Real estate on shifting sands
Times Property, February 14, 2009, Page 14
The current phase of real estate sector will separate ‘short-term’ players from the ‘long-term’ players and despite momentary slowdown, the long-term outlook for the sector is positive and encouraging, says Anshuman Magazine
The Indian economy has been growing at an average rate of 8.8% in the last four fiscal years, with the 2006-07-growth rate clocking an impressive 9.6%. The financial reforms of 1991 have been complemented by favourable policy changes and significant increase in investment on physical infrastructure. The country has also emerged as the fourth largest economy (in Purchasing Power Parity ‘PPP’ terms) in the world, led by economic liberalization and broad-based growth across various sectors. This stellar growth, augmented by unmatched fundamentals that the country enjoys, had given strong impetus to the real estate sector in India which registered an annual growth rate or about 25% between 2003 and 2007. Information technology revolution and MNCs-led demand for quality office space resulted in modern buildings springing up in new suburban locations of key Indian cities. Salaries in India have been rising at the rate of 10-15% per annum and the per capita disposable income that increased several fold in the past decade is expected to further grow by 8-13% in the next five years.
Thus improved affordability in conjugation with increased penetration of housing mortgage finance led to an unprecedented housing acquisition drive by end users as well as investors. This, together with the fact that the average household size in India is fast decreasing, has fostered residential demand in recent times. Moreover, the change in attitude and spending habits of the consumers has led to an increase in consumption and demand for retail malls and has transformed India from a ‘saving’ to a ‘consuming’ economy.
Over the last 2-3 years, the capital markets have seen an increased presence of the real estate sector. In a bid to raise their capital base and fund future projects, real estate companies have approached domestic stock markets and close to 20-25 real estate and construction companies opted for IPOs and stock exchange listing between 2007 and 2008. Another trend that found favour with Indian real estate developers was listing on the offshore exchanges like AIM, Singapore listed REIT, Singapore Stock Exchange and Dubai International Financial Exchange in order to raise overseas capital.
Post partial relaxation of FDI in the real estate sector in 2005, significant amount of global capital has been chasing Indian real estate market, and interest in the sector has been boosted by increased participation from private equity real estate funds, cross border real estate investors and foreign commercial banks. Relaxing of the Foreign Direct Investment (FDI) regulations for real estate sector opened the floodgates for foreign capital inflow into the sector and close to 20% of the total FDI coming into the country in 2007-08 was directed to the real estate sector.
The much-required capital in the last few years has facilitated widespread development of residential, office, retail and hotel space in the country. It has also been instrumental in organizing the market to a large extent and bringing it closer to the real estate markets in other developing countries around the world.
However, after a dream run of close to 36 months, the real estate sector in the country has been exhibiting signs of slowing down in the last few quarters. This slowdown came after the onset of recession in several large economies in the world and is reflective of the financial crisis and economic turmoil facing the global economy. In response to the Reserve Bank of India’s measures to control credit growth and liquidity in the economy, interest rates on home loans were increased by several basis points in the last one year.
This came at a junction when the rising residential values and compounding inflation started to negatively impact affordability of many end users. On the other hand, developers have been facing a cash crunch on account of diminishing sales and scarcity of bank credit due to increase in risk weight for real estate sector.
Poor stock market performance, where share prices of premium real estate players in the country fell by over 80% during 2008, has also blocked raising of money from primary market by way of IPOs. Real estate sector has been the major recipient of the total private equity placement in the Indian market since mid-2007. However, the volatility in the global capital markets and bearish sentiments has led to drying up of private equity funding. Even the off shore exchanges like the Alternate Investment Market (AIM), Singapore Stock Exchange, Dubai International Financial Exchange, etc have been impacted by the global financial crisis and have thereby affected capital raising capacity of a number of domestic developers who were looking at international listings.
As a result of liquidity crunch in the market, increasing input costs and weakening global economic conditions, new project launches in the country have been put on hold and under-construction projects are facing delays.
The transactions volumes across asset classes hit an all time low in mid-2008 and resulted in about 10-20% correction in prices. However, notwithstanding this fact, buyers are still in a wait-and-watch mode and there has been an erosion of confidence amongst buyers due to weakening business sentiments, reigning job insecurity and pay-cuts.
On the other hand, developers who have been trying to hold back their prices so far are reconciling to the current market conditions and are readying themselves for a downward revision in price points. In order to ease liquidity situation and boost demand, the government has taken various policy measures since October 2008. Exhibiting its commitment to encourage consumer spending and to keep up the pace of economic growth and investment in the country, the government announced two financial stimulus packages within a month of each other.
While the stimulus package includes speeding up infrastructure projects, introduction of export incentives, and cut in various categories of value-added tax to encourage consumer spending, the RBI’s staggered downward revision in Cash Reserve Ratio (CRR) and repo rates to a low of 5.5% (from a high of 9% in September 2008) is aimed towards reduction in cost of capital and infusion of liquidity in the economy including the real estate sector. Besides, developers have been allowed to explore the External Commercial Borrowings (ECB) route for the development of integrated townships.
