The three Tier I cities in India, namely Mumbai, Delhi-NCR, and Bangalore, together represent about 70% of the real estate market (calculated across the top seven metro cities). About 70% of annual new residential unit launches and sales in the past 4-5 years have been in these three cities. Similar is the case with the retail sector, where the three cities represent about 71% of total retail mall stock and annual transactions.
Residential prices in the three key cities have largely remained flattish to single digit correction in FY14whereasthey increased by up to 30-50% since the previous cycle in 2009. We expect prices in Mumbai to correct by up to 5-10% in the next 2-3 quarters followed by time correction over the next year. Whereas Gurgaon primary market is expected to correct up to 5% in the same time frame. On the other hand, we expect prices in Bangalore and Noida to stay firm given their increase was limited to inflation+ levels. Price correction will primarily be driven by the need to trigger sales volume recovery, generate cash flows and curb rising unsold inventory.
Saturday, April 05, 2014
Tuesday, April 01, 2014
Latest Land Prices in Mumbai MMRDA Region
The land parcel being sold by Tata Steel is located in Borivali (a western suburb of Mumbai). The total land size is 25 acres with a development potential of 2.5-4msf depending on the availability of public car parking. If the bidding settles at the current price of Rs11.55bn, and assuming a selling price of Rs12,000/sf, cost of construction of Rs4,000/sf and sales cycle of 5 years, we estimate IRRs for the project to be 12% (if saleable area is 2.5msf) or 23% (if saleable area is 4msf).
Paucity of clean title land in Mumbai has been keeping bidding prices high. Even in this deal, six developers like Tata Housing, Indiabulls, Lodha, Kalpataru, Peninsula Land and Oberoi have been participating. The last few land deals in Mumbai (details on pg2) indicate that land prices continue to rise across the city. The physical market in Mumbai continues to remain weak due to high prices and uncertain macroeconomic environment.
Map showing Mumbai residential property prices at various locations
The Land Prices are Benchmarked Against the Prices in South Mumbai's Commercial Business Disctrict - Price = US$1700/sq ft. USD to INR In Our Calculation is at Rs 60 / $.
In Parel the Ruling Land Prices are Price = US$500/sq ft, distance from CBD = 15km
In Bandra, Land Price = US$500/sq ft, distance from CBD = 20km
In Ghatkopar, Land Price = US$250/sq ft, distance from CBD = 25km
In Andheri Land Price = US$350/sq ft, distance from CBD = 25km
In Goregaon, Land Price = US$250/sq ft, distance from CBD = 32km
In Thane, Land Price = US$180/sq ft, distance from CBD = 40km
In Borivili, Land Price = US$200/sq ft, distance from CBD= 40km
In Kalyan, Land Price = US$90/sq ft, Distance from CBD = 70km
Paucity of clean title land in Mumbai has been keeping bidding prices high. Even in this deal, six developers like Tata Housing, Indiabulls, Lodha, Kalpataru, Peninsula Land and Oberoi have been participating. The last few land deals in Mumbai (details on pg2) indicate that land prices continue to rise across the city. The physical market in Mumbai continues to remain weak due to high prices and uncertain macroeconomic environment.
Map showing Mumbai residential property prices at various locations
In Parel the Ruling Land Prices are Price = US$500/sq ft, distance from CBD = 15km
In Bandra, Land Price = US$500/sq ft, distance from CBD = 20km
In Ghatkopar, Land Price = US$250/sq ft, distance from CBD = 25km
In Andheri Land Price = US$350/sq ft, distance from CBD = 25km
In Goregaon, Land Price = US$250/sq ft, distance from CBD = 32km
In Thane, Land Price = US$180/sq ft, distance from CBD = 40km
In Borivili, Land Price = US$200/sq ft, distance from CBD= 40km
In Kalyan, Land Price = US$90/sq ft, Distance from CBD = 70km
Tuesday, March 18, 2014
Why Land Prices Not Falling Despite Weak Demand ?
Given weak demand, general credit tightness and a willingness from developers to sell, one would expect land values to be trending down. However this has NOT been the case and begs the question: why is it so? We think this is partly due to most cash rich developers’ willingness to bet on demand improvement, and
there is a development margin of 25-30% to be had on current rates. More importantly, there is also optionality on potential increases in FSI across most markets (Gurgaon/Noida could benefit on this account. In Mumbai gradual increases are being affected as well).
At these transacted land rate levels we think most developers are sitting on huge MTM gains (5 to 10x) on their land holdings, however business remains cash poor on account of cash drain on legacy projects / weakness in new sales. Correspondingly on a generally low Net D/E (0.5-0.7x) levels most developers are still running tight cash flows. A balance hence needs to be restored; however this could require developers to shed 15-20% of their B/S, and asset sales are likely to continue well into the next 12 months.
Some developers have had success in these transactions and have been able to reduce debt materially. However far more is required especially given uncertain environment around pre-sales in Mumbai / NCR. However we note that most asset sales done even in this environment have been done at valuations which are far above holding cost levels and there are no signs of any decline in land values.
there is a development margin of 25-30% to be had on current rates. More importantly, there is also optionality on potential increases in FSI across most markets (Gurgaon/Noida could benefit on this account. In Mumbai gradual increases are being affected as well).
