Residential prices have been increasing despite weak volumes over the past 3-4 years. However, now different data points are 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 7% YoY in 1QFY15 – deceleration from 12%-16% YoY increase seen over 2QFY12 - 4QFY13. NHB Residex for 4QFY14 shows significant deceleration in prices with 13 cities (out of 26) showing YoY decline in prices and average (unweighted) price increase of just 0.3% YoY across 26 cities
Residential absorption (area sold) in key cities of India fell 44%YoY/ 13%QoQ in 1QFY15 (Prop Equity
data). The pace of demand destruction has continued unabated. Residential absorption fell 27% YoY in FY14 with 0%/ 25%/ 36%/ 45%YoY decline in absorption in 1Q/ 2Q/ 3Q/ 4QFY14. All these data point to very weak demand environment and it appears that up-tick in GDP growth in 1QFY15 has not impacted demand yet
Commercial absorption in key cities fell 19%YoY/ 29% QoQ in 1QFY15 on an already weak base of FY13 / FY14 which had a decline of 16%YoY/ 12%YoY. High inventory (~60 months of available supply) has kept rentals in check. Rentals are flat to down (~-2%) YoY despite continuing high inflation.
Monday, September 15, 2014
Saturday, August 30, 2014
FSI increase in suburban Mumbai
In a major policy move, the Maharashtra government has allowed an increase in Floor Space Index (FSI) from 1 to 3x in suburban township projects. Under this policy, if developers construct affordable housing stock of 0.75x FSI and hand it over to the government, they can avail of higher FSI on their plots. The move is aimed at improving the affordability of suburban residential development and the low cost housing stock with the government. The policy, in our view, is a major positive for suburban township developers in Mumbai like IBREL/ HDIL that have large land parcels for township development in the suburbs.
IBREL (+20msf) / HDIL (50msf) and Godrej (4 msf) have large suburban township projects in Panvel and Virar regions and hence stand to benefit in the longer term from this policy. The additional FSI comes in lieu of additional construction done for providing housing stock to the government and as such is not free. Nonetheless, it still is accretive for value on a marginal cost basis. FSI increase additionally should keep longer term price inflation in check in these areas allowing for more sustainable demand.
As with other major cities in India, Mumbai’s population growth is now concentrated in the suburbs. As per the last census (2011), population growth over a 10-year period in suburbs like Navi Mumbai (+56%), Virar (221%), Panvel (113%), and Thane (44%) have outgrown the city center (-5%) or main city (only 5%) growth.
FSI levels (1-2x) in most Indian cities are way below most global city standards despite each individual city (NCR/ Mumbai 20MM+) having populations to rival small countries. FSI increase, in our view, is the only possible way to reduce pressure on land & infrastructure rollout costs. Some cities have at the margin started to increase such levels (i.e., Noida, and now Mumbai) but this still is yet to become a more generalized trend across major cities.
IBREL (+20msf) / HDIL (50msf) and Godrej (4 msf) have large suburban township projects in Panvel and Virar regions and hence stand to benefit in the longer term from this policy. The additional FSI comes in lieu of additional construction done for providing housing stock to the government and as such is not free. Nonetheless, it still is accretive for value on a marginal cost basis. FSI increase additionally should keep longer term price inflation in check in these areas allowing for more sustainable demand.
As with other major cities in India, Mumbai’s population growth is now concentrated in the suburbs. As per the last census (2011), population growth over a 10-year period in suburbs like Navi Mumbai (+56%), Virar (221%), Panvel (113%), and Thane (44%) have outgrown the city center (-5%) or main city (only 5%) growth.
FSI levels (1-2x) in most Indian cities are way below most global city standards despite each individual city (NCR/ Mumbai 20MM+) having populations to rival small countries. FSI increase, in our view, is the only possible way to reduce pressure on land & infrastructure rollout costs. Some cities have at the margin started to increase such levels (i.e., Noida, and now Mumbai) but this still is yet to become a more generalized trend across major cities.
Monday, August 11, 2014
REIT Regulations in India for Dummies
SEBI has approved the SEBI (Real Estate Investments Trusts) Regulations. In its Finance Bill 2014,
the Government cleared a majority of tax regulations for the eventual listing of the REITs in India.
SEBI is yet to release a detailed notification, which is expected in the next two months. Most
regulations from the proposed draft (REIT regulations 2013) were passed, with a few relaxations.
has already specified tax related incentives proposed by the Government. We wait further/changes
if any in the tax structure for the eventual listing of REIT instruments.
the Government cleared a majority of tax regulations for the eventual listing of the REITs in India.
SEBI is yet to release a detailed notification, which is expected in the next two months. Most
regulations from the proposed draft (REIT regulations 2013) were passed, with a few relaxations.
- 80% should be invested in rent yielding projects versus 90% mentioned in the drafts
- Value of the REIT for an IPO has been reduced to Rs 5 bn from Rs 10 bn.
- Multiple sponsors are permitted with a maximum of three.
