Real Estate: Outlook 2014

2013 was a forgettable year for Indian realty players, as they faced issues like subdued sales, unsold inventory pile-up and mounting debt pressures. Reports suggested that there were a few smaller unorganised players who were even close to bankruptcy levels. Naturally, realty stocks failed to ignite any positive performance on the bourses. The 34 per cent fall in the BSE Realty index in 2013 as against the nine per cent appreciation in the Sensex vindicates the same.

The reasons behind such a poor performance were political uncertainty, liquidity tightening, higher interest costs and most importantly, cautious sentiments. The equity markets have a direct co-relation to the realty markets. In boom periods, even realty players put in a better performance. But volatility in the equity markets kept investors at bay, only adding to the woes of realty players.

Amid all this, realty players also struggled to repay their short-term debts. However, not many of them opted to go ahead and take a price cut. As a result, the prices remained unaffordable in locations like Mumbai, which made it the market with the highest levels of unsold inventory. The scenario was no different in the other major cities.

An estimated 172500 apartment units were launched in 2013 as compared to 196846 units in 2012 in eight major cities, viz. Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Kolkata, Ahmedabad and Pune. This clearly indicated towards the factor that the cautious sentiments prevailed in the markets not only from the buyers point but also from the builders’ perspective. This shows that the builders are focusing more on the executing current projects rather than on launching new ones.

Looking ahead, the tide is expected to gradually turn in favour of the sector in 2014 as a few factors change over the year.

The first factor is the hope for a stable government at the centre after the General Elections scheduled for April or May. This will end the issue of policy paralysis. Apart from this, we expect a change on the macroeconomic front too. Inflation is likely to witness contraction, resulting in the RBI taking a dovish stance on interest rates. Other worries like higher CAD would also recede over the period.

The most direct impact and the biggest positive for the sector would come from the Real Estate Investment Trusts (REITs). This would help realty players to mobilise funds and reduce their debt burdens. Apart from this, the secondary equity markets are likely to revive this year, and with direct correlation to the equity markets, realty would get additional benefits.

However, the improvement would be gradual and bargaining power would remain with the buyers. One can expect new launches from players in the sector in the second half of the year. Read on for expert views on what you can expect from the realty markets in 2014.
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Residential Real Estate Outlook For 2014

Anuj Puri
Chairman and Country Head
Jones Lang LaSalle India

2013: A Review

Lack Of Confidence Reduced Investor Interest, But Empowered End Users

The year 2013 was a drag for the Indian economy, with poor macroeconomic conditions. Slowing income growth, sustained weakness in the rupee, sky-rocketing inflation and high borrowing rates combined to make consumers wary of spending. This is reflected in the Indian Consumer Confidence Index, which has been falling consistently over the last three quarters.

Housing absorption statistics for the first three quarters of 2013 also reflect this trend in consumer sentiment – from a largely positive QoQ growth to largely negative growth as of 3Q13. Despite this, residential property prices continued to exhibit upward movement even as the weakening rupee steadily eroded purchasing power.

Over the last four years (from the trough of 2Q09 up to 3Q13), taking into account the period of economic slowdown, apartment prices have risen by over 50 per cent on an average across India. As a result, absorption remained subdued during 2013 (until 3Q13), falling further from the already tepid levels observed during the same period last year.

This was particularly true of cities where new supply rose sharply. However, affordable markets such as Kolkata and a few emerging locations near city peripheries witnessed better absorption rates. Preliminary data indicates that a subdued sentiment continued into the 2013 festive season (the initial few weeks of the fourth quarter), when developers typically sell around a third of their annual inventories.

Policies To Enhance Transparency

Notoriously non-transparent, the Indian real estate sector certainly needed a fresh infusion of progressive reforms to boost confidence amongst home buyers as well as investors. To this end, major reforms were initiated around mid-2013 in the form of the Real Estate Regulatory (RER) Bill and the Land Acquisition, Resettlement & Rehabilitation (LARR) Bill. Schemes such as pre-launch (selling apartments without obtaining all necessary approvals) and 80:20 (20 per cent booking advance and remaining 80 per cent after possession) were targeted to ensure adherence to market best practices.

However, typical to the housing sector, no reform is without its unique drawbacks, flaws or limitations – and these were no different. Both the bills (RER & LARR) had clauses or bye-laws that threatened to further escalate prices in a market craving for absorption numbers. While the Real Estate Regulatory Bill raised developers’ funding concerns by proposing to ban the practice of pre-launches, the Land Acquisition Bill rendered the process of acquiring land costlier and more time-consuming.