Even though the recent policy measures to increase liquidity and ease credit for real estate sector were much desired, real liquidity may take some time to get back in the system and credit disbursal may remain sluggish. According to reports, despite the sharp cut in CRR, repo rate and reverse repo rate by RBI, bank credit declined sharply in Dec ‘08 by levels not seen in the past 10 years. Going forward, the markets are expected to remain slow in the near future on the back of low consumer sentiments due to global macro weakness.
Looking ahead, the revival of the real estate markets in India would depend substantially on the improvement of the economic sentiments, which is likely to take some more time, as such sentiments amongst occupiers, buyers and investors will remain subdued in the short to medium term. In the residential segment, the prospective buyers are expected to come back when there is renewal of confidence that the prices have stabilized and the mortgage rates are conducive for investing in property once again. However, an overriding concern and a key variable influencing the purchase decision will be the outlook for the Indian economy and its future growth prospects.
The office segment is currently undergoing a demand compression as most of the space occupiers are large MNCs who have put their expansion plans on hold for the time being. However, India is an established information technology and outsourcing destination and has unparalleled capacity in the sector. Hence, with the revival of the global economy in the near future there will be restoration of outsourcing demand, thereby bringing back the space demand in office sector.
Most importantly, the current churn in the real estate sector will result in increased focus on ‘neo-asset’ classes like development of healthcare facilities, warehousing space development and infrastructure initiatives based on public-private partnership (PPP) models. Besides being the need of the hour, these asset classes will help developers spread risks and hence will find place in developers’ future portfolios.
The recent trend by real estate markets in the country reinforces the fact that real estate sector is a cyclical sector influenced by several variables. In the long term, current churn and shakeout in the sector is expected to lead to market consolidation and make it more attractive for investment as the valuations will be more realistic. The current phase of the industry will separate ‘short-term’ players from the ‘long-term’ players and despite the momentary slowdown, the longterm outlook for the sector is positive and encouraging.
With strong economic and demographic fundamentals that the country has, real estate will remain a long-term attractive proposition. Though revival of the sector will depend on recovery of the domestic economy, it is likely to be earlier than in many other countries across the globe.
Times Property, February 14, 2009, Page 14
The current phase of real estate sector will separate ‘short-term’ players from the ‘long-term’ players and despite momentary slowdown, the long-term outlook for the sector is positive and encouraging, says Anshuman Magazine
The Indian economy has been growing at an average rate of 8.8% in the last four fiscal years, with the 2006-07-growth rate clocking an impressive 9.6%. The financial reforms of 1991 have been complemented by favourable policy changes and significant increase in investment on physical infrastructure. The country has also emerged as the fourth largest economy (in Purchasing Power Parity ‘PPP’ terms) in the world, led by economic liberalization and broad-based growth across various sectors. This stellar growth, augmented by unmatched fundamentals that the country enjoys, had given strong impetus to the real estate sector in India which registered an annual growth rate or about 25% between 2003 and 2007. Information technology revolution and MNCs-led demand for quality office space resulted in modern buildings springing up in new suburban locations of key Indian cities. Salaries in India have been rising at the rate of 10-15% per annum and the per capita disposable income that increased several fold in the past decade is expected to further grow by 8-13% in the next five years.
Thus improved affordability in conjugation with increased penetration of housing mortgage finance led to an unprecedented housing acquisition drive by end users as well as investors. This, together with the fact that the average household size in India is fast decreasing, has fostered residential demand in recent times. Moreover, the change in attitude and spending habits of the consumers has led to an increase in consumption and demand for retail malls and has transformed India from a ‘saving’ to a ‘consuming’ economy.
Over the last 2-3 years, the capital markets have seen an increased presence of the real estate sector. In a bid to raise their capital base and fund future projects, real estate companies have approached domestic stock markets and close to 20-25 real estate and construction companies opted for IPOs and stock exchange listing between 2007 and 2008. Another trend that found favour with Indian real estate developers was listing on the offshore exchanges like AIM, Singapore listed REIT, Singapore Stock Exchange and Dubai International Financial Exchange in order to raise overseas capital.
Post partial relaxation of FDI in the real estate sector in 2005, significant amount of global capital has been chasing Indian real estate market, and interest in the sector has been boosted by increased participation from private equity real estate funds, cross border real estate investors and foreign commercial banks. Relaxing of the Foreign Direct Investment (FDI) regulations for real estate sector opened the floodgates for foreign capital inflow into the sector and close to 20% of the total FDI coming into the country in 2007-08 was directed to the real estate sector.
The much-required capital in the last few years has facilitated widespread development of residential, office, retail and hotel space in the country. It has also been instrumental in organizing the market to a large extent and bringing it closer to the real estate markets in other developing countries around the world.
