Real Estate - What next?

This is a terrible time for real estate developers, who have excess inventory, are short of capital and very low demand, but a great time for buyers with cash at their disposal. In a bearish market, where there is a poor demand for products, customer is the king! The same is true for property buyers. Remember the time when developers were asking exorbitant (ridiculous is the right word!) high prices for their properties. Their greed is over now but it is the time for YOU, the buyers, to be greedy.

This sector has already seen price corrections and will see another correction soon. Developers are in deep trouble because not only funds have dried up but also demand has gone down. People who booked properties this year are delaying or canceling their orders. These firms are facing acute problem of servicing their debt obligations (They raised huge capitals to fund their ambitious pan-India projects). There is some fear in the market that even big developers are on the verge of defaulting loan payments.

Bangalore Real Estate Expo-2008
I went to attend Real Estate Expo in Bangalore on October 25th and 26th. Mantri Developer was the only big developer out there while rests were Tier-2 and -3 developers, which had only couple of projects to their credit. As expected I found very few people compared to last year. It appeared to me that things are not going great for the big as well as local developers. Most of their completed projects are yet to be sold. If you remember the scene in the last few years, projects used to get sold the day it was launched! Alas, those days are over. When I spoke to these developers, however, none of them was willing to accept it. They appeared confident, at least were pretending to be, and optimistic about their new projects, which they were planning to launch soon. But, one thing was clear that most of their projects were behind schedule, at least by six months.

Do’s and Don’ts in the market
Ask for heavy discount on finished apartment. You could ask for up to 30% discount. Real estate developers are in deep red and will want to sell off all the finished products as soon as possible. However, buy ready to handover properties only. If you can delay your plan, wait for another 4 to 5 months. Prices would come down by another 15-20% over this period.

Do not buy any under construction property because the chances are high these developers may not have enough fund to complete these projects. Mid-tier developers are the worst affected because they may not have enough resources to fund their projects. Expect to see a delay of 2 to 3 years on most of the projects that were announced this year. “Over the night flyers” have quit the market and this is a great news for the consumers.

Employment scenario in the sector
Diwali sales are down amid the ongoing financial crisis. Buyers have adopted wait and watch approach which I believe is the right thing to do in the bear market. Some analysts believe the sector would see layoffs in the coming years. In the current scenario, developers can not sustain a huge workforce that was created during the boom time. So top realtors like DLF and Unitech might be forced to reduce their workforce by 5-10% to cut costs while mid-tier developers may layoff around 15-20% of their manpower. Moreover, executives at these firms got huge salary increments previous years which may now be reduced. There will be some effect on ancillary businesses as well. Consulting or Investment Banks or Private Equity firms which specialize in providing real estate specific advisory services would face the heat as well. So we will see lesser recruitment by these firms.

However, some analysts believe that there won’t be many layoffs in this sector because there is a scarcity of real estate professionals (compared to mature markets) in India. Second, new areas to work for especially for real estate i-banking people (REITS and real estate derivatives, the latter will take perhaps some more time). Third, fundamentals of Indian economy are still strong that will lead to higher growth, create more people with high disposable income, retail revolution, etc.

Outlook
The next couple of years would be slow for the industry. There is a genuine excess supply in the market which needs to be absorbed quickly to match it with the demand. This will lead to further price correction. Interest rates have started coming down which might ease some pressure on buyers’ shoulders to borrow from banks. This would give some boost to the demand for the residential properties. However, as long as there is a negative sentiment among buyers, both domestics and internationals, the demand would grow slowly, forcing speculators out of the market. The demand for commercial properties will depend on the outlook of US and European countries. If they go into deep recession, IT/ITES companies (which consumes 75% of commercial real estates) will have lesser growth and hence less demand for commercial space. Hence, both global as well as domestic factors will decide the future of industry.

Indian Real Estate Sector

I published an article on Indian Real Estate couple of months back in a leading magazine. Two days back, I revisited this article and decided to start a blog on Indian real estate sector - What it was, where it is now and where will it go from here. A small piece of the entire article is here:

India Real Estate
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.

Long-term outlook
Long term industry outlook remains attractive: We believe that long term industry outlook remains attractive, on account of increasing urbanization, growing nuclear families and the increasing number of Indian middle class. Fundamentally, strong GDP growth, increasing tourism traffic and increase in per capita income coupled with lower interest rates shall improve the outlook of the sector in the medium to long term.

Key Drivers of Real Estate
1) Economic Growth
- GDP growth rate of ~8-8.5%
- Double-digit income growth rate for the next 3-4 years
- Income growth should improve affordability, driving demand for residential units
- Lower interest rates

2) Demographics and Urbanization
- Positive demographic trends - middle class or the aspirers to show a CAGR of 10.4% to reach 124m in 2013 compared to 46m in 2003
- Urbanization – UNDP forecasts urban population will constitute about 40% of total population by 2030 from the current about 28%
- Indian household families moving from joint families to nuclear families

3) Favorable Interest Rate and Fiscal Incentive
- Housing loan interest rate, despite the recent rise, continue to remain low compared to 15-16% in the 1990s
- Easy availability of finance
- Fiscal incentives offered on owing a residential house is also a significant demand driver

4) IT/ITES Growth
- Strong IT/ITES growth should drive demand for commercial space – FY07-10 CAGR of 23% as a result of 568 000 employee additions; Indirect contribution to residential demand as well
- They consume about 75% of the commercial space

5) Organized Retail and Hospitality Demand
- Organized retail penetration level at 4.1% is lowest compared to other emerging markets
- Economic growth and changing demographics should increase retail penetration levels
- Strong tourist arrivals should spur demand for hotels across India. Foreign Tourist inflow is forecasted to show a 20%+ CAGR to reach 10m by 2010 compared to 4.4m in 2006
- Room shortages have resulted in a sharp jump in average room rates – Rs7,559 at end-FY07 vs. Rs2,004 in FY03; Approx. 105,000 hotel rooms are available in India

Future outlook of the sector
The real-estate sector offers a US$80bn-100bn opportunity over the next three years. Higher economy growth and rising income level will lead to higher demand for both residential and commercial properties. An easy and huge availability of capital will enable real estate developers to meet the demand.

Growth in the next decade should come from Tier II/III cities
- Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations
Tier I cities- Mumbai, Delhi and Bangalore
Tier II cities- Kolkata, Hyderabad, Pune
Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur
- Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore, Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate demand from the IT/ITES sector
- According to Nasscom’s projections, Tier II and Tier III cities, which account for about 29% and 5% of the total commercial space in FY07, respectively, will increase to 44% and 20% at the end of FY17