Gurgaon + Noida + Chennai Property Markets Lead in Recovery

A comparison of volumes during the peak 2007 and end of 2010 data suggests that Gurgaon, Noida / Greater Noida and Chennai property Markets recovered to cross the previous peak volumes consistently for the last 6 months while the rest of India exhibited mixed trends.

Noida / Greater Noida - Sold 2 Mn SFT / Month in 2007. The figure went up as high as 10 Mn SFT / Month in the last 6 months and has started to cool off with rising interest rates.

Gurgaon - From a lull in mid-CY10, demand for residential property in Gurgaon has recovered smartly. Price correction may still be staved off for another 4-6 months, post which prices may correct by 15%, we believe. The key here would be to watch for supply from investors in the secondary market, as this could lead to an earlier price correction.

Chennai - Volumes in Chennai are currently at their best ever in history. We believe Chennai volumes should remain strong vs. FY09 levels, driven by the IT industry and good affordability in the suburbs. Inventory levels though remain a worry, in our opinion.

Bangalore - The Bangalore residential market seems to have entered a rut with volumes unable to break out of the 3-4 mn sqft range. An interesting feature is that the size of homes sold has come down in the past 3-4 months suggesting that buyers in Bangalore are downtrading in the face of a 150bp increase in interest rates and a 15% rise in prices. Affordability in Bangalore is little high and hence buyers are not willing to stretch themselves with the Poorest City Infrastructure compared to all other Tier-I cities in India.

Hyderabad - Hyderabad continues its poor performance as the uncertain political situation and the consequent lack of clarity on Hyderabad’s status as the capital city seem to have led to buyers staying away.

Kolkata - Kolkata witnessed a good demand environment in 2H CY10, with volumes consistently above 1mn sqft. The unsold stock with developers has come off significantly over the last 2.5 years

Mumbai Metro Region - Demand for residential property in MMR slowed down considerably since the early part of the year. While the slowdown in square feet terms looks muted, in terms of units sold at 3,101, Dec 2010 was the second-slowest month since Dec 2008 (2,925). This is because sales of larger-sized apartments (premium homes) are continuing; the slowdown seems to be more in mid-segment homes due to rising interest rates.

Residential demand Weakens

Recent data suggests absorption (demand) volume in India’s top 7 cities has either been flat or declined over the past two quarters. The Mumbai region and Pune have reported sharp drops, while Gurgaon and Bangalore have shown flat-marginally negative growth.

While developers could hold prices firm in the near term due to stable balance sheet liquidity, we think this will only hurt demand as interest rate rises and higher property prices will curtail affordability.

Likely stringent measures by RBI towards the sector could curtail credit to the sector and hurt execution. Looking ahead, the risks of sticky inflation, further rise in interest rates and more stringent RBI policies imply further downside risk to demand. However, the Job market is looking really good and hence Developers should reduce their margins a little bit which will get the consumers back to their doors.

Private Equity in Indian Realty

After a weak 2009, private Equity Funding in Realty saw a pick-up in 2010. ~$1.5 b (~Rs68 b) was invested across 46 deals in the sector vs $749m across 23 deals in 2009. To put this in perspective of sector funding, $1.7b equity was raised through IPO/QIP route in CY10. Of the total PE pool.

Developers are increasingly approaching PE funds, likely due to lack of other options. As an after math of the bribe-for-loan scam, banks are tightening lending to real estate firms. Also, falling sales volumes and lack of appetite for equity raisings have worsened their case. Hence, more developers across India now are turning to PE funds.

Recent PE Deals Include - Parsvnath raised Rs1.0b by selling 49.9% stake in Ghaziabad project to SUN-Apollo India RE; 2) ASK's Property Fund is investing in two Pune Projects of Rs5.25b; 3) Red Fort Capital is looking to invest Rs1.5b in Ansal API’s “Esencia” township Gurgaon; 4) Kumar Urban may raise Rs1.1b by divesting stakes in five Mumbai and two Pune projects.

Housing Finance Scam - Realty Stocks in Blood Bath

The Indian Real Estate Stocks which have always been a pack of cards falling at the slightest jerks have taken a severe beating on the Stock Exchanges today. RBI which has been an indirect hand in glove to the real estate industry backed by Government sponsoring Black Money / Unaccounted - Non taxed Money to be used in deals makes this the least preferred choice for investment.

Investors deserted REal Estate Stocks in yesterday's trade and continued their selling spree in early trade today. Almost all the stocks are down between 5% to 10% and here is how the Indian Real Estate Stock Index looks like.