However, after a dream run of close to 36 months, the real estate sector in the country has been exhibiting signs of slowing down in the last few quarters. This slowdown came after the onset of recession in several large economies in the world and is reflective of the financial crisis and economic turmoil facing the global economy. In response to the Reserve Bank of India’s measures to control credit growth and liquidity in the economy, interest rates on home loans were increased by several basis points in the last one year.
This came at a junction when the rising residential values and compounding inflation started to negatively impact affordability of many end users. On the other hand, developers have been facing a cash crunch on account of diminishing sales and scarcity of bank credit due to increase in risk weight for real estate sector.
Poor stock market performance, where share prices of premium real estate players in the country fell by over 80% during 2008, has also blocked raising of money from primary market by way of IPOs. Real estate sector has been the major recipient of the total private equity placement in the Indian market since mid-2007. However, the volatility in the global capital markets and bearish sentiments has led to drying up of private equity funding. Even the off shore exchanges like the Alternate Investment Market (AIM), Singapore Stock Exchange, Dubai International Financial Exchange, etc have been impacted by the global financial crisis and have thereby affected capital raising capacity of a number of domestic developers who were looking at international listings.
As a result of liquidity crunch in the market, increasing input costs and weakening global economic conditions, new project launches in the country have been put on hold and under-construction projects are facing delays.
The transactions volumes across asset classes hit an all time low in mid-2008 and resulted in about 10-20% correction in prices. However, notwithstanding this fact, buyers are still in a wait-and-watch mode and there has been an erosion of confidence amongst buyers due to weakening business sentiments, reigning job insecurity and pay-cuts.
On the other hand, developers who have been trying to hold back their prices so far are reconciling to the current market conditions and are readying themselves for a downward revision in price points. In order to ease liquidity situation and boost demand, the government has taken various policy measures since October 2008. Exhibiting its commitment to encourage consumer spending and to keep up the pace of economic growth and investment in the country, the government announced two financial stimulus packages within a month of each other.
While the stimulus package includes speeding up infrastructure projects, introduction of export incentives, and cut in various categories of value-added tax to encourage consumer spending, the RBI’s staggered downward revision in Cash Reserve Ratio (CRR) and repo rates to a low of 5.5% (from a high of 9% in September 2008) is aimed towards reduction in cost of capital and infusion of liquidity in the economy including the real estate sector. Besides, developers have been allowed to explore the External Commercial Borrowings (ECB) route for the development of integrated townships.
Even though the recent policy measures to increase liquidity and ease credit for real estate sector were much desired, real liquidity may take some time to get back in the system and credit disbursal may remain sluggish. According to reports, despite the sharp cut in CRR, repo rate and reverse repo rate by RBI, bank credit declined sharply in Dec ‘08 by levels not seen in the past 10 years. Going forward, the markets are expected to remain slow in the near future on the back of low consumer sentiments due to global macro weakness.
Looking ahead, the revival of the real estate markets in India would depend substantially on the improvement of the economic sentiments, which is likely to take some more time, as such sentiments amongst occupiers, buyers and investors will remain subdued in the short to medium term. In the residential segment, the prospective buyers are expected to come back when there is renewal of confidence that the prices have stabilized and the mortgage rates are conducive for investing in property once again. However, an overriding concern and a key variable influencing the purchase decision will be the outlook for the Indian economy and its future growth prospects.
The office segment is currently undergoing a demand compression as most of the space occupiers are large MNCs who have put their expansion plans on hold for the time being. However, India is an established information technology and outsourcing destination and has unparalleled capacity in the sector. Hence, with the revival of the global economy in the near future there will be restoration of outsourcing demand, thereby bringing back the space demand in office sector.
Most importantly, the current churn in the real estate sector will result in increased focus on ‘neo-asset’ classes like development of healthcare facilities, warehousing space development and infrastructure initiatives based on public-private partnership (PPP) models. Besides being the need of the hour, these asset classes will help developers spread risks and hence will find place in developers’ future portfolios.
The recent trend by real estate markets in the country reinforces the fact that real estate sector is a cyclical sector influenced by several variables. In the long term, current churn and shakeout in the sector is expected to lead to market consolidation and make it more attractive for investment as the valuations will be more realistic. The current phase of the industry will separate ‘short-term’ players from the ‘long-term’ players and despite the momentary slowdown, the longterm outlook for the sector is positive and encouraging.
With strong economic and demographic fundamentals that the country has, real estate will remain a long-term attractive proposition. Though revival of the sector will depend on recovery of the domestic economy, it is likely to be earlier than in many other countries across the globe.
(The writer is chairman & managing director of CB Richard Ellis, South Asia Pvt Ltd)
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1 comment:
This article is very timely and relevant. As I quote Cameron Muir, an economist, "Home sales are unlikely to fall much further..That being said we expect home sales not to decline much further."
But it's never too late, with the right business plan set up, it will lead to valuable outcome. This is what most counselors would give as an advise.
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