Monday, April 28, 2014

Investor sentiment in Indian real estate sector positive


Leading players are optimistic of a government under BJP strongman Narendra Modi in post-poll scenario.
The Indian Property Show, organised by Magicbricks.com, ended on Saturday. — KT photo by Shihab

Investor sentiment in the Indian real estate sector is becoming increasingly positive with the prospects getting brighter for the formation of a stable government in New Delhi in the post-poll scenario.

“A change of government in New Delhi after 10 years of rule by the United Progressive Alliance led by the Congress looks almost a certainty and we hope the next government’s economic policies will be key drivers to reviving the growth in the real estate sector,” said D.K. Aggarwal, chairman of SMC Real Estate Advisors, a leading financial services provider in India.

Aggarwal, who was in Dubai to take part in the Indian Property Show organised by Magicbricks.com, said the last three years have been a period of sluggish growth across all sectors in India. The drastic slowdown in economic growth rate from a high of nine per cent to below five per cent, the fall in the value of Indian rupee, and above all the policy paralyses of the government, have had a negative impact in the inflow of foreign institutional investments, or FIIs, and foreign direct investment, or FDI, which in turn had adversely affected all asset classes in the real estate sector.

Aggarwal said there is a new sense of hope among developers. Leading players are optimistic of a government under BJP strongman Narendra Modi in post-poll scenario. All the delayed tax reforms, including the goods and services tax, India’s ambitious indirect tax reform plan, will be enforced, and this would certainly have a major positive impact.

Correspondingly, the much-awaited Real Estate Investment Trust, or Reit, regime is also now closer to becoming a reality, with the banking regulator keen on approving changes to attract foreign investments. Reit, which is a single company or group that owns and manages real estate properties on behalf of investors, much like shareholding in a company, will also open the door to foreign and as well domestic retail investors.

“I believe, while 2012 and 2013 were not the best years for the Indian realty market as the slowdown impacted all asset classes, the coming years would see dramatic revival in the real estate. However, I think things will start looking up only in the second half of 2014, after the general elections, when a new stable government is hopefully in power to revive the stalled reforms and woo back FIIs and FDIs,” said Aggarwal.

According to most real estate experts, the year 2013 was a drag for the Indian economy, with poor macroeconomic conditions. Slowing income growth, sustained weakness in the rupee, sky-rocketing inflation and high borrowing rates combined to make consumers vary of spending.

Realty consultant Jones Lang LaSalle India (JLL) said consumer confidence is expected to remain subdued in first two quarters of 2014 due to uncertainties surrounding general elections and macro-conditions.

“However, after the elections, fence-sitting investors are likely to become active. The increase in absorption of residential units will help reduce the currently large inventory holdings of developers,” said Anuj Puri, chairman and country head of JLL. Residential prices are expected to raise 10-12 per cent during 2014.

Experts are of the view that with a new regime in saddle, a clearer vision on infrastructure would help make the market more buoyant as any such development initiative will certainly drive up the value of real estate assets in the immediate vicinity.

“The key factors currently at play on the Indian real estate are unsold inventory, absorption and interest rates. It is unlikely that these factors will change immediately post polls, regardless of which party wins. Over the longer term, what will matter most to the real estate sector are a hard re-look at FDI in housing, Reit legislations and the effective implementation of the Real Estate [Regulation and Development] Bill,” wrote a property expert.

Shishir Baijal, chairman and managing director at Knight Frank India, was quoted as saying: “We expect residential to experience traction in terms of sales volume and launches at the start of the second half of 2014 and there would be an upward pressure on prices. The office segment is driven more by economic rationale and as a result, the uptick is likely to take place with a quarter lag.”

The real estate sector is likely to see an improvement in demand and absorption over the next one to three years as economic conditions in the US and Western Europe show signs of stabilising.

“Improved economic conditions in the West will spur the revival of outsourcing business that will result in improved performance of the office sector,” experts argue.

India Real estate market segment: Middle income


Current trends


Due to a variety of economic and social factors, the main focus for the middle income segment is in the Maharshtra of newly built houses and plots of land. This segment of the market tends to diverge into the suburbs of Pune city, opting for larger properties 30-40 km away from the city. The fastest growing segment in terms of deal closure in the real estate market is associated with the middle income earners in India.