At these transacted land rate levels we think most developers are sitting on huge MTM gains (5 to 10x) on their land holdings, however business remains cash poor on account of cash drain on legacy projects / weakness in new sales. Correspondingly on a generally low Net D/E (0.5-0.7x) levels most developers are still running tight cash flows. A balance hence needs to be restored; however this could require developers to shed 15-20% of their B/S, and asset sales are likely to continue well into the next 12 months.
Some developers have had success in these transactions and have been able to reduce debt materially. However far more is required especially given uncertain environment around pre-sales in Mumbai / NCR. However we note that most asset sales done even in this environment have been done at valuations which are far above holding cost levels and there are no signs of any decline in land values.
Monday, March 10, 2014
Delhi Absorption lower than 2008 levels; unsold stock at peak
A weak economic environment under the Corrupt Congress led Government led to low volumes (below 2008 levels). Our recent interactions with market participants in Gurgaon showed that most developers emphasized weak sentiment and expected volumes to recover after the elections.
The National Capital Region (NCR), of which Gurgaon is a part, is the only major investment market in North India (unlike South India, which has five large markets). This, along with a growing service sector, led to high real estate demand in Gurgaon, mainly from investors and eventually end users (on job creation).
Most markets in North India, including Gurgaon, work on an investor/broker sale model during project launches. Such participants underwrite developer stock and down-sell in the market over the period of project construction. Large supply of high-priced units and low liquidity resulted in such brokers not participating in new launches (brokerage rates have increased from 2-3% to 7-8% for select developers). This resulted in brokers and underwriters moving away from the market, as some have started booking losses on their investments.
Prices of offerings in Gurgaon have increased by over 3X in the past six years . Most project launches, in almost all Gurgaon’s micro-markets by tier 1 and 2 developers focus on premium and luxury products. Under-construction projects in locations like Golf Course Road, New Gurgaon and Northern Peripheral Road offer projects at prices above ready-project prices and secondary units in under-construction projects. Ticket sizes have also increased in Golf Course Road and Golf Course Road Extension areas with unit sizes on offer increasing by 40-100%.
The National Capital Region (NCR), of which Gurgaon is a part, is the only major investment market in North India (unlike South India, which has five large markets). This, along with a growing service sector, led to high real estate demand in Gurgaon, mainly from investors and eventually end users (on job creation).
Most markets in North India, including Gurgaon, work on an investor/broker sale model during project launches. Such participants underwrite developer stock and down-sell in the market over the period of project construction. Large supply of high-priced units and low liquidity resulted in such brokers not participating in new launches (brokerage rates have increased from 2-3% to 7-8% for select developers). This resulted in brokers and underwriters moving away from the market, as some have started booking losses on their investments.
Prices of offerings in Gurgaon have increased by over 3X in the past six years . Most project launches, in almost all Gurgaon’s micro-markets by tier 1 and 2 developers focus on premium and luxury products. Under-construction projects in locations like Golf Course Road, New Gurgaon and Northern Peripheral Road offer projects at prices above ready-project prices and secondary units in under-construction projects. Ticket sizes have also increased in Golf Course Road and Golf Course Road Extension areas with unit sizes on offer increasing by 40-100%.
Friday, February 28, 2014
India Property Sales Dip in 2013
Residential absorption (area sold) in key cities in India fell whopping 45% YoY / 16% QoQ in 3Q FY14 (as per Prop Equity data). Residential absorption fell 28% YoY in 9M FY14 v/s +9% growth in FY13. 3Q FY14 is the third consecutive quarter of accelerating decline in residential absorption and points to a big drop in residential demand due to the economic slowdown and high prices.
Residential prices have been increasing despite weak volumes due to the rampant corruption by Congress Government in 22 various departments from where Real Estate developers seek permissions. Over the past 3-4 years. But different data points are now suggesting some decline in prices in a few areas. At least the sharp price rise has moderated over the past few months. In key cities, the residential prices grew 10% YoY in 3Q FY14 – a deceleration from 12-17% YoY increases seen in 2Q FY12-4Q FY13
Commercial absorption in key cities fell 34% YoY in 3Q FY14 on an already weak 3Q FY13
base. Commercial absorption had declined 18% YoY in FY13. High inventory due to the slowdown in economy (~68 months of available supply) has kept rentals in check. Rentals are flat to down (-1%) YoY despite high inflation.
Residential prices have been increasing despite weak volumes due to the rampant corruption by Congress Government in 22 various departments from where Real Estate developers seek permissions. Over the past 3-4 years. But different data points are now suggesting some decline in prices in a few areas. At least the sharp price rise has moderated over the past few months. In key cities, the residential prices grew 10% YoY in 3Q FY14 – a deceleration from 12-17% YoY increases seen in 2Q FY12-4Q FY13
Commercial absorption in key cities fell 34% YoY in 3Q FY14 on an already weak 3Q FY13
base. Commercial absorption had declined 18% YoY in FY13. High inventory due to the slowdown in economy (~68 months of available supply) has kept rentals in check. Rentals are flat to down (-1%) YoY despite high inflation.