- Borrowings shall not exceed 49% of the value of the REIT assets, versus 50% in the draft
- Minimum size of the IPO shall be 25% of post issue share capital or `2.5 bn whichever is higher,
versus Rs 2.5 bn in the draft - REIT shall have at least two assets with a maximum 60% investment in one asset; versus REIT can invest 100% in one asset.
has already specified tax related incentives proposed by the Government. We wait further/changes
if any in the tax structure for the eventual listing of REIT instruments.
Thursday, July 17, 2014
#NaMo Government Pushed for Affordable Housing
Under the directions from Finance Ministry, the RBI, in a notification today, eased credit availability for the affordable housing sector in India. We believe the central bank’s fresh measures will enhance availability of funds to the sector, while not having material impact on affordability. The above measures along with key
announcements in Budget 2015 highlight the government’s intent to give impetus to the real estate sector.
Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to affordable housing (defined as housing loans eligible under priority sector lending by RBI and also housing loans to individuals upto INR5mn for property valued up to INR6.5mn in Mumbai (clarity awaited whether intent is Greater Mumbai or MMR), New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad, and INR4mn for property valued up to INR5mn in other cities.
The above measures will enhance availability of funds to the affordable housing sector. The measures will not significantly impact interest rates and accordingly affordability, as current home loan rates (~10.25%) are already near base rates (10%) but in the Medium Term will help Small & Genuine Home BUYERS across India as Interest Rates Will begin to Fall in the next 24 months.
announcements in Budget 2015 highlight the government’s intent to give impetus to the real estate sector.
Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to affordable housing (defined as housing loans eligible under priority sector lending by RBI and also housing loans to individuals upto INR5mn for property valued up to INR6.5mn in Mumbai (clarity awaited whether intent is Greater Mumbai or MMR), New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad, and INR4mn for property valued up to INR5mn in other cities.
The above measures will enhance availability of funds to the affordable housing sector. The measures will not significantly impact interest rates and accordingly affordability, as current home loan rates (~10.25%) are already near base rates (10%) but in the Medium Term will help Small & Genuine Home BUYERS across India as Interest Rates Will begin to Fall in the next 24 months.
Thursday, July 03, 2014
Residential Demand / Launches Dull - Price Stable
Residential absorption (area sold) in key cities of India fell 31%YoY/ 51%YoY in FY14/ 4QFY14
(Prop Equity data). The pace of demand destruction has accelerated through FY14
with 3%/ 27%/ 39% 51%YoY decline in absorption in 1Q/ 2Q/ 3Q/ 4QFY14.
Absorption fell 19%QoQ in 4QFY14. Though the monthly numbers are volatile, April
2014 (1MFY15) saw an absorption decline of 53%YoY in key cities tracked. All
these data point to sharp deterioration in residential demand due to ongoing
economic slowdown and stubbornly high prices.
Residential Property Prices in India have been increasing despite weak volumes over the past 3-4 years. However, now different data points are suggesting some decline in prices in a few areas. At least the sharp price rises have moderated over the past few months.
Wednesday, July 02, 2014
REIT in India Could be Simple With Taxation / Rules
The very act of setting up a REIT requires a sponsor to contribute assets (either directly to the REIT or shares of an SPV that owns immovable property into the REIT). Any such contribution, under the current law, will mean a capital gains tax incidence of at least 20% on the difference in value between the holding cost and the transacted fair market value in terms of contribution to the REIT. The industry has lobbied hard to the Finance Ministry that such a tax incidence on contribution will be a non-starter, as it would entail a 20% outflow in order to do an IPO and a liquidity element of at least 20% will be required just to pay taxes. Experts on our call opined that the Finance Ministry is coming around to the view that the contribution of assets or contribution of SPV shares into a REIT should be treated as restructuring and hence, should be tax exempt.
Secondly, any income generated at the SPV level or property income at a trust level is subject to corporate tax and a dividend distribution tax in order to upstream income and be distributable to unitholders.
The industry is seeking a zero-tax regime on the grounds that: (a) income stands distributed to unitholders and unitholders, depending on their character, may or may not be taxed; and (b) being a new investment product, the REIT, as an investment instrument, needs a fiscal impetus. Whilst zero-taxation is the ask, our
experts felt that the Finance Ministry may agree to a single point of taxation but it may not be in a position to provide complete exemption.
Whilst these tax concessions impose a minimal cost on the exchequer, our experts opined that the benefits to the Government and the economy, in the form of foreign inflows, comfortably outweigh the implicit costs. REITs will not only attract foreign inflows that positively impact the economy’s current account deficit but also channel household savings towards investment in REITs (as against the current habit of Black Money Investment in Physical Gold and Real Estate Assets)
Secondly, any income generated at the SPV level or property income at a trust level is subject to corporate tax and a dividend distribution tax in order to upstream income and be distributable to unitholders.
