Largest property developers will continue to face a challenging operating environment over the next 12 months including weak cash flows, flat sales and stagnant prices; * expect solid economic growth in India in 2014-15 to provide some support to housing sales, while the likely gradual easing of lending rates will also boost investor confidence and investment activity; * high home prices and declines in savings rates will outweigh these factors, particularly in Mumbai and Delhi
Rising inventory levels in Bengaluru has been highlighted before. While job market has been robust in the region, improvement in IT hiring and continuation of E-commerce led job market boom will remain key monitorables for the region’s performance going forward.
Strapped for cash and struggling to find buyers, developers are offloading apartments in scores. And taking advantage of the situation, private equity (PE) funds and even high networth individuals are driving a hard bargain. Real estate firms, sitting on large inventories, find they have little choice but to offer deep discounts — anywhere between 20% and 40% — as they need cash to complete projects. Gaurav Gupta, director, Omkar Realtors and Developers, confirms he is offering discounts for bulk deals explaining that off-loading apartments. Kolkata’s Forum Project Holdings too has done a bulk sale to Piramal at its BKC project.
Wednesday, September 09, 2015
Tuesday, August 04, 2015
CII Conclave on Real Estate Demands Volume Based Business
At the CII Conclave on Real Estate, Most residential participants were from Mumbai but some large core asset developers from Bangalore and Noida also participated in commercial discussions. Key takeaways were,
Construction activity in India has increased over 2.5X since 2009 to US$240 bn. The ratio of construction which was nearly 50:50 between residential and commercial (offices, malls, hotels) is now skewed towards residential (around 86%). This, along with higher supply of high ticket projects are contributing to the current slowdown.
Residential: There is a clear shift towards this sector by organized developers across markets. While demand drivers remain strong, too many developers are focusing on premium projects while demand is at the lower end. Despite general perception, there is little ready-to-move-in inventory available across key metros. But going forward, we believe there will be more inventories in the ready-to-move-in projects for sale, as (a) supply increases, (b) size of projects are increasing and (c) projects available are much dearer than a decade back.
Government policies: There is no change or improvement in policies at the local level unlike announcements made by the central government. Announcements on REITs, ‘Housing for All’ did not move to the implementation stage in the past year. Some office developers believe the first REIT could come in the next 12 months, but land and taxes remain the biggest hurdle for private participation in ‘Housing for All’.
Affordable housing: There is a disconnect between central and state governments on affordable housing, as land is a state subject. 34% taxes on land and construction are unlikely to lure private developers to affordable housing. We have already pointed this out in our past notes. We continue to believe that giving higher FAR / FSI for projects and making EWS / LIG unit construction compulsory should be the major policy decision to be taken.
Most participants believe larger, organized developers will perform well as smaller developers struggle. We hear such discussions usually during down cycles. As real estate is a low entry barrier business new participants enter the market near the peak. Eight of 10 developers present in the market since the ‘80s continue to operate, and have increased their scale of operations.
Construction activity in India has increased over 2.5X since 2009 to US$240 bn. The ratio of construction which was nearly 50:50 between residential and commercial (offices, malls, hotels) is now skewed towards residential (around 86%). This, along with higher supply of high ticket projects are contributing to the current slowdown.
Residential: There is a clear shift towards this sector by organized developers across markets. While demand drivers remain strong, too many developers are focusing on premium projects while demand is at the lower end. Despite general perception, there is little ready-to-move-in inventory available across key metros. But going forward, we believe there will be more inventories in the ready-to-move-in projects for sale, as (a) supply increases, (b) size of projects are increasing and (c) projects available are much dearer than a decade back.
Government policies: There is no change or improvement in policies at the local level unlike announcements made by the central government. Announcements on REITs, ‘Housing for All’ did not move to the implementation stage in the past year. Some office developers believe the first REIT could come in the next 12 months, but land and taxes remain the biggest hurdle for private participation in ‘Housing for All’.
Affordable housing: There is a disconnect between central and state governments on affordable housing, as land is a state subject. 34% taxes on land and construction are unlikely to lure private developers to affordable housing. We have already pointed this out in our past notes. We continue to believe that giving higher FAR / FSI for projects and making EWS / LIG unit construction compulsory should be the major policy decision to be taken.
Most participants believe larger, organized developers will perform well as smaller developers struggle. We hear such discussions usually during down cycles. As real estate is a low entry barrier business new participants enter the market near the peak. Eight of 10 developers present in the market since the ‘80s continue to operate, and have increased their scale of operations.
Tuesday, July 14, 2015
India Wide Realty Slowdown - RBI
RBI’s Housing Price Index suggests that prices have moderated on a pan-India basis, data from property websites suggests a deeper slowdown in India’s large cities, with prices falling by 7-18% YoY. Alongside this, we are also seeing a significant drop in transaction volumes: our visits to five property registration offices in Mumbai suggest a sharp drop in the registration of new residential properties and data from property valuers in Maharashtra and Tamilnadu suggest that transaction volumes have fallen by 10-15% per annum
for three consecutive years now.
