REALTY – GETTING OUT OF THE WOODS?

Over the last two years the real estate sector has witnessed sluggish growth. The factors that affected the sector as a whole were consistently higher inflation leading to higher interest rates, weak rupee, and lower GDP growth. All these factors resulted in negative investor sentiments and lower investments in the sector. While these were the macro factors, on the micro front the realty companies witnessed issues like slowdown on sales volumes’ front. This affected the cash flows and hence created financial worries for most of the companies. The rising debt burden also affected the financials as even the payment of short-term debt was difficult to repay.

In such a scenario when the sales volumes were declining the realty players did not reduce the prices. As a result, most of the funds remained stuck in single projects, making it difficult for creating additional funds. What added to the woes is that even banks, which were seen as a major source of funds for realty, stayed aloof with stringent RBI norms. Fund raising was difficult from the equity markets as well with realty stocks trading at multi-year lows. In such a scenario the only option for many players was to sell non-core assets. Not only the smaller companies but even the bigger players like DLF, Orbit Corporation, Unitech and HDIL had to go ahead with sale of non-core assets.

However, with the change in government the tables seem to have turned for the better. There is now a ray of hope for the realty players. With a pro-reforms government likely to change the Land Acquisition Bill Act, the realty sector is beginning to see light at the end of a dark tunnel. The positive moves will even lead to a change in investor sentiments. Further, with the advent of the Real Estate Investment Trusts (REITs) things are expected to take a turn for the better. Apart from that, the ‘Smart City’ concept brings another positive aspect for the sector as also the advantages that will accrue from relaxation in the FDI caps and regulations. All in all, the new government has also given a boost to the sector by announcing favourable policies in the Union Budget while the RBI’s stance toward cutting rates has also helped to boost investors’ sentiment and will consequently push increasing investments into the sector. If we take a look at the advantages of REITs, its coming into play will attract investors with smaller amounts of funds to invest in the realty sector just as in mutual funds. This will clearly provide a way for realty players to raise more capital. The REITs will be registered with the Security Exchange Board of India (SEBI) and will have a professional REIT manager. It will have mandatory assets under management of Rs 500 crore and will be allowed to invest only in commercial properties. The REITs will allot units to investors and the SEBI has mandated a dividend payout of 80 to 90 per cent.

Moreover, it will enhance transparency as the REITs will have to disclose periodical information about its investments. The biggest advantage of REITs will be to rescue the cash-strapped real estate companies as it will help boost liquidity and improve cash flows through the much needed fund infusion route. This was one of the long pending demands of the sector. “REITs are beneficial for both the real estate sector as well as investors, offering an exit route for property developers and at the same time providing a safe, sound and good investment opportunity for high net individual (HNI) investors in commercial properties. It allows its sponsors the much needed liquidity by passing the ownership to shareholders,” opines Manju Yagnik of the Nahar Group.

“The recent initiatives taken by the government on the policy front to incentivize the sector have been very encouraging. These measures will drive the sector going ahead. As and when more reform measures get introduced, we expect the sector to gradually revive. Both demand and price is expected to rise owing to revival in sentiments and on the expectation of more reform measures coming into the sector,” says Hariprakash Pandey, Vice President, Finance and Investor Relations, HDIL. The management of Piramal Fund has launched an India REIT Fund with a corpus of Rs 350 crore to purchase residential apartments in Tier I cities. Furthermore, this sector has also been witnessing inflow from foreign players such as the US-based private equity firm Blackstone which has invested Rs 1,000 crore in the Bengaluru realty market while American business tycoon Donald Trump’s Trump Organization has launched two projects, one each in Mumbai and Pune. These two and many more deals happening around are evident of the fact that foreign players are also confident in the sector’s revival and growth in the near future. Also, the government allowing 100 per cent FDI in the sector has helped boosted overall sentiments.

The residential segment, especially in the urban areas, has shown gradual growth and is expected to continue this trend owing to migration from rural areas to urban areas due to higher number of job opportunities, growing income levels, etc. The industry is expecting a single-window clearance for all projects which will not only boost the operational efficiency of the companies but will also ensure timely completion of projects. As such, the Indian real estate sector is expected to be a favoured sector for not only international players but also private players in the near future. The residential and commercial segments are especially poised to grow at a faster rate and give good returns to investors.  Going ahead in the story we provide views of two real estate research firms.