Shift Of Bargaining Power

2013 saw a decisive shift of bargaining power in favour of buyers. Towards mid-year, a significant fall in the rupee against the US dollar gave NRIs and foreign investors an opportunity to earn incremental returns of 10-15 per cent merely on exchange rate movement (the rupee has partially recovered since then). Further, developers’ willingness to lower prices by 10-15 per cent gave serious local buyers a chance to get genuine bargains on their property purchases. Therefore, the market presented good windows of opportunity (albeit small ones) at fairly regular intervals.

The Rise Of The Suburbs 

Stock-weighted average prices across India rose by 10 per cent YoY during the first three quarters of 2013. The growth in prices was clearly skewed in favour of suburban and newly emerging locations as opposed to established city sub-markets (barring a few exceptions). Markets such as Kolkata, which have traditionally catered to low and mid-segment buyers, witnessed sharp price rises. In this period, rental values across India increased by a relatively modest eight per cent.

Hyderabad proved to be an outlier, as capital values rose sharply owing to changes in the State government’s housing policy. In mid-2012, the Andhra Pradesh government had enforced a policy making it mandatory to provide Economically Weaker Sections housing in every project covering one acre or more. Few new projects were launched after this, until early 2013. The policy was later revised to include only projects with five acres or more of land for mandatory inclusion of EWS housing. With this revision and a thinning of previous unsold inventory, more new projects were launched at higher price points.
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2014: Outlook

Time To Match Demand With Relevant Supply

While the India’s gripping urbanisation growth story has been fascinating global investors so far, an underlying truth gradually emerged in 2013 – economic growth, the consumption story and property prices may not rise consistently, and there could be intermittent hurdles or growth risks. The presently cautious market sentiment is likely to continue, as headwinds to growth will prevail at least until the first half of 2014.

However, the second half is likely to witness gradual revival in absorption. Residential real estate capital values will increase in a subdued range of 10-12 per cent YoY pan-India for the whole year.

Affordability Will Drive Growth In 2014

An emerging economy is never short of opportunities, and it is time that the Indian residential real estate industry realises where the opportunity lies. To date, the shortage of homes in India stands at around 19 million units, and 95 per cent of this housing shortage is in the Economically Weaker Section (EWS) and Low Income Group (LIG) categories.

In India, housing for EWS is defined by the Technical Group on Estimation of Housing Shortage as having a carpet area of 21-27 square meters; LIG housing includes units of 28-60 square meter carpet area. By government definition, EWS housing falls in the range of INR 4-10 lakh. This means that development of affordable housing will have to penetrate into the deeper suburbs of our cities, where such price points are feasible.

The Tata Shubh Griha project (popularly known as Nano homes; completed in 2011) in Boisar near Mumbai was a splendid example of successful identification and auctioning of such opportunities. The project had 1300 units, which received applications from 3500 households. A recommendation to the government by the technical group to incentivise such projects by subsidised land, tax rebates, grants per supply of dwellings, etc. could help developers in improving the feasibility of such projects.

Redevelopment Activity To Increase

With scarce availability of land in the urban agglomeration, redevelopment will emerge as another growth driver in a scenario of cost-and-time-intensive complexities with regard to land acquisition brought forth by the LARR 2013 amendments. Indian cities present an exceptional opportunity for developers in this respect — as per the latest available census data on households, only 50 per cent of the residential units are in good condition, while the remaining are either merely liveable or in dilapidated condition.

Rise In Bank Penetration As Demand Driver

The housing mortgage market in India is currently low at nine per cent (mortgage-to-GDP ratio) when compared to other emerging Asian economies such as Malaysia (31 per cent), Thailand (19 per cent) and China (17 per cent). In developed economies, this ratio averages around 60 per cent of the GDP, with countries such as Switzerland, Netherland and Denmark close to the 100 per cent level.

Deeper penetration of banks and innovative financial products would help the mortgage market to expand in India. As per RBI data, even in the highly progressive state of Maharashtra, bank offices are largely concentrated around metro cities (40 per cent of total ~10,000 bank branches in the state). With the expected release of 12 new banking licences by the central bank during early 2014, we foresee deeper penetration of the banking sector.

In fact, many banks are already aggressively enhancing their rural penetration to stay ahead of the anticipated rise in competition. We believe that the housing sector will benefit a lot from this development.