The industry is seeking a zero-tax regime on the grounds that: (a) income stands distributed to unitholders and unitholders, depending on their character, may or may not be taxed; and (b) being a new investment product, the REIT, as an investment instrument, needs a fiscal impetus. Whilst zero-taxation is the ask, our
experts felt that the Finance Ministry may agree to a single point of taxation but it may not be in a position to provide complete exemption.
Whilst these tax concessions impose a minimal cost on the exchequer, our experts opined that the benefits to the Government and the economy, in the form of foreign inflows, comfortably outweigh the implicit costs. REITs will not only attract foreign inflows that positively impact the economy’s current account deficit but also channel household savings towards investment in REITs (as against the current habit of Black Money Investment in Physical Gold and Real Estate Assets)
Friday, June 27, 2014
How Real Estate Developers Model Changed in India ?
We'd liek to Present you on How the Indian Real Estate Developers Model has changed from Greed Towards being Industry Oriented on various factors such as Land Bank, Fund Diversion, new Project Launch, etc
There have been numerous lessons learnt from the mistakes of 2008, recovery of 2009/10 and the slowdown of 2010 onwards. The last three-plus year slowdown may well have been a blessing in disguise, in our view, as it has shaken out the industry and forced a re-think of a lot of practices (as detailed below) which, in our view, are key to the longer-term health of the business. Some of the main areas of change
which, in our view, are under-appreciated as of now are:
There have been numerous lessons learnt from the mistakes of 2008, recovery of 2009/10 and the slowdown of 2010 onwards. The last three-plus year slowdown may well have been a blessing in disguise, in our view, as it has shaken out the industry and forced a re-think of a lot of practices (as detailed below) which, in our view, are key to the longer-term health of the business. Some of the main areas of change
which, in our view, are under-appreciated as of now are:
Thursday, June 05, 2014
NRI Investors Must Avoid Real Estate With Modi Win
Given the baggage of political uncertainty that impacted buyer confidence and Investor sentiments during the past few quarters, experts on the panel unanimously welcomed the strong political mandate at the Centre. However, with key areas such as land and labour being state government subjects, experts opined that a stronger government at the Centre, by itself, will have a limited role to play in ironing out key ground-level issues that the real estate sector currently grapples with, especially around ease of transactions and approval timelines.
Real Estate developers are likely to identify geographies witnessing healthy job creation and employment generation as key growth corridors of relevance. Demand for housing, in geographies driven by healthy job creation, is largely end-user driven, reasonably stable and relatively more immune to demand-side shocks.
As a result, residential demand in cities such as Bangalore, Chennai, Hyderabad and Pune remained reasonably stable through FY14 with a healthy run rate of launches coupled with steady absorption. On the contrary, residential demand in NCR and Mumbai continued to be investor-driven, resulting in significantly higher volatility in underlying demand. In fact, most developers, according to the experts on the panel, make the mistake of deploying excessive amounts of short-term capital in land, which deters on-time project completion and affordable pricing of completed units.
Problems for Realty Developers
The panel of experts unanimously opined that although capital is available to highest quality developers, the cost of capital gets prohibitively expensive when developers are unable to demonstrate their ability to convert inventory (land) into cash flows in a time-bound manner.
Real Estate Regulation Bill penalises developers for undue delay in project completion, developers on the panel highlighted the exogenous factors in the local government agency domain that often delay the approval process and hence, the project completion lifecycle. The experts on the panel believed that these legislative and regulatory moves will be rendered toothless unless proportionate accountability is fixed on the state, in terms of time-bound approvals and clearances for projects.
In this backdrop, Historical Performance of Indian Equities in 10 Years with ZERO Long Term Capital Gains Tax and total White Money in the hands of Investors which they are FREE to encash.
Real Estate developers are likely to identify geographies witnessing healthy job creation and employment generation as key growth corridors of relevance. Demand for housing, in geographies driven by healthy job creation, is largely end-user driven, reasonably stable and relatively more immune to demand-side shocks.
As a result, residential demand in cities such as Bangalore, Chennai, Hyderabad and Pune remained reasonably stable through FY14 with a healthy run rate of launches coupled with steady absorption. On the contrary, residential demand in NCR and Mumbai continued to be investor-driven, resulting in significantly higher volatility in underlying demand. In fact, most developers, according to the experts on the panel, make the mistake of deploying excessive amounts of short-term capital in land, which deters on-time project completion and affordable pricing of completed units.
Problems for Realty Developers
The panel of experts unanimously opined that although capital is available to highest quality developers, the cost of capital gets prohibitively expensive when developers are unable to demonstrate their ability to convert inventory (land) into cash flows in a time-bound manner.
Real Estate Regulation Bill penalises developers for undue delay in project completion, developers on the panel highlighted the exogenous factors in the local government agency domain that often delay the approval process and hence, the project completion lifecycle. The experts on the panel believed that these legislative and regulatory moves will be rendered toothless unless proportionate accountability is fixed on the state, in terms of time-bound approvals and clearances for projects.
In this backdrop, Historical Performance of Indian Equities in 10 Years with ZERO Long Term Capital Gains Tax and total White Money in the hands of Investors which they are FREE to encash.
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