Real Estate

 Real Estate

HK, Tokyo overtake London as most expensive office locations

London has lost its status as the world’s most expensive office location for the first time in nine years.According to the new Office Space Across the World 2009 report from global real estate advisor Cushman and Wakefield, Hong Kong and Tokyo are now the world’s two most expensive locations relegating London to thirdplace. The cost of occupying a prime square metre of office per year in Hong Kong now stands at €1,743.

Although rents in Hong Kong actually fell 4 per cent in 2008, the much larger 23 per cent fall in London’s West End pushed occupancy costs down further to €1,403 per sq m per annum. The cost of space in Tokyo now stands at €1,649 per sq m per annum, a fall of 19 per cent in 2008.

Office Space Across the World 2009 compares office occupancy costs in 202 key locations in 57 countries around the world. Of these 202 locations, 58 per cent showed rental growth in 2008, 26 per cent saw stable rents and 16 per cent showed a rental fall (compared with only 1 per cent in 2007). Office rents globally rose on average by 3 per cent, significantly below the 14 per cent achieved in 2007 and the lowest growth rate since 2004.

South America was the best performing region with rental growth averaging 12 per cent for the year. Western Europe was the poorest performing region with average rental growth of only 1 per cent. The impact of the global economic downturn has been felt in all markets although some were better placed to withstand declining occupier demand for space. The expansion of financial institutions, particularly the hedge funds, have driven up rents in London’s most prestigious West End market for the last few years but it has now felt the full impact of the credit and banking cri

Most expensive real estate in the world

The list of cities that top property price chart reads as follows: London, Monaco, New York, Hong Kong, Tokyo, Cannes, St. Tropez, Sydney, Paris and Rome.

As signified by the list, London has emerged as the most expensive real estate market of all with prime property registering a cost of 2,300 pounds per square foot. The increase in the region is believed to be more than 14% on an average in 2006 as compared to 9% rise for the mainstream properties in the market.

It is followed by Monaco with 2,190 pounds per square foot.

Rising property prices in London imply that many people can sell properties here, buy a bigger property overseas and still have a scope for change.

New York comes close to third position with an average rate of 1,600 pounds per square foot. Property prices in this city have soared at an unbelievable rapid pace over the past few years, surpassing many other foreign destinations.

The fourth position has been grabbed by Hong Kong with 1,230 pound square foot.

The data has been showcased by the ‘Wealth Report 2007’ compiled by estate agent Knight Frank and Citi Private Bank. Likewise, it shows similar trends in other 70 locations to come up with the list.

Such a rapid rise in real estate prices has been attributed to a large economic development. The ownership of immovable property is one of the best indicators of wealth. It also makes the space for a stiffer competition to own properties. This trend is estimated to grow over the next 4-5 years.

Portals are taking over from real estate agents

A real estate ‘consultant’ with more than two decades of experience, K. Premsundar is a worried man. His business, a letting agency for low-end properties, has seen a big drop in the last two years. He says his clients have left him, choosing to place advertisements directly on the many real estate Internet portals and in neighbourhood dailies. Such advertising costs a fraction of the fee that agents charge.

Indiaproperties.com, an online real estate portal, allows owners to post their properties for Rs500 per listing, whereas if the deal is done through a broker, it would mean a month’s rent as commission, from either the owner or the tenant. Others sites such as magicbricks.com and Sulekha.com also offer similar services. The portals allow for direct interaction between the property’s owner or seller and a prospective tenant or buyer.

“Online portals have impacted agents’ business especially in the lower range. Their traditional clients have moved away,”said J. Sohail Sarooshi, vice-president of the Chennai Real Estate Agents Association. The association, which has 60 members, was formed as an attempt to bring standardized and fair conduct norms into the industry, which is largely unregulated. For a sale, agents get a 3-4% commission on the value of the sale, and for a rental deal, they get 15 -30 days’ rent as commission.

“Real estate agents have so far thrived on information,” said Naresh Malkani, chief executive officer of indiaproperties.com. “Now, the Internet provides the information.”
However, he said unlike booking travel tickets online, the “Internet is not going to replace agents, as the transaction has to be done physically”. Agents now need to focus on services such as valuation, documentation, registration and field visits, he said.

“We definitely have seen the advanced Internet user take advantage of the free online classifieds platform as an additional option. By interacting directly with other individuals, they have able to reduce lead time and costs”, said Satya Prabhakar, chief executive officer of Sulekha.com, a portal that also lists properties. “It still may be a good idea to supplement this with the professional advice of local real estate agents”.