Policy-Induced Growth Opportunities

Policy paralysis has been one of the primary reasons for the slowdown in India over the last few years. The bad press which this garnered for the Indian economy began catalysing reforms on various fronts. Policy-based efforts are already under way to make the residential real estate sector more transparent.

These efforts will continue in 2014, as well. India’s capital market regulator has reiterated the importance of Real Estate Investment Trusts (REITs) as a tool to attract large pools of money into the real estate sector at relatively cheaper cost. At present, participation in real estate growth is largely restricted to NRIs, HNIs and institutional investors. REITs could open up opportunities for small investors to diversify their asset structure.

Since REITs are adept at searching for income-generating properties, it could result in extracting new growth opportunities through rental housing projects, affordable housing projects and senior citizen housing projects, which will increase the depth of the industry. These factors can help the Indian real estate sector sustain its attractiveness.

Demand (And Price Growth) Likely To Revive In 2H2014

Consumer confidence will remain subdued during the first two quarters of 2014 owing to uncertainties surrounding the general elections and macroeconomic conditions (both global and domestic).

However, post the elections, fence-sitting investors are likely to become active. The increase in absorption of residential units will help reduce the currently large inventory holdings of developers. A recently-observed trend of a gradual fall in supply in response to the subdued demand will only reverse with a lag, helping prices to strengthen gradually in the second half. Therefore, pan-India residential real estate prices are likely to grow at 10-12 per cent YoY, factoring in input-cost inflation and a gradual pick-up in demand. The risk to this growth estimate is largely on the upside, considering that post-elections, a great deal of uncertainty which currently exists will be put to rest.
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India’s Realty Sector In 2013 And Expectations In 2014 

Shishir Baijal
Chairman and Managing Director
Knight Frank India

Overview Of The Real Estate Sector In 2013

It’s that time of the year when I look back at the months gone by and analyse events which may have leveraged the prospects of the Indian economy. The progress seems manifold in almost all sectors. Real Estate and Infrastructure, especially, is an area that has witnessed unprecedented growth in the last two decades. Of course, the other side of growth is slack, and with economies facing a slump in the past few years, no sector has been left unscathed.

The monetary tightening resulting from the RBI’s measures to control inflation was the major macro influence on the real estate business in India through most part of the year. High interest rates, spiraling vacancy levels and lower margins arising from inflationary pressures also contributed to a slowdown of construction activity, leading to a drop in new launches and also delayed project delivery by several months. Developers with exposure to residential projects are particularly worried, as slowing sales are leading to an oversupply situation in many parts of the country. 

City-wise Classification

My interactions with developers, clients and in-house experts have shaped my understanding of the top six residential markets of the country, viz. Mumbai, NCR, Bengaluru, Chennai, Hyderabad and Pune.

Mumbai and Chennai, which are edged from one side by the sea, have the highest weighted average price of Rs 5900/sq. ft. and Rs 4700/sq. ft. respectively. Their unique topography has ensured restricted supply of land, resulting in high prices for residential properties. While the weighted average price in Mumbai city is much higher at Rs 15000/sq. ft., it goes down to Rs 5900/sq. ft. for the entire Mumbai Metropolitan Region, which also includes areas such as Thane, Navi Mumbai, Mira-Bhayandar and Vasai-Virar.

Cities such as Bengaluru, Pune and Hyderabad have a relatively lower weighted average price of Rs 3800/sq. ft., Rs 4500/sq. ft. and Rs 3450/sq. ft. respectively. Emergence of peripheral markets in these cities on the back of large-scale development of the IT/ITeS sector, has managed to keep the prices at more reasonable levels. Bengaluru remains the most affordable residential market, with more than 77 per cent of its total under-construction units falling below the ticket size of Rs 50 lakh. This is followed by Chennai, at 75 per cent.

The deliberate strategy on the part of developers in these cities has been to focus on the peripheral areas and offer the right-sized apartment, which has ensured that the new supply does not breach the affordability levels of the target segment.

In contrast, Hyderabad has only 51 per cent of its total under-construction units below the Rs 50 lakh price bracket, despite the city having the lowest weighted average price among the top six metros. Since the majority of new projects are skewed towards larger-sized apartments, the ticket size breaches the Rs 50 lakh mark despite the lower per square feet price.

Mumbai remains the most unaffordable market, with 29 per cent of the city’s total under-construction units surpassing the Rs 1 crore mark as compared to 11 per cent and five per cent for the NCR and Bengaluru markets respectively.