EXPERTS VIEWS

Mr. OM AHUJA CEO, RESIDENTIAL SERVICES, JLL INDIA

At this point in 2014, the arrival of a new government has spelt a positive change in country’s economic scenario. The significant rectification of the status quo has helped in stabilising the stock market, which in turn has relevance to the growth parameters of real estate development.

MUMBAI: Mumbai’s eastern belt, with its improved infrastructure and better conveniences, is attracting corporate to shift their base from other parts of the city. This will lead to employees preferring this region to stay close to their work places. Considering the value proposition, current pricing, infrastructure and appreciation potential, the Wadala-Chembur- Ghatkopar-Vikhroli-Kanjur Marg belt up to Bhandup will do exceedingly well in the next five years.

NAVI MUMBAI: Thanks to the rapidly improving infrastructure and comparative arbitrage this region offers, corporate find it beneficial to set up their offices there because of savings on operational costs. The zones from Airoli to Kharghar will boom over the next five years. Specific pockets like Airoli, Ghansoli and Kharghar are very good investment bets. Mumbai currently lags behind New Delhi, Gurgaon and Bangalore when it comes to public transport and robust connectivity. The metro, rapid metro, ring roads and AC buses in these cities have bought great relief to their citizens, and this has led to more corporate to set up operations, thereby improving job creation in these cities. With the crumbling public transport and limited coverage of the Metro and Mono Rail, Mumbai is facing direct competition from cities like Bangalore, Gurgaon, Pune and Chennai, and losing jobs to these cities. The execution of most such infrastructure projects has been exceedingly slow over the last ten years, and this has had a major impact on the cost of living and loss of new businesses to cities like Bangalore, Gurgaon and Pune.

OVERALL OUTLOOK 

With the increasing cost of FSI, land and construction, prices are not coming down for new constructions. On the other hand, the secondary or resale market has already slowed down significantly as the sellers in this segment are factoring redevelopment-related price escalation expectations into the price. This has led to the number of transactions in this space being at the lowest volume in the past few years. New buyers are opting for new launches as these provide better affordability and choices when compared to the resale / secondary sales’ market. We will see smaller configuration apartments that suit the budgets of buyers doing better over the coming months, specifically in the new launches lined up in Mumbai.

Affordability has become a big issue in Mumbai city, which has limited land available for development. One can still work in New Delhi, live 30 minutes away in Noida and afford to buy a 2 BHK at Rs.1 crore. This is not the case in Mumbai. Many initiatives from the government need to be implemented. These include drastically reducing the TDR costs to make apartments more affordable, increasing the FSI, releasing Port Trust land for planned development and auctioning off mill and railway land, specifically in central Mumbai.

PUNE: Pune is the only other destination in Maharashtra that currently shows high promise. From 2010 Pune has been ranking among the top five cities in terms of attracting international players to set up offices and facilities. It is now being perceived as a city whose sole attraction is that it is close to the financial capital. Over the last two to three years, Pune has been capturing over 17 per cent of the office space absorption in the country. In absolute terms, it has 4.7 million square feet of Grade A office space; every 100 square feet of office space leased create a new job, and at this rate Pune, is creating 47,000 new jobs every year. Over the next few years, Pune will be directly competing with cities like Bangalore and Mumbai. The number of jobs being created will mean more need for housing. The highest appreciation will be seen in the eastern and western belts of Pune.

OVERALL OUTLOOK

Pune’s real estate market is showing healthy growth across most asset segments. Considering the concentration of population that is professionally active in the IT and manufacturing industries, there is now a greater demand for multistoried apartments. Residential micro markets like Kharadi and Wagholi in east Pune and Pimple Nilakh, Pimple Saudagar and Wakad in west Pune are seeing a lot of residential development, driven by good connectivity with the key centres of the city and the presence of good social infrastructure like schools, hospitals, malls and entertainment centres. All these areas have demonstrated a steady increase in customer inquiries and are poised to grow exponentially in the future. The luxury homes segment has been burgeoning on the Pune’s real estate market. The city’s developers are understandably upbeat about the response that ultra-luxury housing continues to evoke in Pune, and are launching projects with the motto that luxury knows no recession. Luxury housing in Pune is, in fact, now defined by a whole new dimension when it comes to amenities and conveniences. In industry terms, super-premium housing in a city like Pune is defined by projects which have unit sizes of 3,500 square feet and above, complemented with addresses that convey status and prestige, carrying price tags of Rs.12,000 per square feet and above.

