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Indian Real Estate Market: Crash or consolidate?

t is not easy to find an analyst on the street who will be mildly bullish on the real estate market leave along someone who is irrationally bullish. In a scenario where the market seems to be short the real estate market, the laws of contrarian investing state that “when the whole market is long/short a trade, the trade may not fructify” which is what is happening to the real estate market in India. Fundamentally, the market is poised on a knife edge with multiple triggers slowing the market down. Some of the macro pointing to an imminent fall in real estate market are:

  • 75 bps Rate hike by India central bank in 2011 has had debilitating effect on families who have been thinking of a new house purchase. Rising borrowing costs and inflation are reducing ability of Indian families to purchase a house.
  • With more interest rate hikes from RBI in the offing, macro environment is expected to continue to get tougher. Therefore, the risk of an accelerated downturn in sales still remains.
  • Lower Loan/Equity ratio: RBI has now instructed banks to accept nearly 20% of house value as equity portion from the buyer thus effectively reducing the ability Indian families leverage to buy a home.
  • Developers borrowing cost: Rising borrowing cost have also effected developers who now find it difficult to complete projects.

Ground situation

  • Launches declined to 13.5 mn sq. ft in March 2011 (from 21.5 mn sq. ft in February 2011) as developers got cautious and regulatory hurdles delayed approvals and hence launches.
  • Anecdotally, we hear of approval hurdles easing out in Mumbai and Bengaluru and also Mumbai developers looking to soft launch a few projects.
  • Though we hear of a marginal price discount across developers for perceived genuine buyers, data still indicates to flat to marginally up pricing though prices in Mumbai are clearly flattening out.
  • Total absorption of 14.4 mn sq. ft is the lowest since March 2010 – declining absorption continued in Mumbai while other regions too saw a declining trend.

The Indian Real estate (BSE Realty) index has significantly underperformed the broader based Sensex (India equity market Index) to the tune of 30%.

The markets continue to be negative the underlying. Given the overwhelming bearishness prevalent in the market, we do not see a massive price correction in the underlying (land prices) purely on the basis of contrarian logic. Too many people are short the market.

A quick look at the launch and absorption data across four geographies needs to noted for the muted absorption of real estate supply.
Total launches decreased to 13.5 mn sq. ft in March 2011, down 37% from 21.5 mn sq. ft in February 2011.Bengaluru had the least fall while NOIDA launch volumes fell 60% monthon- month. While part of this decline could be attributed to lower potential demand, regulatory/clearance-led delays were partly responsible for weakness in Mumbai, Bengaluru and NOIDA. Anecdotally, we hear of Mumbai developers exploring pre-launch of their projects (Lodha, Sunteck, Rustomjee) and Bengaluru developers near to getting approval.
Also, as per news reports, BMC has cleared a backlog of 70 projects in Mumbai which could push up launches in 2QFY12E.


Total absorption of 14.4 mn sq. ft is the lowest since March 2010 – declining absorption
continued in Mumbai while other regions too saw a declining trend

 

Even with fundamentals pointing to a correction in the real estate markets, the factual data do not suggest so. Indian real estate markets need to be analysed region wise and for the purpose of this article we are only looking at Mumbai and the NCR (Gurgaon, Noida and Delhi) region.

 

Mumbai
Sales registrations for the month of May are up 8% on a MoM basis but down 1% on a YoY basis. The registrations have shown an uptick on a MoM basis coming in at 5,287. Sales, at ~5000 levels in the last few months, continue to remain at the recent lows; the only bright spot being an absence of a further deterioration in the sales trend from the already low ~5000 levels.
However, registrations for the month of May would pertain to sales that have happened in the month of March or end February, thereby, not factoring in the impact of the ~75bps hike in lending rates that have taken place since March 2011.

Lease registrations continue their uptrend, with leases for the month of May at a new high of 9950, up 12% YoY and 5% MoM. Thus, leases continue to point to the built‐up of a huge pent‐up demand in the system.

NCR: Gurgaon, Noida Region
Gurgaon still predominantly remains an investor-led market where the first buyer of a project remains the investor. However, investment timeframe for investors has changed over this period from 5–12mths earlier (speculative) to 2–3 years now and is primarily because of higher upfront payment demanded by builders now-a-days (30–40% in the first 4–6mths now vs. 10–20% earlier), thus stripping off small-time, over leveraged buyers. The investors include (1) second home buyers, (2) NRIs, (3) service class executives, and (4) professionals



Given stable demand from investors and end users, Gurgaon and Noida, continue to offload their inventories, a sign of strong and sustainable demand. Noida inventory of unsold apartments and plots were at 52 week low of just 5 months while for Gurgaon it was closer to 9 months. NCR region is home to large corporate head offices which continue to put upward pressure on prices. We believe that while a real estate correction is overdue, as long as there is stable demand, we do not see developers in NCR cutting prices in a hurry.

So while you may wait for a price correction in India, one must also remember that the US real estate market was one continuous rise for 25 years till the time the house prices corrected in 2008. The question that begs an answer then, is whether the Indian real estate market has just enetered into one such bull market spanning over a decade.

The signs of such a bull market are evident with the whole market overwhelmingly short and doubtful of a sustainable rise in home prices. It is such doubtful times that the savvy make their millions.

Happy investing

Ravi
Mumbai Team, GMG post



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.