Real Estate

Real Estate as an Investment !

A lot has changed in the last 12 years in Real Estate. The erstwhile kingmakers of the sector have become a pale shadow of their former selves. Who were keeping track of real estate back in 2007, would find the sector unrecognisable in its current state. There was quite literally no end to the price appreciation. The market didn’t just create a bubble, it inflated it to the size of a planetary body. And inevitably, it did burst leaving the players gasping for breath and struggling to stay afloat. How far have we come from that? 

One would expect the market to clean up their act after the debacle of 2008. Even though the unbridled expansions came to a grinding halt, the shoddy practices in the industry persisted. The practice of buying and flipping projects like it was a commodity was not uncommon. It led to a shadow parallel economy in the country. Prices were perennially inflated. The bid-ask spread was humongous, but the price never dropped in the major cities. Subdued growth in tier 2 and tier 3 cities made sure that the big money of real estate was always concentrated in the major cities of Mumbai/NCR/Bangalore/Chennai/Hyderabad. 

Sure, it did change. The real estate market was dealt a hammer blow when demonitization was announced. What followed was a period of consolidation, aided by further measures like RERA. Slowly the unorganised real estate developers started exiting the scene. The leveraged balance-sheets did serve as a death knell for these players, especially when the prominent builders were unable to gain any foothold. 

Real Esate

An interesting aspect of this consolidation was not that the developers found a moral compass and cleaned their act. The basic idea of this consolidation was that the demand had sharply fallen. If one is to take the bare basic numbers, the sales have dropped by an astonishing 11% this year. As a matter of fact, this is going to get worse. The real underlying parameter for real estate prices to shoot up is the demand, like every other commodity. But this demand for the real estate sector is highly aided by job growth and wage growth. The prices usually double in the same period when one expects the wage to double. But we have seen little to no wage growth in the country, let alone job growth. 

The current market scenario is quite good for the developers. Interest rates are going down, steel prices are down and lower regulatory hassles. Yet the most important aspect on any market is the demand, which remains subdued. Due to this there are a lot of smaller developers who are doing a fire sale to clean up their inventory and reduce the interest cost. When a developer announce a project, that project becomes an inventory for the developer. Now when these projects don’t get sold, the cash outflow for the developers will be crippling in interest terms. Hence consolidation would further intensify in the coming months. 

But these unsold inventories are a concerning factor for the market. These projects would become stressed assets for the banking industry and would dent future advances if the current market scenario in real estate is to continue. In previous 12 months the unsold inventories have increased by a staggering 19% as compared to the sales decline of 9%. This has further stressed the inventories to sales ratio, with the current inventories are at 2.5x TTM sales for the industry. 

In the current market, even the prominent players are offering houses at a huge discount. Currently in a city like Mumbai the going rate is at least at a 25% discount from the previous year. In Bangalore the rates have dropped by, but not limited to, 33% in some pockets. Chennai and Pune are also not very different when it comes to discount. A tier 2 city is no different, with inventory build ups happening even in cities like Coimbatore. 

Let’s look at a few examples to see how it has affected the industry leaders. Sobha, Kolte Patil and Oberoi are the industry leaders in Bangalore, Pune and Mumbai respectively. Even though the market segment they operate are quite different, they can be taken at least as indicative examples for the market conditions. Given that Oberoi didn’t have any new launches recently, the inventory to sales ratio improved a bit to 1.9 from 3.3. But for Sobha and Kolte Patil this ratio declined, with Kolte Patil’s ratio worsening multifold. 

This can mean that the launches are reducing, maybe due to an over-saturation in the market. It could also mean that the demand has gone down because of the huge bid-ask spread. Launches for Sobha meanwhile is picking pace, with a lot of new regions being added to the kitty. The interesting aspect for Sobha to look at is the acquisition of nearly 170 acres in various locations of Karnataka. This despite the company having nearly 2300 acres of land-bank. As the whispers in the industry go, these new land parcels were from the distressed developers who were unable to find credit to finance the projects. Consolidation continues in yet another region. 

As for Oberoi, the properties are being moved at a 20% discount to their 12 months prior rates. This shows a distress in the market and across spectrum given that Oberoi caters to mainly super luxury projects. The real estate market in Mumbai has gone for a toss, with endless ghost towns in areas like Panvel where builders like Lodha, Poddar and Hiranandani are gasping for breath. The story is not very different in the heart of city either, as the likes of Piramal are finding sale of their projects difficult. 

Pune is a different tale. The once retirement hamlet has turned into a busy young city with bustling crowd of college students and young graduates. This had promptly ushered a growth phase for real estate developers with Kolte Patil as one of the flagbearers of this monumental growth. But that tale maybe behind us now. The demand has dropped, and buyers have stagnated. Kolte Patil sells midrange apartments in Pune, and maybe their increased Inventory to Sales ratio (currently at 3) might portend to a lukewarm demand in the market. 

A shift in consumer trend can also be a reason for the drop in housing demand. Consumeristic housing demand has further taken a backseat because of this. Younger generation hardly sees a house as an investment, and rightly so. This has affected the inflated housing market adversely. This change in consumeristic pattern can be quite visible in Sobha’s sales numbers with demographics shifting towards above 50 in age. This segment has grown by 3% in the last 2 years where as every other age group has contracted. The difficult liquidity scenario prevailing in the market has also compounded the pain prevailing in the industry. Government measures are yet to see any tangible outcome, as majority of the easy housing credit was fronted by the NBFC’s which are reeling under immense asset quality pressures. 

India is a consumeristic country with improving domestic conditions, and one would be stupid to bet against an industry which is a necessity for the society to prevail.  – Click To Tweet

The market will continue to consolidate as seen from 2009, with limited survivors. And the sentiment in the industry also will turn. A consolidation cannot last more than 10 years, and when the tides turn, which it inevitably will, the survivors won’t be mere winners, they’d be the uncrowned emperors of the industry. India is a consumeristic country with improving domestic conditions, and one would be stupid to bet against an industry which is a necessity for the society to prevail. 

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  • Nothing lasts forever. Neither the good times nor the bad. The inordinate merrymaking expanse which lasted for extended time periods finally gave way as brought out above. Ironically the creation of the bubble was paid for by the herd that is the middle class and the after effects also have been borne likewise, whichever way one looks at it.

    There are exceptions though, a DLF Ultima in a relatively newer Gurgaon is expensive, yet has attained an almost sold out status. The bells, whistles and glossies certainly help and the towering brand too. Similarly a Raintree Boulevard project in Hebbal, Bangalore refuses to negotiate its price. Same is the case with DLF Camellias. Hence, if managed well, there is money to be made by all stakeholders with the discerning customer willing to loosen her purse strings. As Arbind says, margin of safety needs to be the greatest with Quality being the cornerstone.Guess, becoming a PIE member has some side advantages of extrapolation, articulation and financial prudence!

    Nice insights Harsh. You are getting addictive. 👌

  • Harsh having the great knowledgeable in the several sectors with great details thanks for writing up and show us the details or Real Estate.


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