Mr. Hetal Bachkaniwala, Assistant Vice-President, Research, Knight Frank India.

The residential market in India has been witnessing extreme volatility in terms of demand and supply over the last three years. Factors such as slowing economic growth, rising interest rates by banks, high inflation and the weak rupee, among others, have contributed toward building a negative sentiment among home buyers and resulted in dwindling sales’ volume. Cities like Mumbai, NCR and Pune have faced the maximum brunt of this trend, with demand levels in each of these cities falling drastically since early 2012. While the demand in Mumbai and NCR dropped by 14 per cent and 12 per cent respectively during 2013, Pune witnessed a fall of more than 19 per cent.

Regrettably, this trend seems to continue in 2014 as well, with the sales volume decreasing by 25 per cent, 37 per cent and 30 per cent in Mumbai, NCR and Pune respectively during the first six months of the year. However, the developer community has been taking these factors into consideration and hence has deliberately reduced the launch of new projects since 2013. The election results, sops for the housing sector in the Union Budget, and all the subsequent decisions taken by the central government in order to revive the economic growth of the country seem to have changed the home buyers sentiment from negative to positive in the last three months.

The sales volume during July-December 2014 is expected to post a phenomenal recovery at 49 per cent, 17 per cent and 11 per cent in Mumbai, NCR and Pune respectively compared to the corresponding period in the previous year. Hence, despite a poor show during the first half of 2014, the total sales volume in Mumbai is projected to increase by 8 per cent, from 74,000 in 2013 to 80,000 during 2014.On the contrary, new project launches in Mumbai are expected to drop by 15 per cent, from 1, 09,200 to 92,850.

The unabated demand-supply gap in the Mumbai residential market has created a pile-up of unsold inventory, which now stands at 2, 13,742 dwelling units. We estimate that it will take more than 12 quarters for the Mumbai market to exhaust this kind of unsold inventory. While the inventory two years ago was mainly on account of under construction projects, the share of ready possession projects is rising this time around. Opportunistic investors, including some private equity fund firms, have started to exploit this new investment avenue presented by the residential market. Going forward, the unsold inventory level is expected to reduce gradually on the back of higher demand and limited new launches.

The demand for homes in NCR is projected to drop by 17 per cent, from 71,400 in 2013 to 59,000 during 2014. Hence, despite an impressive recovery projected for the second half of this year, the overall sales volume in 2014 will be much lower than the previous year, as the demand during the first six months was abysmally low. Similarly, the demand in Pune is expected to fall by 11 per cent, from 38,800 to 34,500 in 2014. However, the silver lining in both these cities is that the fall in supply will be far greater than the fall in demand as developers are expected to restrict launching new projects in the remaining period of 2014. While the number of new project launches in NCR is forecasted to drop by 24 per cent, from 95,760 in 2013 to 72,760 in 2014, Pune will witness a drop of 21 per cent from 45,300 to 35,800 during the same period. The unsold inventory in the NCR and Pune markets stand at 1, 67,800 and 71,000 units respectively as of June 2014. This amounts to more than nine quarters of unsold inventory levels for NCR and seven quarters for Pune.

The bumpy ride in demand and supply does not seem to have any significant impact on price levels as prices continue to move upwards, albeit at a slower pace. The weighted average price in Mumbai, NCR and Pune have increased by 8 per cent, 5 per cent and 6 per cent respectively in the first six months of this year. The significant build-up in unsold inventory and the availability of a large number of ready-possession apartments have restricted the price growth to single digits in these cities. However, prices in Mumbai are estimated to rise by 10 per cent in the remaining six months of 2014 on the back of improved demand. Going forward, the price growth will be limited to 4 per cent in NCR and Pune.

In terms of affordability, Pune has emerged as the most affordable city during 2014, as 83 per cent of the new launches during January-June 2014 were below the ticket size of Rs.5 million. Since the majority of the new projects were launched around the periphery of the city, the ticket size of the apartments in these projects has remained small, despite a steady growth in prices. Similarly, 62 per cent and 51 per cent of the new launches in NCR and Mumbai respectively were below the ticket size of Rs.5 million. Mumbai has emerged as the most premium market, with 34 per cent of the total launches above the ticket size of Rs.10 million.