India Real Estate - what's the future?

India Real Estate - what's the future?

Predictions for Indian Real Estate

• Even the well–established CBDs markets are likely to face vacancies in 2009, as the first impact of the global recessionary economy is being felt by the financial and other fore-runner organizations. The vacancy may be further fuelled in CBD areas by the consolidation moves of many organizations.

• We will also see a reversal of the trend witnessed over the last two expansionary decades where large organizations moved from owned to leased assets. Given the drop in prices and availability of choice properties, this will be a good time for surviving organizations to announce their new leadership positions through trophy purchases. Jones Lang LaSalle Meghraj is currently transacting in many such mandates.

• This CBD vacancy rate, if triggered, can add significant pressure to the upcoming/newly developed premises in upcoming front-office districts such as Lower Parel in Mumbai and Nehru Place in Delhi.

• While the sentiment in the US and Europe towards outsourcing is positive in the long term, as the corporations there realize its need more than before, the active decision-taking for expansion by BPOs is totally suspended for the moment. We do not expect this to change in the 2009. Hence, the pressure on upcoming and announced projects –especially SEZs – will continue in 2009.

• In 2009, IT SEZs will also experience further pressure from the fact that the STPI concessions may be extended for another couple of years. While these concessions are important for IT companies' survival during the recession, they will adversely impact SEZ developments.

• In 2009, the peripheral areas of metros as well as the Tier II/III cities will need to compete with the central or secondary business districts for the same set of talents, thus dissolving the clear segmentation which was emerging and separating various micro-markets over the last couple of expansionary years. Newly developed or announced projects are especially going to suffer and may see continued vacancy in 2009.


• However, 2009 will also see practices in the real estate business become more organized and professional, as they did in the late '90s and early 2000s with the introduction of FIs, foreign money and the creation of Government-supported large development formats. This time around, a similar professional approach may reach warehousing land acquisitions.

Asset Class: Retail

• 2009 is expected to be a year of consolidation for Indian retail sector. As a result of adoption of best practices and restructuring of business models by the retailers, organized retail is expected to realign itself to the market conditions and create new areas of growth in 2009.

• Given the market malady being faced by developers and retailers alike, it is possible that partnership models of growth through mechanisms such as revenue sharing would become more prominent.

• More deals are going to get renegotiated as priced drop in over-priced locations. The process of rationalization should reach its peak by March, 2009.

• In 2009, it is anticipated that the supply pipeline may witness further stalling

• Most players' expansion plans for 2009 will slow down considerably. However, Projects that are planned well (incorporating approaches like proper zoning, optimal tenant mix strategies), implemented with high quality standards and incorporating appropriate mall management practices are anticipated to be successful

• In 2009, premier brands will look at Tier II cities, but certainly not Tier III. Luxury brands will stick to metros.

• Pan India mall developers will look at more practical rentals in 2009.High streets may see consolidation with a high possibility of a revenue-sharing model in terms of the overall cost-to-retailer on many high streets.

• For 2009, Jones Lang LaSalle Meghraj has seen a decisive upscale in transactions in the hypermarket category. However, the demand is clearly higher for stand-alone high street locations rather than mall-based locations.

Asset Class: Residential

• Much of the previously anticipated demand for 2009 will not see the light of day due to a confluence of various factors. Developers have only now begun to come down on their rates, and a lot depends on whether how many of them will follow suit in the coming year. The much-awaited drop in interest rates for home loans has happened, but not at a level sufficient to boost the residential sector out of the doldrums entirely.

• In response to the considerable demand for such formats, we anticipate more national players to launch affordable housing projects in 2009. However, since different cities will have different costs for land and construction of such homes, developers will have to define 'affordable housing' on a city level.

• We expect that at least 20% of the current players in residential real estate will begin to think on a portfolio rather than project level. So far, developers have been pricing their projects according to their expected profit margins vis-à-vis the cost of land in different locations. Buyers, however, are now not prepared to consider the initial and appreciated cost of land as a valid component of the buying price. When we speak of 'portfolio level', we mean that at least one fifth of these developers will now cross subsidize their construction costs internally and sell their project at prevailing selling rate.