According to an estimate by indiaproperties.com, in cities covered by online portals, 40% of the total market, in terms of property inventory, is listed on Internet sites. In the last six months alone, Malkani said, there has been a 120% increase in listings. And, property for a monthly rent of between Rs5,000 and Rs20,000, the traditional bread and butter for letting agents, constitutes one-third of total listings on his website.

On Sulekha.com, Prabhakar said 80% of rentals are at Rs20,000 per month or below. Both individuals and real estate agents access the site.
Over the next few years, this percentage will increase, as new and young property buyers of the last five years would be in the market to sell or rent. Traditionally, it takes about 7-8 years for change in ownership or usage.

Though the Internet is posing a challenge to agents, Sarooshi and Malkani agreed that both could co-exist. Agents, who pay an annual fee of Rs10,000 to enrol as members, can list 100 properties every year, and provide one-fourth of all listings on indiaproperties.com.

Local real estate agents, especially smaller ones, Prabhakar said, are using online classifieds as a “platform to reach out to individuals who are looking for rental solutions in the niche areas that they operate in. The lower entry barriers and flexible advertising options have helped those who have been quick to adopt this.”

However, Premsundar, in his late fifties, has never used the computer nor browsed the Internet. He says he is too old to start now.

DLF's real estate story

Four years after delisting its shares from the Delhi Stock Exchange, real estate behemoth DLF is knocking at the capital market again selling shares at - hold your breath - 837 times the valuation at which it exited the stock market. Should you buy?

If the country's largest real estate developer DLF had been listed on the bourses over the past four years, it would have delivered a return unparalleled in the history of Indian stock markets.

Promoter K P Singh opted to delist the company in its earlier avatar as DLF Universal from the Delhi Stock Exchange in September 2003 by buying back the public holding, valuing the company at Rs 112 crore. Over the past 45 months, DLF has seen an annualised appreciation of over 500 per cent going by the valuation it is commanding for its latest initial public offer.

The 10-odd per cent public shareholders would have potentially amassed wealth of over Rs 8,500 crore by now had the company remained listed. In a dramatic reversal though, the ace builder is now offering to dilute 10.26 per cent stake earlier bought back by the promoters dirt cheap -- for less than Rs 50 crore, for a minimum of Rs 8750 crore.

"The market would not have forgiven a smaller company for this act but here we are talking about one of India's largest private enterprises and that too at a time when global investors are queuing up to get a share of booming real estate market," says a leading fund manager on the condition of anonymity.

After controversies relating to a small group of minority shareholders who had remained invested in the stock even after the delisting, DLF was forced to withdraw its application for public offer from the capital market regulator last year.

Even as the book building for the IPO constituting 17.5 crore equity shares of Rs 2 each priced in the band of Rs 500-550 begins today, it appears that the delay has ironically played out in favour of DLF with market sentiment much better than a year ago.

The company has utilised the additional time fruitfully by changing its corporate structure and strategy that has helped it inflate profits for the past year over ten times and make it less difficult to justify its aggressive projections.

Valued at the higher end of the price band, the company would be the eighth largest by market capitalisation, post-listing. With negative cash flows and current earnings abysmally low compared with future projections, the company is demanding its price relying solely on its vast land holdings, the value of which is not clear.

Here is the promise. Armed with 10,000-odd acres, DLF plans to build over the next 10 years more than double the area it has developed over the past 60 years. In the next three years, DLF has a target of developing over 70 million square feet or triple the area it has developed till the last calendar.

As a result, investment bankers are forecasting the company's sales at Rs 20,000 crore in fiscal 2009, up from Rs 2600 crore achieved in the last fiscal, and net profit in excess of Rs 11,000 crore, roughly six times that for the year gone-by.

The grand plan DLF has outlined a three-pronged growth strategy, which includes strengthening its pan-India presence, building up land reserves at strategic locations, and leveraging its real estate capabilities in related areas be it special economic zones or hospitality.

The company will primarily be a developer and sell its properties retaining limited assets to be leased out. The money raised through the IPO would go towards buying more land (Rs 3500 crore), developing existing projects (Rs 3500 crore) and repayment of loans.

Going by the scale of development done so far, DLF is the largest real estate player in the country with land reserves of 10,255 acres or about 574 million square feet (msf) of developmental area. Of this, 171 msf is located in or near developed urban areas while 404 msf is urbanisable.

"About 90 per cent of the total land bank is available as large contiguous plots enabling large integrated development", says, chief executive officer Rajiv Singh.

After being centered around Delhi for many years, the company now has a nation-wide presence across 31cities and towns. It has developed 29 msf of residential, commercial and retail projects and integrated townships spread over 3000 acres in Gurgaon so far. Currently, some 44 msf of development is under progress and projects involving 524 acres is planned over the next few years.