RBI data suggests that the banking system seems to have turned the tap off for property developers over the past year. This has in turn made developers either stop construction or cut prices. The knowledge that there is many years’ worth of unsold real estate inventory in most of India’s tier-1 and tier-2 cities is causing investors to hold back further purchases. Data from property research houses suggest that regions like Mumbai and Delhi would take as much as 11-14 quarters to clear the existing inventory.
Black Money Bill Pushes Speculators Out
The draconian Black Money Bill went live on 1st July and has made HNW families reluctant to invest in Real Estate. Key state governments (Karnataka, Maharashtra, West Bengal, Delhi) have hiked “ready reckoner” rates sharply this year and thus prevented prices from dropping to a market clearing level.
for three consecutive years now.
RBI data suggests that the banking system seems to have turned the tap off for property developers over the past year. This has in turn made developers either stop construction or cut prices. The knowledge that there is many years’ worth of unsold real estate inventory in most of India’s tier-1 and tier-2 cities is causing investors to hold back further purchases. Data from property research houses suggest that regions like Mumbai and Delhi would take as much as 11-14 quarters to clear the existing inventory.
Black Money Bill Pushes Speculators Out
The draconian Black Money Bill went live on 1st July and has made HNW families reluctant to invest in Real Estate. Key state governments (Karnataka, Maharashtra, West Bengal, Delhi) have hiked “ready reckoner” rates sharply this year and thus prevented prices from dropping to a market clearing level.
Tuesday, June 30, 2015
Residential Prices Halt, Slowdown Continues
After showing some pickup in first 9MFY15, demand has moderated in 4QFY15, especially in commercial segment. Residential prices and commercial rentals have flattened out. Full recovery will take some more time, in our view.
Residential absorption (area sold) in key cities of India fell 11%YoY in 4QFY15 and 21% YoY in FY15 (Prop Equity data). Decline of 21% YoY in FY15 comes on the back of very weak FY14 when absorption fell 22% YoY. But the silver lining is moderation in sequential decline – QoQ growth rate was -5%/-1%/-6%/0% in 1Q/2Q/3Q/4QFY15: this shows some moderation in demand de-growth through FY15. Anecdotally, demand for premium residential property in Mumbai and Gurgaon seems to have picked up at the margin over past six months.
High inventory and weak demand has forced developers to cut back on new launches. Residential new
launches fell 48%% YoY / 18% QoQ in 4QFY15 and 37% YoY in FY15. In terms of quarterly run rate, 4QFY15 saw lowest quantum of new launches after FY09. Anemic new launch data does not bode well for future construction activity.
Different data points continue to suggest broad-based deceleration in residential prices across India. Residential prices grew just ~0.5% YoY in 4QFY15, compared to 12%-16% YoY increase seen over 2QFY12- 4QFY13 (Prop Equity data). As per Reserve Bank of India’s All India Residential Property Price Index (RPPI), price increase decelerated to 3.6% YoY/ 0% QoQ in 3QFY15 from a high of 28% YoY in 3QFY13.
Residential absorption (area sold) in key cities of India fell 11%YoY in 4QFY15 and 21% YoY in FY15 (Prop Equity data). Decline of 21% YoY in FY15 comes on the back of very weak FY14 when absorption fell 22% YoY. But the silver lining is moderation in sequential decline – QoQ growth rate was -5%/-1%/-6%/0% in 1Q/2Q/3Q/4QFY15: this shows some moderation in demand de-growth through FY15. Anecdotally, demand for premium residential property in Mumbai and Gurgaon seems to have picked up at the margin over past six months.
High inventory and weak demand has forced developers to cut back on new launches. Residential new
launches fell 48%% YoY / 18% QoQ in 4QFY15 and 37% YoY in FY15. In terms of quarterly run rate, 4QFY15 saw lowest quantum of new launches after FY09. Anemic new launch data does not bode well for future construction activity.
Different data points continue to suggest broad-based deceleration in residential prices across India. Residential prices grew just ~0.5% YoY in 4QFY15, compared to 12%-16% YoY increase seen over 2QFY12- 4QFY13 (Prop Equity data). As per Reserve Bank of India’s All India Residential Property Price Index (RPPI), price increase decelerated to 3.6% YoY/ 0% QoQ in 3QFY15 from a high of 28% YoY in 3QFY13.
Monday, May 25, 2015
Modi's PSU Land Use Formula for Industrialization
While the ordinance on the land acquisition bill has been referred to a Joint Committee, according to the media, the government plans to use the large land reserves (250,000 acres) available with central PSUs (Public Sector Units), mainly financially troubled ones, for industrial and infrastructure projects.