• In terms of sales volumes and market recovery for 2009, there are two distinct and equally possible scenarios:

a) Buyers who were waiting for rates to drop to levels they could afford will make their moves when rates fall into their budget range. If this happens, developers will be able to move on to more projects and pull the market out of stagnation.

b) Buyers will continue to wait for the period in time that delivers the best rates – a point that may come and go without them being aware of it. They would, in other words, act more in the capacity of investors rather than end users. The fact that the purchased properties will appreciate over time in any case would be ignored in such a scenario. If this happens, market recovery for residential real estate would be further delayed.

• If rates drop by between 20-25% in the mid-level and high-end home segments, we will see a return of the previous effervescence. If they do not, developers will put on hold their expansion plans. This would lead to a clear shortage over 2-3 years, which would not be addressed, since there would be neither buyers nor sellers. In such a scenario, we will see complete stagnation in residential real estate.

• For 2009, Homebay Residential agency (a wholly owned subsidiary of Jones Lang LaSalle Meghraj) has registered deals in the luxury housing segment, but the overall demand remains muted. There is a significant NRI component to the overall buyer corpus, but the watch-and-wait stance is still evident. A certain number of transactions in the luxury segment that have remained on hold due to conflicting rumors concerning the optimum time to buy may crystallize in 2009.

Real Estate Capital Markets

• Judging from the mandates chalked up for execution, 2009 will see a good number of capital markets transactions. Then period from March 2009 to December will be a decisive time. All business sectors have been hit by the economic meltdown, and many will generate liquidity by divesting non core assets such as real estate.

• Type of enquiries are likely to be in the higher risk adjusted return segment with Greenfield opportunities seeing limited interest as most investors will be investing in Asia with chasing liquidity and not higher return. Residential projects in the middle income segment are likely to see renewed interest with interest rates declining in 2009.

• In 2009, we will also see the decisive arrival of sale-and-lease-back deals, in which owners currently occupying their properties will sell them and continue as lease tenants. Corporates have to address liquidity issues in their core businesses and are now eager to unlock the value of their non-core assets.

• In 2009, the biggest buyers would be FDI-compliant India-dedicated funds, domestic funds, high networth individuals and cash-rich corporate houses.

Projects & Development Services

2009 will be guided by dynamics of two contradictory forces:

1. Recession trend guided by capital market slow down, decrease in demand, caution in cost and spending.

2. Governmental and social efforts to regain growth momentum.

We feel that for first 3 to 6 months the impact of point 1 will be more significant while in the later half of 2009 the impetus and support to growth from government and global community will be more visible. Also it has been observed that a fall in economy is followed by increase in construction activity.

• The life cycle of projects normally last from 6 to 36 months and the revenue flow for projects are in general predictable. The finances and end use for most big projects are well planned and hence, significant proportion of ongoing projects of 2008 will go on in 2009 and construction at site will continue.

• While there has been slow down in new projects, the requirements for special use like consolidating operations of different offices of a company into one office, re-stacking and optimizing use of existing facilities, low cost housing etc will increase

• A segment of clients also feel that this period is apt for construction with lowering of prices for construction items and consultants fees and will look forward to use this lean period for construction and be ready for launch when the cycle again peaks.

• Individual office buildings as company's corporate office use will increase due to reduction in the cost of acquisition.

• There will be more focus on seeking expert advice for risk analysis, cost control and efficient project management services. The demand for development advisory services like feasibility study, pre-investment due diligence, procurement strategy, value engineering etc should increase.

• Sectors like Infrastructure, Industrial, Health care, Life sciences, Logistics, R&D, Educational centers should get more attention in 2009

• Innovative and new methods of construction will be sought to reduce time and cost & increase quality of projects.

by JONES LANG LASALLE MEGHRAJ

Real estate sector to ride the subprime woes

The US subprime credit defaults have become a bugbear for most global markets, though none of them, except for the US market, seems to have been directly impacted by it.

