Capital Driven Real Estate & its Consequences

By Liases Foras

It is a capital driven market

REALTY IS FACING STRUCTURAL PROBLEM

Capital pushes the prices, Prices pushes the land cost Requirement of the capital pushes the construction cost; Price pushes consumers away Investors with surplus money are roped in Stuck up investors default Results in construction delays Capital fails to generate returns

VICIOUS CIRCLE OF THE CAPITAL

Inflow of capital (FDI) in housing sector

16,000 14,000

FDI Inflow in Housing Sector (Rs Crore)

14,027
12,621

12,000 10,000 Rs Crore 8,000 6,000 4,000 2,121 2,000 171 0 FY 2006 (Apr - FY 2007 (Apr - FY 2008 (Apr - FY 2009 (Apr - FY 2010 (Apr - FY 2011 (Apr - 2012(till Sept) Mar) Mar) Mar) Mar) Mar) Mar) Source - DIPP 2,043 5,600

8,749

Capital pushes the prices

Price and cost of flats in MMR increased @22% CAGR since the infusion of capital

12000 10000 8000 6000 4000 2,690 2000 0 3,013 7,962 5,326 5,488 8,124

Price (Rs / psf)

6,179 5,637
5,354 5,775 6,028 7,131 7,742

8,870 8,442

9,235

10,021

9,716

120 100 80 60 40 20 0 27

Cost of Flat (Rs Lac)

93 58 31 59 89 76 64 60 64 62 65 77 87 86

93

98

104

Price & Affordability Mapping

Interest adjusted Affordability Index 450 400 350 300 250 201 Under Value Market 100 112
Risk Spread

Inflation adjusted Price Index

Speculative market 354 369 387

Unfair and Speculative Market 345 302 291 247 171 223 205 75 Correction Phase 275 235 208 297 326

271

200
150 100 50 0

100

118

144

136

120

109

133

130

125

127

132

137

135

125

115

112

116

The widening gap between the prices and affordability is pointing towards the speculative market practices. Even if the interest rates comes down to 9% level, still the prices needs to undergo correction to the extend of 33% to attain the efficiencies of June 2009 .

High prices push consumers away

Yearly Sales in MMR
Millions 70 60.60 60 50 40 30 20 10 0 Dec'07- Dec'08 Jan'09- Dec'09 Jan'10- Dec'10 Jan'11- Sep'11 16.58 26.59 47.84
Figures in Mn sqft

Investors with surplus money are roped in

Investors participation as % total of absorption
60%
52% 50% 40% 30% 22% 20% 10% 0% 2008 2009 2010 2011 45% 43%

Most of the stock is being picked up by investors, within the city, Boisar, Panvel, Gurgaon, Noida

Stuck up investors default Construction delays

31% of projects launched in past 12 months have already witnessed deferred possession dates compared to their earlier made commitments
Deferred by less than 6 months 21 41 76 30 63 13 244 Deferred by 6 -12 months 5 19 60 55 31 23 193 Deferred by 1 -2 year 3 9 40 10 15 5 82 % of projects with deferred possession date 40% 39% 36% 30% 27% 19% 31%

Cities Hyderabad Bangalore MMR NCR Pune Chennai Grand Total

No Delay 44 110 308 217 297 171 1147

Funds are exiting at 1%, 2% and 3% IRR. Some of them are losing even their principal

CAPITAL FAILS TO GENERATE RETURNS

Price rise hits sales gap between promise and performance

Input (Rs psf on saleable area) Construction cost

Result (Rs Crore)

Selling Price

Sales Velocity

Land Cost

Equity Rs Crore

NPV

ROE

IRR

PBT

Duration (months)

CAGR Return

Fair Market

7,000

2.75%

1,894

1,325

13

17

50%

66%

42

42

39%

Promised to P/E

10,000

2.75%

2,642

2,050

20

27

50%

70%

64

42

37%

Performance

10,000

1.00%

2,642

2,050

20

16%

23%

55

106

12%

In order to accommodate the PE investor Selling Prices are increased by 43% Land prices increase accordingly by 55% Mark up in equity requirement of Rs 8 Crore

Missing dimension of valuation is hurting the most

Line of optimum velocity Price 12000 3.92% 10000 3.10% 8000 6000 4000 2000 2,690 3,013 2.51% 2.52% 7,962 8,124 3.86% 3.24% 2.55% 8,870 9,235 8,442 9,716 10,021 Sales Velocity MMR Market 4.50% 4.00% 3.50% 3.00%

7,658 2.50% 2.04% 7,131 1.71% 2.00% 6,179 6,028 2.33%2.18% 1.57% 1.55% 5,637 5,354 5,775 5,488 1.39% 5,326 1.19% 1.50% 1.43% 0.87% 0.86% 1.00% 1.55% velocity clearly implies 64 months gestation 0.50%

0.00%

With the increase in the prices, velocity drops Slow sales result in delayed construction and also impact the returns of PE investor Consumer is losing, PE is losing, then who is gaining?