Some of the land with the PSUs is leased from the state governments, not directly owned, while some is encroached on. The location of the surplus land will need to match with the requirement of the projects.
Healthy PSUs giving up land for the private sector could lead to protests from employees and opposition parties.
Apparently, the government is also planning to use this land for plug and play projects (all the clearances in place before the award), which as we pointed out in our budget note (see F16e India Budget: Visible Infra
Focus dated March 1, 2015) could be a game-changer. If the PSUs involved are already financially troubled companies, the impact of taking away unutilized land will be insignificant, reducing the risk of opposition from any stakeholders.
Some of the land with the PSUs is leased from the state governments, not directly owned, while some is encroached on. The location of the surplus land will need to match with the requirement of the projects.
Healthy PSUs giving up land for the private sector could lead to protests from employees and opposition parties.
Apparently, the government is also planning to use this land for plug and play projects (all the clearances in place before the award), which as we pointed out in our budget note (see F16e India Budget: Visible Infra
Focus dated March 1, 2015) could be a game-changer. If the PSUs involved are already financially troubled companies, the impact of taking away unutilized land will be insignificant, reducing the risk of opposition from any stakeholders.
Tuesday, May 19, 2015
Declining Affordability, RBI Data Alludes Correction in Property Prices
RBI residential property index trends for 3Q15 indicates a marginal increase in all India property prices. While Bangalore witnessed 11% increase in prices YoY, Mumbai, Kolkata, and NCR saw limited price improvement during the period. In addition, home affordability continued to decline over last one year.
However RBI data indicates material time correction in Mumbai, NCR and Kolkata property prices last year. Bangalore and Chennai witnessed consistent increase in property values primarily driven by end user demand. Time correction has a domino effect in regions with high proportion of investor flats, as non-commensurate returns impact asset holding capacity of the investors, resulting in property price correction.
Home affordability has declined over last one year as EMI to income ratio increased from 36% to 40% during the period. As the home affordability declines, we see a gradual shift to smaller apartments especially in Mumbai, Pune and Chennai.
While property price escalation has moderated, it has outpaced rental inflation significantly over last 3-4 years. Lower rental growth and declining affordability has resulted in deferral of purchase decision by end users leading to higher inventory level across regions.
Mortgage lending rates have been reduced by 15-20bps across banks/NBFCs post the RBI policy in Apr-15. While the reduction is directionally positive, the reduction in EMI, in our view, is not material enough to improve demand scenario in the sector.
However RBI data indicates material time correction in Mumbai, NCR and Kolkata property prices last year. Bangalore and Chennai witnessed consistent increase in property values primarily driven by end user demand. Time correction has a domino effect in regions with high proportion of investor flats, as non-commensurate returns impact asset holding capacity of the investors, resulting in property price correction.
Home affordability has declined over last one year as EMI to income ratio increased from 36% to 40% during the period. As the home affordability declines, we see a gradual shift to smaller apartments especially in Mumbai, Pune and Chennai.
While property price escalation has moderated, it has outpaced rental inflation significantly over last 3-4 years. Lower rental growth and declining affordability has resulted in deferral of purchase decision by end users leading to higher inventory level across regions.
Mortgage lending rates have been reduced by 15-20bps across banks/NBFCs post the RBI policy in Apr-15. While the reduction is directionally positive, the reduction in EMI, in our view, is not material enough to improve demand scenario in the sector.
Tuesday, April 28, 2015
New Residential Launch, Push Up Sales
All cities except Gurgaon saw an increase in new launches in 1QCY15 leading to a QoQ increase in sales (demand). We question sustenance here as we believe (from historic property cycle experiences) that developers use new launches at attractive prices as one of their strategies to push up sales and cash flows in periods of market weakness. Gurgaon clearly witnessed this play out in CY14 with little success.
Mumbai - 1QCY15 witnessed a pick-up in sales velocity led by launches at attractive pricing by well-known developers timed with local New Year in March. However, we maintain our view that Mumbai housing market remains tough evidenced by CY14 annual absorption rate flat at 24% compared to CY13. We reiterate our belief that projects by developers with good brand-value and execution track record will see better sales velocity. 10 key project launches (mainly in eastern & western suburbs) accounted for 33% of total new sales in 1QCY15.
Bangalore - 1QCY15 was the 2nd consecutive quarter to witness new project launches greater than 13,000 units (14,000 units in 4QCY14). Led by aggressive launches, 1QCY15 clocked new sales (demand) of more than 8,000 units (only the 2nd occurrence in last 7 years). As unsold inventory continues to rise above 70,000 units or above 10 quarters, we believe these are early signs of weakness. Also, mere 4% increase in overall housing price in CY14 supports our hypothesis
Noida - CY14 strategy of controlling new launches (supply) worked well in containing rising unsold inventory. We believe Noida’s unsold inventory has peaked at 100,000 units. However, given recent absorption rate, Noida will require 14 qtrs to exhaust this unsold inventory. 1QCY15 witnessed new sales of ~4,800 units which is the lowest in last six years. Absorption rate at 4.5% is lowest ever as investors who held the market in the past seemed to have deserted the market given poor visibility on timely delivery, price appreciation and exit to end-user.
