saturday, October 01, 2016
REIT listings finally to come true in India
Recent media articles have quoted promoters /senior management of developers /sponsors putting a timeline for listing their rental portfolios. Our channel checks suggest some sponsors have started working towards filings with the regulator. Government has cleared many impending issues, mainly on taxation and what remain are state (local) subjects.
SEBI has allowed the REIT to invest in a two level SPV structure. This will save taxes at multiple levels as many assets are held in different SPVs, with different structures. This is beneficial for most of the developers. Allowing REITs to invest up to 20% in under-construction assets (from 10% earlier). Such a change will help bringing more assets under the REIT and also a possible increase in the yield as under-construction /un-leased area is usually brought at lower prices than a rent yielding asset.
Amending the definition of valuer. We believe Independent Property Consultants (IPCs) and real estate valuers will be included as not all practicing Chartered Accountants have the ability to provide fair value to real estate properties.Clarifying the definition of ‘real estate property’: The proposal was to include other rent generating assets like hotels, hospitals, warehouses etc., which otherwise are classified as infrastructure assets. Such inclusions will bring many more assets under the REIT.
Removing the limit of sponsors (currently up to 3) and introducing the concept of sponsor group. While developer sponsors won’t be affected by this; it could be beneficial for private equity, conglomerates and financial institutions having REITable assets.
We expect the first set of REITs to come from three or four unlisted developers /sponsors and together could raise between USD 1.2-1.6 bn (between 75-100 mn sq. ft of rental assets will be listed).
SEBI has allowed the REIT to invest in a two level SPV structure. This will save taxes at multiple levels as many assets are held in different SPVs, with different structures. This is beneficial for most of the developers. Allowing REITs to invest up to 20% in under-construction assets (from 10% earlier). Such a change will help bringing more assets under the REIT and also a possible increase in the yield as under-construction /un-leased area is usually brought at lower prices than a rent yielding asset.
Amending the definition of valuer. We believe Independent Property Consultants (IPCs) and real estate valuers will be included as not all practicing Chartered Accountants have the ability to provide fair value to real estate properties.Clarifying the definition of ‘real estate property’: The proposal was to include other rent generating assets like hotels, hospitals, warehouses etc., which otherwise are classified as infrastructure assets. Such inclusions will bring many more assets under the REIT.
Removing the limit of sponsors (currently up to 3) and introducing the concept of sponsor group. While developer sponsors won’t be affected by this; it could be beneficial for private equity, conglomerates and financial institutions having REITable assets.
We expect the first set of REITs to come from three or four unlisted developers /sponsors and together could raise between USD 1.2-1.6 bn (between 75-100 mn sq. ft of rental assets will be listed).
Tuesday, August 09, 2016
JLL Views on Indian Residential Market
According to Jones Lang Lasalle - JLL, pan-India new launches have been falling steadily to now 30k units in F2Q17 and sales have stabilized at 36-38k units/quarter. Overall, projects with a good brand name and good locations are selling well, with premium pricing, like Godrej Trees (Rs18k psf ). Upcoming city markets include Chennai, Hyderabad and Ahmedabad. Also, developers are launching their projects in phases as opposed to their failed attempts at one-time launches seen three years ago.
Mumbai's eastern suburbs (GPLs Trees and OBER's Mulund) are doing better than western suburbs. Ready but unsold inventory is low – a mere 1.46% in Mumbai, 2.5% in Bangalore and ~5% on an average in other cities. Grade A companies are already RERA compliant, having financial discipline and good governance.
Pan-India residential prices have stagnated in the last two years, but are most likely to appreciate 5-6% in the next two years (inflation-linked). Mumbai based Ekta Developers recently sold its project of 700 units in Virar by offering a 20% discount (received 14,000 applications).
Commercial & Retail
Upcoming office completions will add 110msf in the next three years, wherein two-thirds of new completions will be composed of good office space having the right infrastructure, price and specifications. The remaining one third of upcoming assets will not have the same location-infra mix and hence could show high vacancy rates. Some 40% of office space is currently being leased to IT companies, and the balance of demand is being driven by pharma, consultancy and BFSI.
