India Real Estate market

In the first post, I talked about Real estate market in general. Here, I want to examine the realities in India Context.

Few peculiarities about India :

In the past, Black money has supported price levels; and fair price discovery in the market has always been hindered as real estate was the best place to store large sums of black money.

Also, the conventional wisdom of real estate being the safest investment, led to huge amount of household savings being funneled here.

But, now since past few years it has been getting difficult to invest in real estate with black money, as circle rates have been rising throughout the country. Also, a loophole where stamp duty was paid on circle rates but transaction was done way below this value has been plugged, with any transaction done below circle rates attracting penalties for both buyer and seller.

And, with the advent of new central government in 2014, there have been indications of massive policy changes in this sector.

1. Government has shown intent for significantly uprooting the menace of black money in real estate. They have proposed a ‘Benami Transaction Bill’ which seeks to curb benami properties and promote usage of wired money rather than cash in transactions.
2. Also, to bring much needed transparency for home buyers, Government has proposed a ‘Real Estate Regulatory Bill’.

Some salient features are:

• Setting up of a Real Estate Regulatory authority .
• Registration of Real Estate Projects and Registration of Real Estate Agents.
• Public disclosure of project details
• Compulsory maintenance of escrow accounts project wise, where 50% of advances received from customers need to be parked for use in that particular project.

With proper implementation, this will bring transparency, better access of capital, consumer confidence for the sector.

The flip side is with curbing of black money, real estate may no longer be an attractive investment for majority, leading to price levels which may be significantly lower than current ones. Currently it is difficult to predict how will the scenario play out.

India as an investment case

India has the uniqueness of unmet and increasing housing demand and simultaneously huge unsold inventory; one needs to delve deeper into price segmentation of demand to ascertain reasons for this.

Affordable housing:  It refers to housing for economically weaker sections (EWS) and lower income groups (LIG) where income ranges from 100000-200000 INR per annum. The majority of housing shortage 80-85% is concentrated here; and also has the highest demand-supply mismatch.

Government is trying to provide a policy push here, easing the land acquisition for affordable housing projects by introducing amendments in the Land acquisition bill.

Previously, this section lacked access to housing finance due to lack of income proofs, nil past experience of banking etc. Now, we have housing finance companies specializing in providing finance to EWS/LIG sections of society. They have developed their strength by a better understanding of income patterns, cash flow patterns of this group and hence tailoring a suitable loan product.

Also, the interest of developers in this previously ignored space is rising with lot of pilot projects being undertaken and some companies completely concentrating on affordable housing space. But, these projects are tricky in nature with very little room for time and cost overruns and lower margins.

Middle Income Housing:  It refers to housing for middle income group where annual income ranges from 300000-1000000 INR. This market accounts for round 7-8% of housing demand

The incremental demand should be strong with increasing urbanization and mid-income households expected to triple from current 30 million to 110 million by 2026.

At the national level, the government estimated the total urban housing shortage at 18.78 million units in the 12^th five-year plan . Of this, about 2.47 million units would arise from the top eight cities (Ahmedabad, Bengaluru, Chennai, Delhi-NCR, Hyderabad, Kolkata, Mumbai, and Pune) in India, with LIG (0.85 mn units) and MIG (0.88 mn units) segments likely to account for the major chunk (about 80%) of the total demand.

Luxury housing:  As the name suggests, it is meant for people with income upwards of INR 12-15 lakhs per annum. These houses are typically greater than 1200 square feet in size and no ceiling on the higher side.

In India HNI population has shown huge growth in past few years with 2012, clocking an impressive 22% growth and is expected to continue growing by 10-12% each year for next five years.

This space provides fat margins to developers but they have to keep coming with new innovative offerings (branded residences, golf townships etc) providing luxury living.

A good capital allocator

A good capital allocator in this sector tends to plan ahead for at least a 5-7 year cycle with prudent demand estimation, project planning, attracting low cost capital and having a solid risk management framework in place(see previous post).

There is inherent cyclicality in real estate as discussed in previous post, he may take advantage of peak and troughs; recessionary times can be used for adding land parcels at opportunistic valuations( since A real estate downturn may not necessarily coincide with downturn in capital markets)

Present situation with developers

Currently, majority developers are mired in debt, have huge piles of unsold inventory, not meeting cost of debt with refinancing looming due to their overconfidence in the previous boom times, where they forgot the discipline needed.

If the government is successfully able to implement its planned measures for real estate sector, increase transparency, bring back consumer confidence, and with important support from reversing of the interest rate cycle, a lot of wealth will be created during the next upswing, but one has to choose the pockets carefully.

I am not investing as of now but will be watching keenly from the sidelines.