The company intends to focus on its core competence while partnering with leading global players such as Nakheel (SEZs), Laing O'Rourke (construction), ESP (engineering and design), Feedback Ventures (project management) for better execution.

Right from acquiring low cost land to creating a full fledged township to realise the true potential of the land, DLF has amply demonstrated its success in Gurgaon. One key advantage is that DLF's average cost of acquisition of land is fairly low at around Rs 274 per sf which will enable it sit out the cycles and not indulge in distress sale ever.

Some key determinants of profitability for real estate companies apart from the land cost, is the developer's land acquisition and aggregation skills, relationship with the state authorities and reputation – on all these DLF scores highly.

And with its unquestionable capabilities as a successful developer, DLF seems best placed to capitalise on the booming real estate market, which is expected to grow at 20 per cent-plus annually from the current size of $40-45 billion.

Even more, the national capital region, where the company has over 50 per cent of its land holdings, is among the fastest growing markets in the country. Apart from the boom in retail malls and residentials owning to rising disposable income, there are several new vistas opening up for developers which DLF is planning to tap -- for instance, SEZs which offer opportunities to create integrated townships, hotels and serviced apartments, multiplexes, airports and the list goes on.

The risk A look at DLF's financial performance is hardly inspiring. Last year, the company sold its asset to a group company to get its revenues and profits to a respectable level. Sales to fully owned promoter company DLF Assets Limited (DAL) constituted almost 55 per cent of total revenues and 77 per cent of profits. DLF Vs UNITECH (Rs crore) DLF Unitech Land bank (acres) 10255 10332 Developable land (sq ft) 574 472 Net debt 9500 2600 IPO cash 8800 - Outstanding shares (cr) 170 81 Market-cap 85200/93700 48700 Enterprise value 85900/93600 48700 EV/Square FT (rs) 1498/1631 1032

According to a newly devised strategy, the company would, instead of leasing out commercial projects, indulge in outright sale to potential buyers including DAL. This model rests on the ground that DAL would be able to garner low cost capital by tapping the alternative investment market overseas and pay a higher capitalisation rate for DLF's properties resulting in faster growth in revenues and better margins too. THE PROJECT PROPOSAL (Mn Sq Ft) Completed Under progress Planned Plots 195 0 46 Residential 19 7 375 Commercial 7 27 60 Retail 3 10 44 Total 224 44 526

Though swift disposal of assets can favourably alter DLF's return ratios, DAL's ability to raise cheap funds is still unclear and poses a threat to DLF's cash flows.

Even otherwise, earnings of developers tend to be less predictable with lumpy revenues and cash flows. And after the phenomenal rise in property prices over the past three to five years and the rise in interest rates, analysts expect a property price correction because of the double whammy.

Though demand for retail malls and commercial estates is currently buoyant, huge supplies are yet to hit the market with most builders planning an aggressive ramp-up, again, increasing the risk of weaker property prices.

On the residential side too currently, investors (or the secondary market) are selling residentials at a price lower than the builder's price in most parts of the country and the demand from investors could dry up if cost of funds continue to be high and properties do not turnaround around quickly. Roughly, a 1 per cent fall in sales realisation cuts DLF's earnings by 2 per cent. If prices were to correct about 10 per cent, a fifth of its earnings could be shaved off meaning stock prices could take a considerable beating.

Is it fair? So what is a fair price to pay for DLF? Since there is little strength in either its P&L or balancesheet, an investor is essentially betting on the ability of the management to create another Gurgaon and realise the best price for their cheap land. To put a number to this, analysts are looking at the net asset value of the company which is essentially a measure of cash flows of the firm from its entire land bank discounted by its cost of capital (CoC) less the debt in its books.

Various analysts peg the net asset value in the range of Rs 70,000 crore to 95,000 crore. Edelweiss estimates NAV at approximately Rs 88000 crore based on a CoC of 12 per cent primarily assuming that the company would develop the entire land bank only over the next 15 years as against the management projection of 10 years.

This results in fair value of Rs 512-517. First Global estimates NPV at Rs 70,000 crore or Rs 413 per share based on its base case assumptions and says that a majority of global real estate companies in Singapore and Hong Kong trade at a discount of 10-30 per cent discount to NAV.

DLF's investment bankers too estimate NAV to be in the range of around Rs 80,000 crore to Rs 1 lakh crore but they argue that the company deserves to be traded at a premium to its NAV, an argument most domestic fund managers refuse to buy. Property stocks in Hong Kong, China, Singapore, Japan and Australia have traded at earnings multiples upwards of 20 in their early cycle but on this metric again DLF looks grossly expensive.