Top city choices include Bangalore (under 5% vacancy), followed by Pune, Hyderabad (under 10% vacancy.) and Chennai (10% vacancy.) Gurgaon prime is relatively better than Delhi and Mumbai prime markets. Due to low availability of office space in Bangalore and Hyderabad, forward contract bookings
for built-to-suit facilities have increased substantially. Central Business District is driving the office market in India due to convenient connectivity to residential areas.
Mumbai's eastern suburbs (GPLs Trees and OBER's Mulund) are doing better than western suburbs. Ready but unsold inventory is low – a mere 1.46% in Mumbai, 2.5% in Bangalore and ~5% on an average in other cities. Grade A companies are already RERA compliant, having financial discipline and good governance.
Pan-India residential prices have stagnated in the last two years, but are most likely to appreciate 5-6% in the next two years (inflation-linked). Mumbai based Ekta Developers recently sold its project of 700 units in Virar by offering a 20% discount (received 14,000 applications).
Commercial & Retail
Upcoming office completions will add 110msf in the next three years, wherein two-thirds of new completions will be composed of good office space having the right infrastructure, price and specifications. The remaining one third of upcoming assets will not have the same location-infra mix and hence could show high vacancy rates. Some 40% of office space is currently being leased to IT companies, and the balance of demand is being driven by pharma, consultancy and BFSI.
Top city choices include Bangalore (under 5% vacancy), followed by Pune, Hyderabad (under 10% vacancy.) and Chennai (10% vacancy.) Gurgaon prime is relatively better than Delhi and Mumbai prime markets. Due to low availability of office space in Bangalore and Hyderabad, forward contract bookings
for built-to-suit facilities have increased substantially. Central Business District is driving the office market in India due to convenient connectivity to residential areas.
Thursday, June 23, 2016
REITs & Infra Trusts: Will They Be Reality Soon?
Market regulator (SEBI) has introduced fairly comprehensive framework for introduction of REITs/Infra trusts. Further consultations are underway to smoothen out the last remaining hurdles.
Three infra developers have taken approval for formation of investment trusts. The discussion with property developers for formation of REITs is underway.
Long pending issues of taxation have been resolved. The only pending issues are 1) exemption from long-term capital gains taxes for holding period of >3 years (vs one year for equity), 2) Incidence of stamp duty at the state level, 3) tax inefficiencies when multiple level of SPVs are involved. However, most of the experts felt that remaining tax issues are not a deal-breaker and there is high chance that these issues will be resolved in near future.
Since the regulatory framework is largely in place and most tax hurdles are resolved, formation of REITs and Infra Trusts hinges on meeting of developer investor expectations. India has higher long-term bond yields compared to developed countries and it appears that investor expectations of returns are at 300- 350bps above benchmark yields.
Since unlike commercial property, infrastructure assets have finite concession periods (at the end of which asset reverts back to government), the expectations of the yield from infrastructure trusts will have to be correspondingly higher.
Thanks to efforts of regulators and tax authorities, most of hurdles have been resolved. From regulatory/tax perspectives; India is now quite close to seeing formation of initial REITs and Infrastructure investment trusts.
Three infra developers have taken approval for formation of investment trusts. The discussion with property developers for formation of REITs is underway.
Long pending issues of taxation have been resolved. The only pending issues are 1) exemption from long-term capital gains taxes for holding period of >3 years (vs one year for equity), 2) Incidence of stamp duty at the state level, 3) tax inefficiencies when multiple level of SPVs are involved. However, most of the experts felt that remaining tax issues are not a deal-breaker and there is high chance that these issues will be resolved in near future.
Since the regulatory framework is largely in place and most tax hurdles are resolved, formation of REITs and Infra Trusts hinges on meeting of developer investor expectations. India has higher long-term bond yields compared to developed countries and it appears that investor expectations of returns are at 300- 350bps above benchmark yields.
Since unlike commercial property, infrastructure assets have finite concession periods (at the end of which asset reverts back to government), the expectations of the yield from infrastructure trusts will have to be correspondingly higher.
Thanks to efforts of regulators and tax authorities, most of hurdles have been resolved. From regulatory/tax perspectives; India is now quite close to seeing formation of initial REITs and Infrastructure investment trusts.
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