Concerns over the crisis in the US subprime lending market, where loans are offered to borrowers who do not qualify for market interest rates because of poor credit history, has sent world markets into a tailspin since the beginning of the month.

Though the markets recovered well on Monday, taking cues from buoyant conditions following US Fed’s intervention on Friday, the realty sector still appears to be a bit jittery. Any adverse news or events relating to the US subprime could further upset the sector, say market watchers.

Most global markets have been witnessing extreme bearishness and volatility over the past couple of weeks. Stocks of real estate companies, listed across world exchanges, have been at the receiving end. Key US sectoral realty indices have fallen by 11-32%. The US Mortgage REIT Index is down 32% over the past one month.

As far as Asian indices are considered, there has been a ripple effect of the shake-up in the US market, as most realty benchmarks have fallen down in the range of 9-11% over the past one month. The Singapore Property Equity Index has plummeted 21% over the period.

“Though indirect ripples could not be ruled out, the subprime crisis should not affect Indian real estate sector as much as it impacts European countries and the US. Forget India, it should not even hit Asian markets (excluding Japan) like Singapore and Hong Kong,” Emkay Shares & Stock Brokers analyst Navin Jain said.

“There may be some blips or dips in real estate sector as it is closely related to mortgage loans; infrastructure sector looks perfectly fine. As far as India is concerned, the construction sector would continue to do well in the long term. Stocks in the sector would bounce back once the market stabilises. The sector would be buoyant as foreign direct investment into India is unlikely to drop,” Mr Jain added.

Fundamentally, there should be no impact of subprime on GDP growth of the country or earnings of Indian corporates. Minus the concerns of US credit defaults, the market is well-poised as interest rates have softened a bit and inflation seems to be under control, analysts said.

“Indian real estate does not have any direct exposure to the US subprime credit market. Moreover, subprime fears in the US can only trigger negative sentiment in markets that have low or no exposure; there will be only concerns of a probable real estate slowdown shrouding the sector in subprime insulated markets. However, to be on the safer side, investors can overlook real estate stocks for some time; infrastructure companies look good even in these market conditions,” said India Infoline vice-president-research Amar Ambani.

According to analysts, the trouble may start when large-sized funds, with exposure to highly-leveraged subprime markets, start liquidating their holdings in emerging markets to make good their losses in a sinking subprime market.

Indian market has been witnessing a series of large outflows over the past one week as a result of probable losses suffered by overseas funds in the US subprime market.

Realty IPOs to double every year: JP Morgan

Global investor JP Morgan has said initial public offerings (IPOs) in the Indian real estate sector could double every year.

“Fairly strong activity can be seen in the Indian listing market. We believe IPOs can double every year. In the offshore market, including Singapore Stock Exchange (SGX) and Alternative Investment Market of London Stock Exchange, investor appetite is there for good projects and income-producing assets. Four real estate investment trust (REIT)-type vehicles may list on the SGX in the near future, banking on the success of Ascendas India Trust,’’ said Anthony Ryan, managing director, head of Real Estate Investment Banking, JP Morgan Asia, in a video-conference from Singapore.

When the business expands, the need for a third-party capital arises and developers are tapping both public and private equity markets. So far, seven realty companies, including DLF, HDIL, Omaxe and IVR Prime, have tapped the capital market and nearly ten firms have lined up their IPO plans.

“Our estimates suggest that the public floats in the real estate sector could raise from $2.5 billion to $3 billion in the coming months,’’ Kaustubh Kulkarni, executive director, Real Estate Investment Banking, JP Morgan India, said.

He said private equity players had committed nearly $15 billion on Indian realty projects. Given the fact that most of them are seven-year vehicles, it would come to $2 billion to $3 billion every year.

“Nowadays, it is not unusual to see a single-ticket investment of $250 million to $300 million in realty projects. Two years ago, it was only $50 million to $100 million,” he said.