LIC + PSU Banks Financing Realtors Scam

The CBI has arrested officials of several financial institutions ranging from CEO to deputy general managers for allegedly accepting bribes from a debt syndicate company, "Money Matters", for facilitating loans to companies across many industries including Indian property developers.

Details of those arrested: Personnel from LIC Housing Finance (CEO), LIC (Secretary, Investments), BOI (GM), Central Bank (Independent Director), PNB (DGM) and 3 people from Money Matters (CMD + 2 others) were arrested.

Pro-forma analysis of commercial real estate books indicates that were half these books to be written off (an extreme outcome, in our view), the impact on NAV would be an average of 16% for our PSU bank universe but 72% for LICHF. On the other hand, were earnings/book values to remain unaffected but multiples reverted to their 5-year averages, our scenario analysis indicates anything up to a 20% impact on the share prices of our PSU bank universe from current levels.

We believe these investigations will have negative implications on the companies involved and will remain an overhang, both from financial impact as well as sentiment perspective.

Has the RBI Woken up yet to take to task all the il-legal money launderers ? Land / Real Estate is the Worst Asset Class for Investment. Read on How Government Sponsors Black Money in Land Dealings.

Historical Returns in Indian Property

JP Morgan was able to capture four transactions in four major markets that gives pointers to a long term price growth trend.

Mumbai (Napeansea Road) over a period of 90 years returned 15% ;
Prime Delhi (Kasturba Gandhi Marg, Barakhamba Road) over 40 years has returned 17%
Gurgaon over a period of last 20 years returned 20%
Chennai (T Nagar) over a period of 80 years returned a CAGR growth of 20% ;
[All Returns in CAGR]

Ansal's residential projects in Prime Delhi have witnessed a price CAGR increase of 15-17% over the last 35-40 years. Based on recent transaction, prime South Mumbai [Carmichael Road] bungalows have registered 15% CAGR over the last 60-70 years.

RBI Checkmates Luxury Residential Projects

The RBI has introduced three measures, which we believe will primarily
impact premium and luxury residential projects.

The RBI has increased the risk weight for residential housing loans of INR7.5m and above, irrespective of the loan-to-value (LTV) ratio, to 125%. However, risk weights for other loans remain unchanged.

So Luxury in India means over 75 Lakhs.

The LTV ratio for home loans has been capped at 80%. Lenders typically have an average LTV ratio of 70%. Hence, we see no significant impact on end-user demand from the 80% LTV imposition. The LTV however, should curb price rises and speculation over the near term in the luxury segment.

The RBI has raised the standard asset provisioning for all 'teaser rate' loans to 2%, from 0.4%. We believe this would end the 'Teaser rate' campaign wherein lenders offered a lower initial 'interest rate' (50bps below the current rate) and calculated affordability (or ability to service loan) of a buyer on the lower interest rate

Mumbai Residential prices riding high

Across all the major micromarkets, prices have risen by 10-30% since April 2010. This is after the 20-40% increases in the period October 2009–April 2010. For example, prices in Borivli, a western suburb in Mumbai, are currently at Rs8,000-11,000p sq ft, up from last year’s Rs6,000–8,000p sq ft.

Here are the latest property prices as we obtained from the Exhibition,

Ackruti Sunmist Andheri 16,600
Rustomjee Elanza Malad 12,500
Ackruti Gardenia Mira Road 4,800
Gundecha Symphony Andheri 13,800
Kalpataru Kalpataru Gardens Kandivali 9,500
Kalpataru Kalpataru Towers Kandivali 9,800
Lodha Eternia Andheri 12,500
DSK Developers Madhuban Andheri 7,700
Hiranandani Hiranandani Heritage Kandivali 11,200
Runwal Runwal Elegante Andheri 15,000

Ackruti Vedant Sion 12,500
Ackruti Siddhi Thane 6,300
Nirmal Lifestyle Citi of Joy Mulund 7,776
Nirmal Lifestyle Lifestyle City Kalyan 2,547
Lodha Imperia Bhandup 8,200
Hiranandani Estates Thane 6,700
Gundecha Zenith Mulund 7,200
Nirmal Lifestyle US Open Mulund 7,200
Hiranandani Meadows Thane 6,700
Runwal Pearl Thane 5,200
Runwal Greens Mulund 7,300
Kalpataru Aura Ghatkopar 9,500
Godrej Properties Riverside Kalyan 2,950

Continued strength in volumes at current price levels would hinge on: 1) expectation of continued growth in personal disposable income, i.e., a robust job environment; and 2) stable interest rate.