Apart from property prices, another risk for DLF is that of delays in execution. Edelweiss estimates that for every one year delay in execution would drag down the net asset value by six per cent.

Says Ramdeo Agrawal, managing director, Motilal Oswal, "Although the future seems quite rosy, the stock will face several challenges going forward trying to meet the tall projections that form the basis of current valuations." He adds that there is little margin of safety in buying the stock at current valuations.

Besides, with nearly 112 related entities and the promoter's past track record concerns on corporate governance remain. Although Rajiv Singh reassured investors of good governance standards during the IPO launch, on paper (prospectus) the company has gone out of the way to state that "we cannot assure that our promoters will act to resolve any conflicts of interest (with certain other promoter-owned companies) in our favour or in the best interest of our minority shareholders," signalling that investors better be prepared for negative surprises.

Having said that, the issue looks poised to deliver good returns in the short term. Flush with liquidity from global investors, investment bankers are confident of a huge over-subscription. For the common investor on the Street it is time to make a quick buck. For in the longer term, India's largest builder appears to be on a shaky ground.

ISEC - Indian Real Estate Sector - Opportunities Unleashed

ISEC - Indian Real Estate Sector - Opportunities Unleashed

Karvy - Cadila, Bajaj Hindustan, Mercator Lines, Real Estate Sector

Karvy - Cadila, Bajaj Hindustan, Mercator Lines, Real Estate Sector

ENAM - Real Estate Conference

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DB Research - Building Up India

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New real-estate stocks trading at discounts to issue price

Stocks of nine real-estate and construction firms, listed between April 2006 and now, are trading at stiff discounts to their listing prices. For two stocks, the discount to their listing price is as high as more than 40%. Six of the nine stocks are even trading below their offer
prices.

Analysts with brokerages say forthcoming public issues of construction firms, too, will face a similar fate, with the capital-market regulator tightening the disclosure norms for such companies.

Market regulator Securities and Exchange Board of India (Sebi) chairman M. Damodaran said on Thursday that real-estate and construction firms that plan to enter the market must disclose their land-bank details with ownership pattern or purchase agreements. The firms have also been directed to project the valuation of their land-bank based on its present value, without taking into account any future appreciation.

Worst-hit is Parsvnath Developers Ltd. Its stock closed at Rs275.35, on Friday, a stiff 47.68% discount to its listing price of Rs526.30. It was listed on 30 November 2006 at a massive premium to its issue price of Rs300.

Tantia Constructions Ltd, too, traded on Friday at a substantial discount to its issue price. It closed at Rs124.65, a 43.34% discount to its listing price of Rs220. It made its debut on 28 April 2006, at an over 400% premium to its issue of price of Rs50. Four other stocks, including those of Akruti Nirman and Patel Engineering, are trading at over 20% discount to their listing prices.

The company which suffered the least is Unity Infraprojects Ltd. On Friday, it closed at Rs456.25, a 3.26% discount to its listing price of Rs471.70. It was listed on 12 June 2006 at a much higher issue priceof Rs675.

D.S. Kulkarni Developers Ltd and Sobha Developers Ltd are now trading at a discount of less than 20% to their issue prices. However, they are still at a premium to their offer prices. For instance, Sobha Developers Ltd on Friday closed at Rs777.05 against an issue price of Rs640. D.S. Kulkarni Developers closed at Rs280.75, marginally higher than its issue price of Rs275.

Meanwhile, Indiabulls Real Estate Ltd made its debut on the Bombay Stock Exchange on Friday . The company was formed following the de-merger of the real-estate business of Indiabulls Financial Services. It opened at Rs380.05, touched a high of Rs414.80 and closed at Rs325.65, the stock’s lowest level during the day.

“I would not say that the days of construction stocks are over. Only those firms that are fundamentally strong and not riding on projected valuation of their land banks will do well on the bourses. Others may find it tough,” says an analyst with a brokerage, run by a private Indian bank, on condition of anonymity.

Indiabulls Real Estate

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Property IPO hopefuls forced to lower sights

Real estate companies looking to launch IPOs will need to scale back their valuation hopes as investors lose appetite for the once red-hot sector.

Surging demand for homes and offices in an economy forecast to grow 9.2 percent in this fiscal year had triggered a spate of listing plans by developers, but rising interest rates, steep valuations, lack of earnings, a market sell-off and the poor performance of recent issues have made investors edgy.

"The correction will slow things on the IPO side, especially real estate," said Ravi Sardana, vice president at ICICI Securities, referring to the recent stock market skid. "Only quality issues would find it easy to raise funds."