Current & Future Scenario

At five per cent GDP growth in FY13, the Indian economy grew at the slowest pace seen during the last decade. Besides, policy inconsistency and apathy towards the sentiments of the international and domestic business community have heightened the agony. Hopefully, the policy makers realise that relaxing FDI norms alone will not attract foreign investment. A conducive business environment promoting transparency and policy consistency is a greater prerequisite.

In a bid to achieve this ideal, the Securities and Exchange Board of India (SEBI) also revived the process of introducing Real Estate Investment Trusts (REITs) in the country. However, these regulations couldn’t take shape due to a number of factors including the global economic slowdown, which also impacted the real estate markets. In a welcome move, the SEBI once again brought out draft REITs Regulations, 2013, which were made public on October 10, 2013 to invite stakeholders’ views.

The underlying reason for all these moves is that the Indian real estate story continues to be tremendously attractive. While there is a sort of saturation in the Tier I cities, the good news is that Tier II cities have started growing with the IT and industrial sectors investing in such places. Thus, real estate in the country is poised for a boom, taking the rest of the economy with it. The notion that Indian real estate is expensive is based more on the cost of undeveloped land, which is becoming a scarce commodity, than finished residential or office space, which is still available at reasonable prices in most places.

The momentum remains positive. If we can get the investment story right, lower the fiscal deficit and have more progressive monetary policies being drafted by the RBI, there is nothing which can restrain us from coming back onto the growth track by the second half of 2014.
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Fundamental Issues Of Liquidity & Interest Rates Need To Be Resolved

Hariprakash Pandey
VP – Finance & Investor Relations
HDIL

2013 was quite dull for the real estate sector. What scenario do you foresee in 2014?

If we look broadly at Mumbai real estate itself, the volumes were really low for the last two years from 2011-12 and in 2013 too. The pricing was far higher because of inflation and as developers were not reducing prices. The past couple of months have seen the approval process improve; there is a lot more clarity in terms of new approvals and the new DCR guidelines that have come in.

I am optimistic that the scenario will improve in 2014. What I mean to say is that the pricing which has remained firm will remain firm, but the volumes are coming back. But I don't see rapid growth in the year. What I see is consolidation and the balance sheets becoming much stronger. We will probably be prepared for the next cycle of growth, which will start from 2015 onwards. But 2014 looks far better than what 2013 or 2012 did.

What, according to you, are the factors that would change the scenario in the residential, commercial and retail space in 2014?

The tone of the RBI and the general tone of banks is that they don't want to lend towards real estate. But if you take a broader view of the kind of exposure that the Indian real estate industry has, it is approximately around Rs 126000 crore in terms of debt, which is hardly less than three per cent of the total banking exposure and when you compare it with the overall debt position of some of the top 10 companies in India, which is more than Rs 110000 crore. Even the largest company in India has more than Rs 120000 crore of debt. So, in no way are we over-exposed in terms of liquidity.
But the sector which gets beaten up the most because of inflation and interest rates is real estate. When banks are not willing to fund you and your customers are not able to get the mortgages at less than 10 per cent, it has a double effect: 1) Sales take a hit 2) Availability of funds is affected.

If you ask me what all needs to be changed, one is the liquidity scenario. There have to be more funds available for real estate both in the hands of both consumers and developers. Second is the affordability of funds. Third is the approval process. If liquidity, fund availability and the approval process improves, I am pretty sure that execution will start picking up. Once that happens and you see the construction of more and more apartments, I think that is where the volumes will start coming in.

If you look at all the metro cities, I think Mumbai is one city where we have seen that the demand is far less than the supply, both in terms of first-time housing or in terms of investment options, as with the income levels moving up, people aspire to move into bigger house. So, the fundamental issues of liquidity and interest rates need to be resolved.

What is the total debt at the current level and the average cost of borrowing?

I can give you the number as on September 30, 2013 because we have still not declared the numbers for December 30, 2013. The consolidated debt for September 30 was around Rs 4000 crore and the average cost of borrowing was around 14 per cent. But since we have crossed the quarter, you will see a lot of reduction in debt and the average interest cost has also fallen by around 50 basis points.

When and how do you see the debt levels reducing?

In the results of the third quarter, you will see that we have already reduced our debt. I think that by the time we complete the fourth quarter, we should be on target for a 15 per cent debt reduction, and that is what we have told investors. Our debt-to-equity ratio is around 0.3, which we are very comfortable with right now.