Ryan said like India, China used to have smaller realty IPOs of $100 million in the beginning. “Now the average market capitalisation of a Chinese realty company is nearly $3 billion,’’ Ryan said.

Real Estate Bubble - Interest Strong in Asia Property market

It’s a decade since an asset bubble fed the Asian economic crisis and fears swirl over the US housing market and interest rates, but investors still believe the only way for Asia’s soaring property markets is up—at least for a couple of years.
Asian economies are booming, and property is once again the hot subject of dinner conversations from Tokyo to Mumbai, fuelled by cheap credit, cross-border investment and rising incomes.

Policy makers fear a boom-and-bust cycle, where rising real estate prices fuel inflation and force interest rates higher, leaving households and companies loaded with debt and dragging on economic activity.

But at the Reuters Real Estate Summit this week in Singapore, where some residents are seeing their rents jump 50% overnight, property executives effused about India, despite a doubling in urban land prices since foreign property investment was ushered in two years ago.

Japan also appears to be still hugely popular, although average Tokyo office prices have leapt 25% in the last two years.

And investors believe government cooling measures will bring order to China’s market, while failing to stem a hunger for homes among the expanding and increasingly affluent middle class.

Justin Chiu, executive director of Hong Kong property giant Cheung Kong (Holdings) Ltd, said the prospect of ever higher prices was driving Asia’s notoriously sentiment-driven markets. “If there are no bubbles, you don’t drink beer. It’s just plain water and there’s no incentive to invest,” he said. “Of course, if you see too many bubbles, you stop pouring.”

Cheung Kong expects mainland China to account for a third of its property earnings by 2010 from about 18% now.

The Asian continent saw some $94 billion (Rs4.32 trillion then) of property investment in 2006, up 43% on the previous year, but barely one- seventh of the global total. And investors show no sign they will stop the flow.

Morgan Stanley said last week it had earmarked for 60% of a new $8 billion fund for Asia and The Goldman Sachs Group, Inc. has raised about the same amount in a couple of funds, according to a person familiar with the matter.

ING Real Estate is raising two $1 billion funds for Asia, and private equity (PE) firm Blackstone Group is raising $10 billion to spend globally.

But some market watchers wonder where all the money will be spent, and if rising values will curb investment returns. Asian commercial property is tightly held by families and private companies, so Peter Barge, Asia chief executive of property consultants Jones Lang LaSalle, believes many investors will have to take on risky development projects.

“There’s a lot of money on the books, but people are scratching their heads about what to do with it,” Barge said.

Japan is a perennial favourite in Asia because its $1.27 trillion of investment-grade property offers huge choice. Kurt Roeloffs, Asia head for Deutsche Bank’s property unit RREEF, put it at the top of his list followed by China, India.
RREEF, one of the world’s biggest property fund managers, plans to spend around 30% of its future PE funds in Asia, said Roeloffs. “Office is still interesting in Japan, rental growth should continue to be strong because the supply rate is low,” he said.

“We also like retail. We’ve done some and we’ll do more.”

China is drawing Hong Kong developers such as Cheung Kong as well as funds run by ING Real Estate, AETOS Capital and Invesco.

But the new flavours of the month are India and Vietnam that both rank among the most opaque property markets in the world, but promise internal rates of return of 25-30%.

Forecasts that Indian property prices have surged too fast and could drop anywhere between 10% to 40% are brushed aside on the grounds that an outsourcing boom is enrichening a middle class couped up in crumbling homes built decades ago. “India has huge potential,” said Seek Ngee Huat, head of GIC Real Estate. An investment company of the Singapore government and one of the world’s top property investors, the Government of Singapore Investment Corporation Pte Ltd. (GIC) is eyeing developing markets, including Russia and Turkey, while cautious about London offices because of steep price rises.