1. Has this capital created stock constructed floor space? 2. Has it created affordable housing?

BIG QUESTIONS

Construction floors space has decreased

Increamental Construction
120 100 80 Mn. Sqft 60 40 20 0 NCR MMR Pune Banglore Hyd Chennai 58 FY 2010 ( Apr'09- Mar'10) 98 85 FY 2011 ( Apr'10- Mar'11)

45
35 28 26 24 34 21 18 13

Premium Prices create Premium Housing

Inventories targeting high-end investors
Distribution of Supply in MMR
Upto 25Lac 100% 9% 90% 80% 70% Distribution of Supply 25% 60% 50% 40% 30% 20% 31% 35% 35% 32% 30% 27% 25% 27% 27% 23% 21% 23% 26% 26% 27% 24% 24% 24% 22% 2,000 13% 8% 11% 9% 9% 10% 10% 11% 10% 12% 23% 22% 21% 22% 22% 20% 26% 26% 6,000 27% 4,000 Price 20% 23% 15% 15% 15% 15% 16% 22% 20% 22% 22% 24% 10,000 25Lac-50Lac 50Lac - 1Cr 1Cr - 2Cr Morethan 2Cr Price 12,000

17%

18%

18%

8,000

10%
0%

17%

14%

11%

10%

9% 0

Nov 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11

The nodal agencies meant to act as regulators, in practise were scaling up the land prices

MIS-ACTS

The high price land deals were responsible for spurt in prices. Later controversial FSI policies were framed to turn projects viable It may be good for a few but for the city this cycle is creating urban imbalance

LEAVING THE CITY PRICES LURCHING AT UNAFFORDABLE LEVELS

Chronology of Events
400 350 300 Index Figures 250
Supply stalled due to TDR 200 corridor, environmental issues Kohinoor Mill Deal @Rs 10,000 FSI and DLF deal of Bombay Textile Mill @Rs 7,000 FSI cost

Inventory

Sales

Price
Prices again start to increase, as liquidity condition relaxed due to bank restructuring and funds availability

Drying up of funds, brought back focus on consumers ; result in 30% price correction

150 100

Increasing supply with retarding sales, Introduction of results into inventory FDI built-up Results in price increase by 40% CAGR

Inventory also increases with focus on luxury product

Prices touch all time high of Rs 10,021. 23% higher than previous peak, locations show no significance, price in Wadala, Chembur, Andheri & Borviali Same

Good sales volumes recorded

Sales reduce by 55% from Jun 09 high

Only 23 out of 1600 projects selling; avg sales in remaining projects is 3,000 sqft per quarter

50 0

Inference

Developers justify the escalating prices to increasing land cost and construction cost. With increased land productivity (FSI), the cost does not come down.. With the induced capital, production is less

The Funds are failing to generate return

Problems of housing has only aggravated, Slums have increased 55% to now 70% Is this what we mean with our housing policy

Market: Driven by capital Catering only to investors Struggling due to inefficient policies

THE CRUX OF THE PROBLEM

Reforms Required

Private Equity capital should be restricted to capital intensive assets such as commercial, hospitality etc Residential development work on bookings and the sales proceed can take care of entire development of the project. The capital is only creating unaffordability.

Lesser benefits to needy and more to the investors

Income tax exemption for an enduser, the first property buyer is limited to 1,50,000 on home loan interest whereas to the investors who is buying second, third.. Property, entire interest amount is exempted provided he rents his property. All the affordable housing schemes are plagued with investors, you have empty buildings while the needy living on the road and resorting to slums. While we are trying to emulate China in terms of growth, we should also learn from their lessons

Recent steps taken by China to curb investor activity

Down payments for second homes increased to 60% from 50% Second home interest rates at no less than 110% of the benchmark rates

Regional property purchase policies to be formulated strictly and local residents with two homes to be banned from further purchase
Transaction and additional tax to be levied in cities with overheated prices Lending for third or more home purchases restricted Local government asked to set price targets on new properties based on regional disposable incomes

Last but not the least

Regulatory and policies also need to be accountable.

THANK YOU

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About Us
Liases Foras initiated in 1998, is a brainchild of Mr Pankaj Kapoor, and is completely a non-brokerage real estate research firm. What makes it stand out among the various other firms is its works in the real estate industry, more specifically in the field of valuation, and future forecasting models. The scientific research based approach adopted by the company stems from its developing an organised database for the real-estate industry. The data and trends provided by the company has been an eye-opener for various financial firms, government agencies and developers. Some of our clients include HDFC LTD, Aixs Bank, Standard Chartered Bank, L&T, India Reits, Birla Sunlife, TCG Real Estate, Essar Goup, Urban Infrastructure, Sun Apollo, University of Miami (USA), Maharashtra Chamber of Housing Industry (MCHI), Hiranandani Constructions, K. Raheja Universal, Kalpataru Construction among others.
Liases Foras is engaged in: Data Services: Providing quarterly updated data on real estate projects across six cities in India Quarterly market trends through Ressex.com and presentations Advisory Services: Best Use Analysis Valuation & Pricing Analysis Feasibility Studies Real Estate Projects Rating

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