Gurgaon - We believe the key reasons for drop in absorption rate are – 1) poor affordability as housing prices rose amidst slowing income growth, 2) pace of development of physical and social infrastructure much slower than housing development and 3) stock dump by investors in projects nearing completion (launched in 2009-10). We foresee following events to occur before any meaningful resurrection in sales and cash flows – 1) notable rise in new launches with freebies and discount schemes and 2) reduction in investor inventory in secondary market.
Mumbai - 1QCY15 witnessed a pick-up in sales velocity led by launches at attractive pricing by well-known developers timed with local New Year in March. However, we maintain our view that Mumbai housing market remains tough evidenced by CY14 annual absorption rate flat at 24% compared to CY13. We reiterate our belief that projects by developers with good brand-value and execution track record will see better sales velocity. 10 key project launches (mainly in eastern & western suburbs) accounted for 33% of total new sales in 1QCY15.
Bangalore - 1QCY15 was the 2nd consecutive quarter to witness new project launches greater than 13,000 units (14,000 units in 4QCY14). Led by aggressive launches, 1QCY15 clocked new sales (demand) of more than 8,000 units (only the 2nd occurrence in last 7 years). As unsold inventory continues to rise above 70,000 units or above 10 quarters, we believe these are early signs of weakness. Also, mere 4% increase in overall housing price in CY14 supports our hypothesis
Noida - CY14 strategy of controlling new launches (supply) worked well in containing rising unsold inventory. We believe Noida’s unsold inventory has peaked at 100,000 units. However, given recent absorption rate, Noida will require 14 qtrs to exhaust this unsold inventory. 1QCY15 witnessed new sales of ~4,800 units which is the lowest in last six years. Absorption rate at 4.5% is lowest ever as investors who held the market in the past seemed to have deserted the market given poor visibility on timely delivery, price appreciation and exit to end-user.
Gurgaon - We believe the key reasons for drop in absorption rate are – 1) poor affordability as housing prices rose amidst slowing income growth, 2) pace of development of physical and social infrastructure much slower than housing development and 3) stock dump by investors in projects nearing completion (launched in 2009-10). We foresee following events to occur before any meaningful resurrection in sales and cash flows – 1) notable rise in new launches with freebies and discount schemes and 2) reduction in investor inventory in secondary market.
Wednesday, April 08, 2015
Real Estate Regulator India - Closer to Reality with Modi's Land Bill
The Union cabinet headed by Narendra Modi has approved amendments to Real Estate (Regulation and Development Bill), 2013. Key changes / inclusion introduced in the amendments are a) Residential and commercial projects under ambit of the new Real Estate Regulator that will come into force, hopefully and not like Jan Lokpal.
We believe Real Estate (Regulation and Development Bill), 2013 is a step in the right direction to address the end user concerns. The key feature of the bill is appointment of Appellate Authority which will adjudicate disputes between the industry participants with predefined timelines. In addition the transparency introduced at the time of registration with Authority (documents like commencement certificate, layout plan, agreement copy etc.) will help end user in taking an informed decision.
Ambit of regulation has been increased by bringing 1) Commercial projects and 2) projects which have not received completion certificate under the its jurisdiction. Previously projects which had received commencement certificate before the implementation of act were exempted from registration.
In original draft bill developer was required to compulsorily deposit 70% of amount realised from allottees in a separate account. The deposit amount has been reduced to 50% thus improving working capital flexibility as compared to draft bill. Another key amendment is the requirement of consent from 2/3rd allottees if the developer intends to alter plan or make structural changes.
We believe Real Estate (Regulation and Development Bill), 2013 is a step in the right direction to address the end user concerns. The key feature of the bill is appointment of Appellate Authority which will adjudicate disputes between the industry participants with predefined timelines. In addition the transparency introduced at the time of registration with Authority (documents like commencement certificate, layout plan, agreement copy etc.) will help end user in taking an informed decision.
Ambit of regulation has been increased by bringing 1) Commercial projects and 2) projects which have not received completion certificate under the its jurisdiction. Previously projects which had received commencement certificate before the implementation of act were exempted from registration.
In original draft bill developer was required to compulsorily deposit 70% of amount realised from allottees in a separate account. The deposit amount has been reduced to 50% thus improving working capital flexibility as compared to draft bill. Another key amendment is the requirement of consent from 2/3rd allottees if the developer intends to alter plan or make structural changes.
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