Barge at Jones Lang LaSalle believes Asia has at least two or three years more to run on the upward swing of its property cycle, saying: “Mother gravity is always there.”
Derek Cheung, Asia executive director at fund manager Cohen and Steers believes

Asia lagged the global property rebound from around 1996 by about five years, so is nowhere near a peak. “We’re now in a similar situation to 1994-1995, before the Asian crisis, with economic growth strong,” Cheung said. “In three or four years from now I don’t know, but now we’re not at a dangerous level.”

With the Chinese and Indian economies growing at around 9% annually, and Japan tentatively emerging from more than a decade of stagnation, the main risks now appear to stem from the US.

GIC Real Estate’s Seek was wary that defaults on US subprime mortgages could infect the whole financial system. “There are certainly financial risks being built up,” he said.

Meanwhile, Liew Mun Leong, CEO of Southeast Asia’s biggest developer, CapitaLand Ltd, which is launching funds for China and India this year, acknowledged that property investors may not have the best crystal balls. “It’s funny, but we in the property industry can always predict when the market will turn up, but we can never say when it will turn down,” he said.

Via Mint

A bricks & mortar economy

It is almost impossible to live in an Indian city right now and miss the obvious signs of the construction mania that has gripped the country.

There is a profusion of new residential towers, malls, office blocks and IT parks sprouting from the urban soil, like wild grass after the first rain. Our cityscapes are changing dramatically, thanks to the new piles of brick and mortar all around us. But do we realize that the building craze is altering our economic landscape as well?

Let’s start with the stock market. The DLF share will be open for trading soon—and that listing will change the very nature of the Indian stock market, perhaps making it more vulnerable to the inevitable cyclical swings in real estate prices, but also making its composition more reflective of the underlying economy.

Assuming that it commences trading at around its issue price, it is likely that DLF will command a market capitalization of Rs90,000 crore. There are already many other real estate developers listed in the stock market and there is a long line of wannabes who are planning to follow in DLF’s footsteps. It’s pretty clear that real estate, which was an investment minnow till just a couple of years ago, will now be one of the big blue whales in our stock market. Perhaps only oil and software will be bigger in terms of market value. Brokerage house CLSA was prescient when it said in an April 2006 research report that the DLF IPO would make India a property-driven stock market, like Hong Kong and Japan.

A few back-of-the-envelope calculations show that real estate and construction could account for around 5% of India’s total market capitalization a few months down the line, despite the recent cooling off of land prices and lower valuations of real-estate developers. Surprised? Actually, there is no need to be. It merely reflects a broader economic fact.

The Asia Development Outlook 2007 published by the Asian Development Bank (ADB) tips its hat, so to say, at the growing importance of construction in the Indian economy. The ADB has actually divided India’s GDP into four sectors, with construction joining the regular three (industry, agriculture and services). This is the first time that I have seen construction given independent billing in GDP data. ADB has also suggested that the construction boom has stimulated credit growth and demand for consumer durables. People borrow to buy houses and then borrow once again to buy televisions and washing machines for their new homes.

The fortunes of many other sectors—from banks to consumer durables to some capital goods—are now inexorably linked with those of the construction business.
Good news? Perhaps. But this also brings a new type of risk in the Indian economy—the risk of asset deflation.

To understand why, look at Hong Kong. This island city is woefully short of land, a fact that has made it an economy heavily dependent on the vagaries of land prices. They power a huge part of the city’s government revenue, personal wealth and bank credit. A sharp drop in land prices inevitably sends the island’s economy hurtling towards recession. Government tax revenues drop, people feel poorer because of lower home prices and cut back on spending, mortgage defaults create cracks in the banking system.
Sure, India is no Hong Kong. Our economy is far more varied. But a strong real estate component in our economy, stock markets and banking system does expose us to a milder version of Hong Kong’s problem.

Many Asian countries such as Thailand and Indonesia did suffer from asset deflation after the financial crisis of 1997, even though their economies were not as dependent on real estate as Hong Kong is. A fall in real estate prices in these countries sent stock markets on a tumble, piled up bad loans in banks and squeezed personal wealth and spending.