Wednesday, February 12, 2014
What is Sample Housing Start Up Index in India ?
RBI has today launched the Housing Start Up Index taking baseline data from 27 cities from 2009-11. The aim is to first stabilize the methodology and then extend the coverage to 300 cities and eventually improve the frequency to release the data on a frequent (quarterly) basis. Compilation of housing starts has never been done exhaustively, given the presence of multiple authorities at different levels and lack of any methodical approach to collating data. This index, if stabilized, may eventually lead to better policy prescription for the Real Estate sector (10% of GDP and relationship with 250 ancillary industries) which has frequently complained about excessively tight policies and regulations governing it. Also this will give markets likely a better nuanced understanding of the wide variation seen in trends across different cities.
HSUI could improve policy prescription-RE sector has been very tightly controlled in terms of overall policy and suffers from various procedural delays in granting approvals. An HSUI, by reflecting the data back to relevant government authorities and also making it public, could help reduce approval lags and also reduce lead times on timeliness and extent of measures regarding policy. At the margin we note that regulators have taken a slightly lenient view given the general slowdown, by reducing risk weights and provisioning norms for residential construction lending
Data read through confirms long held belief that Tier2 is doing better than metros- the data albeit released with a huge lag confirms the belief that new construction growth has largely been led by Tier 2 cities as opposed to Metros, which in general have seen limited recovery post 2009. Post 2014, however, we think the equation will likely change in the favor of metros as city expansion, localized infrastructure creation will likely create opportunities for suburban growth. Bangalore as of now continues to be the most favored market
HSUI could improve policy prescription-RE sector has been very tightly controlled in terms of overall policy and suffers from various procedural delays in granting approvals. An HSUI, by reflecting the data back to relevant government authorities and also making it public, could help reduce approval lags and also reduce lead times on timeliness and extent of measures regarding policy. At the margin we note that regulators have taken a slightly lenient view given the general slowdown, by reducing risk weights and provisioning norms for residential construction lending
Data read through confirms long held belief that Tier2 is doing better than metros- the data albeit released with a huge lag confirms the belief that new construction growth has largely been led by Tier 2 cities as opposed to Metros, which in general have seen limited recovery post 2009. Post 2014, however, we think the equation will likely change in the favor of metros as city expansion, localized infrastructure creation will likely create opportunities for suburban growth. Bangalore as of now continues to be the most favored market
Tuesday, January 28, 2014
Residential Market Outlook 2014 - Narendra Modi Factor
Residential markets ended 2013 on a sluggish note with the festive season remaining fairly quiet due to the launch/ approval delays and weak macro. We expect the residential markets to see an improvement in 2014 driven by the pick-up in demand in the suburban markets. Some price softening, lower mortgage rate and reduction in unit sizes (already being witnessed in 1BHK launches in Mumbai) should bring improvement in the affordability levels. However, we think recovery is likely to be more 2H weighted and 1H may remain quiet until the elections.
We have seen some evidence of price discounting in the select markets of Mumbai and Gurgaon in terms of subvention schemes and lower prices in secondary markets. Prices in the Bangalore market, however, have continued to firm up; while Chennai has been largely stable. Mortgage rates have also come down by 25bps given the competition between banks / HFCs to build out low risk secured portfolio.
Comparison of Residential Property Sales Across India in 2011, 2012, 2013
In terms of markets, Mumbai continued to witness sluggish trends; while Gurgaon saw a sharp decline in volumes in 2HCY13 and trend is likely to continue near term. Bangalore witnessed stable trends (absorption flat Y/Y) as also evinced in strong presales performance of key Bangalore developers; while G Noida registered a sharp revival off a low base post the notification of the G Noida master plan and commencement of the Yamuna expressway.
Mumbai is the key candidate for a turnaround in CY14. Mumbai market has been witnessing sluggish trends over the last 3 years due to regulatory changes, approval/launch delays and high prices. Gurgaon has seen a significant moderation in absorption / launch activity in 2HCY13 and we expect the market to remain muted in CY14. After being an outperformer market in CY12 and CY13, we expect Bangalore to witness some moderation going into CY14.
We have seen some evidence of price discounting in the select markets of Mumbai and Gurgaon in terms of subvention schemes and lower prices in secondary markets. Prices in the Bangalore market, however, have continued to firm up; while Chennai has been largely stable. Mortgage rates have also come down by 25bps given the competition between banks / HFCs to build out low risk secured portfolio.
Comparison of Residential Property Sales Across India in 2011, 2012, 2013
Mumbai is the key candidate for a turnaround in CY14. Mumbai market has been witnessing sluggish trends over the last 3 years due to regulatory changes, approval/launch delays and high prices. Gurgaon has seen a significant moderation in absorption / launch activity in 2HCY13 and we expect the market to remain muted in CY14. After being an outperformer market in CY12 and CY13, we expect Bangalore to witness some moderation going into CY14.
Friday, October 11, 2013
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
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
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