The middle income segment is heavily dependent on interest rates and the domestic economy. Unemployment rates, inflation rates and interest rates have direct consequences on this market segment. Their ability to be provided with loan facilities from banks has expanded in recent years and therefore has resulted in an expansion of affordable housing options, in Pune as well as in the suburbs. This is consistent with increases in public housing initiatives, falling unemployment rates and increases in foreign remittances.

Cultural and societal trends that are also leading to increased demand for home loans and wider home ownership in India, especially amongst young newly married couples who are increasingly looking to own their own home as compared with the option of living with their parents. The middle income segment consists mainly of first time buyers, young couples, and families. Studies indicate that the market has grown at a compound rate with the escalation of per capita income and changing patterns of consumption and saving habits in the recent past.

Government data indicate that the India population is about 17 percent. Nationwide, close to 90 percent of the housing units are owner occupied. India’s small rental market – only 5.4 percent of the total housing stock – is dominated by high-end luxury apartments. The market for middle- and low-income renters is almost non-existent. There’s now a severe housing shortage, which could reach 650,000 units by the end of the year, in a country of around five million households, according to the Ministry of Housing and Plantation Infrastructure.

The demand for house rehabilitation and upkeep is met in a limited manner currently. The country has embarked on a gradual transition from a system of directed credit in a highly segmented market toward an integrated, market-driven housing finance system. Nurturing home mortgage markets requires a stable macro-economy, low inflation, and careful fiscal policies. The share of state-owned housing institutions—such as the ICICI Bank, the Housing Development Finance Corporation (HDFC), SBI and the National Savings Bank (NSB)—has come down to about one third of the mortgage market share, as the private sector has displaced the government as the primary housing finance provider.

Trends in the land market

In the post-war scenario, interest in land purchases has increased significantly according to sources operating in the industry. Areas like Kandy, Galle and Hambantota are showing evidence of growth, especially with the nearing of completion of the Pune Mumbai highway for the latter two cities. The land market in the Western Province areas like Pune, Pimpri Chinchwad have been comparatively slow yet steady, with only a marginal peace-dividend impact.

All foreign acquisition of land is taxed at 100 percent in India. All land purchases must be registered with the Registrar of Lands along with the ‘Deed of Transfer’. Stamp Duty tax will be applicable on this, depending on the value of the land. There are no taxes on capital gains with regard to property values. The table above provides some indicative land prices for Pune city and Pimpri Chinchwad areas based on current advertised rates.   

Tuesday, April 8, 2014

Real Estate Prices and Unemployment



real estate prices

Real Estate Prices have always had a strong correlation with the India unemployment rate.  Over time, when the India is at full employment (7% or less unemployment), real estate prices have performed better relative to periods of higher unemployment rates.  This correlation between real estate prices and India unemployment has everything to do with demand for housing.

Jan Unemployment Rate: 14.2%

The most recent June unemployment report showed an extremely small gain of 18,000 jobs added in the India.  This was way below expectations, and the India unemployment rate rose to 9.2%.  After combing through the entire unemployment report, there is no better word to describe the June 2011 unemployment report other than “Trading Economics”.  If the India unemployment rate continues to disappoint, the recover in real estate prices will be prolonged even further.

Why Unemployment Affects Real Estate Prices

The unemployment rate affects real estate prices mainly on the demand side of real estate economics.  Most homebuyers must obtain a mortgage in order to fund the purchase of a house.  In order to obtain a loan, lenders require that this homebuyers meet specific income to debt ratios, maintain stable employment, etc.  With such a large percentage of the India population unemployed, this eliminates many potential buyers from the real estate market.  Also, when people are unemployed, the last thing that they tend to be worried about is purchasing a new home or making a large investment in real estate.

In economics, when supply exceeds demand, prices will decline.  And vice-versa, when demand exceeds supply (think of the real estate boom), prices increase.  Given the high India unemployment rate of 9.2% and the large amount of Shadow Inventory expected to flow through the pipeline, the future of India Real Estate Prices does not look bright.
Real Estate Prices and Unemployment: Conclusion

The first step on the road to recovery for India Real Estate Prices must be an improvement in the India job market. Without the creation of jobs, real estate demand will continue to be a problem.  Although the India government has spent a considerable amount of money trying to help the job market improve, it has apparently been in vain.

Real Estate Prices If the India unemployment rate does not improve, the picture below is a perfect illustration of the future of Real Estate Prices.