In short: while the construction mania we see around us is part of the very welcome attempt to rebuild India’s tattered infrastructure, it would be foolish to forget that real estate can be a macroeconomic risk. Remember: The International Monetary Fund has included it as one parameter in the financial soundness indicators that it launched in 2003.

Real Estate Stocks to decline ?

Once real estate prices correct, stock prices of sectors that have benefited from the boom will also decline.

The housing and construction boom of the past four years has created a lot of wealth and spread it around more than any phenomenon of the past five decades. Ever since banks started to target retail clients in 2003-04, millions of middle-class citizens have leveraged future earnings to buy property.

At the same time, growth in IT/ITES has driven commercial property. If you'd bought real estate in 2004, you would have probably doubled your investment by now. What's interesting is that returns from other beneficiaries are even higher than returns from real estate itself.

The real estate developers were the stock market success story of 2006-07 with half a dozen multi-baggers. The cement and construction industries and the finance industry have also been major beneficiaries of the boom.

If you'd bought the few listed real estate companies in 2004, your percentage returns would be four-digit. Cement and construction companies have delivered high triple-digit returns. The top rung banking and housing finance stocks have tripled since 2004.

There has been an asset bubble – that is inevitable when real estate doubles in value and more, in three-four years. It now appears that real estate itself is cooling. Lower interest rates and smoother paperwork enabled the boom – higher interest rates have caused cooling.

The recent sale of sticky home loans to asset reconstruction companies is a signal that NPAs are hurting. Real estate prices have softened little but we've got classic signals that suggest further softening in metro markets, at least.

Demand for new home loans has eased substantially – quite apart from defaults. In new real estate, while the price line is officially steady, cash-down buyers are getting 10-15 per cent discounts. Inevitably that will lead to lower prices.

The real estate market itself may clear, given price correction (15-20 per cent) that adjusts for rate hikes and eliminates speculators. Now, does the upside price-sensitivity translate into similar downside sensitivity?

If a 100 per cent rise in real estate prices set off 300 per cent increases in listed companies that benefited from the real estate boom, will a 10-15 per cent fall or a zero-growth scenario lead to a crash in those listed companies?

That's a scary though but it is something a trader should consider. Price declines in these industries can be exploited. Most of the big boys are available in F&O, which means that you can hold short futures positions for months on end. Fundamental shorts are a distinct possibility.

We've already seen 30 per cent corrections in the developer industry in February-March 2007 on the basis of lower 2007-08 projections. Cement also took a hammering especially after the lunatic dual excise rate.

Perhaps the corrections in these two industries have already factored in softer real estate prices. However, I would be tempted to short both sectors given another rate hike.

Banks are doing well in terms of stock prices. In fundamental terms, they shouldn't be. The interest rate hikes of the previous year have already hit both volumes and bottom lines. The highest growth in credit disbursal between 2003 and 2007 was from home loans. That segment is clearly impaired.

But in game-theory terms, banks are likely to continue delivering a decent performance. Every bank of respectable size must recapitalise to meet Basel II norms. ICICI's FPO has just got the ball rolling. This creates a "you scratch my back, I'll scratch yours" situation.

Every financial institution has a vested interest in ensuring all FPOs are successful. Extending the logic, the RBI has an interest in ensuring that bank FPOs go through. Whether it can persuade the political establishment to enable this process is a different matter. But banks won't get a hammering – until the FPOs have gone through.

This implies that unless interest rates start travelling downwards, the entire banking sector will be significantly over-valued by the time FPO action tapers off.

This has implications for banks – the sooner they get their FPOs in, the better. It has implications for FPO investors – you should book profits quickly in FPO allotments because the money will skip onto the next FPO.

It has long-term trading implications. Traders should ignore higher rates and be long on banks in apparent defiance of fundamentals until the FPO action ends. After that, "double-minus" – close long positions and go short unless rates have dropped. If the logic is broadly correct, banking will be a focal point for two years. First, prices will go up, then down.

Over the last 6 months, real estate prices in your area (India only) have

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