India's biggest real estate firm, DLF Ltd., has applied with regulators for the second time in less than a year to launch a float that could raise about $2 billion for a 10.2 percent stake.

Other developers including Omaxe Ltd., Puravankara Projects Ltd., Housing Development and Infrastructure Ltd., IVR Prime Urban Developers Ltd. and Kolte Patil Developers Ltd. have also filed red-herring prospectuses with the regulator.

"There's a big readjustment in terms of valuation expectations, which is very healthy, but it's painful in the short term to the issuers," said Vedika Bhandarkar, managing director and head of investment banking in India at JPMorgan.

Demand for new property issues has been soured by the poor market showing by recent market newcomers.

Shares in Dev Property Development have fallen about 11 percent from their late January issue price after the company raised $267 million on London's secondary AIM platform.

Mumbai-based Akruti Nirman Ltd., which listed last month, and Delhi-based Parsvnath Developers Ltd., which went public in November, both trade below their IPO prices.

Bangalore-based Sobha Developers Ltd. is more than 10 percent above its listing price, but around 40 percent below its high on its first day of trade in December.

MARKET SKID

India's benchmark index is down nearly 12 percent from its Feb. 9 peak, after falling as much as 16 percent in a global sell-off, while the drop in real estate stocks was sharper, thanks to steep valuations and doubts about sustained growth in asset prices amid monetary tightening to curb inflation.

"It was a little unnatural that Indian companies could raise capital at a 50 percent premium to NAV (net asset value) when everybody in the region raises capital at a discount to NAV," JP Morgan's Bhandarkar said.

Still, she said, with the Reserve Bank of India trying to restrict bank loans to developers, property firms will need to raise capital, whether from the public or private market.

The central bank has raised short-term lending rates 125 basis points since January 2006 and home loan rates have risen about 300 to 400 basis points in the last year.

"We need real estate development urgently, but it needs money to be deployed for construction, which can then be sold or rented. Just buying land is not enough," said Sanjay Nayar, chief executive officer of Citigroup India.

VALUATION BLUES

Indian property firms have faced a backlash over the practice of pricing themselves based on the value of their land banks -- which soared over the past three years -- and not by conventional price-to-earnings ratios.

To build up those land banks, many developers borrowed heavily, which increases the pressure on them to raise capital.

"The traditional benchmark of P/E ratio was not taken for pricing real estate IPOs, and instead they were priced based on the land bank, which caused the trouble," said M.A.A. Annamalai, director at brokerage Akshaya & Co.

"That formula won't be accepted any more," he said.

Shares in some property firms such as Hirco Plc. and Ishaan Real Estate Plc., which were listed on the London Stock Exchange's AIM platform, trade far below their IPO prices.

"Many of these issues (on AIM) shared the same flaws, being of fund rather than corporate structures, blind pool fundings rather than with identified use of proceeds, and lacking clear revenue-generating project pipelines," said Frank Hancock, head of M&A and equity capital markets for India at ABN AMRO in Delhi.

But some observers believe that demand for real estate development is so strong in India that rightly-priced IPOs will be absorbed once the volatility subsides.

"At the right price, obviously, our fund managers would be keen to invest," said Sandesh Kirkire, chief executive of Kotak Mahindra Asset Management.

Business Today - The Bubble in Real Estate

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Investors chase Indiabulls Financial

Indiabulls Financial Services surged 5% to Rs 673 on continued buying, a day ahead of the last trading date for shareholder eligibility to get the shares of the real estate firm.

The stock rose on high early volume of 18.2 lakh shares.

The stock had spurted 9.4% to Rs 590.30 on 21 December on high volume of 56.9 lakh shares on BSE after the company announced 9 January 2007 as record date for its demerged real estate business, now brought under Indiabulls Real Estate (IREL). Continued buying in the stock took the scrip up further to Rs 640.75 by 27 December.

The stock enters no-delivery period on BSE from 2 January 2007 to 8 January 2007, for the purpose of the demerger of the real estate business.

Earlier, the stock moved in the range of a low of Rs 500 and a high of Rs 582 since mid-November 2006. Last few months saw a solid surge in the scrip. From Rs 197.95 on 24 July, the stock surged to Rs 640.75 by 27 December.

International consultancy firm Knight Frank has estimated the value of Indiabulls' real estate projects, including the development potential, at Rs 21570 crore, of which IREL's stake is put at Rs 15130 crore. As per the scheme of restructuring, each shareholder of Indiabulls Financial Services will be entitled to one share in IREL.

Recently, Indiabulls Financial Services had acquired 100% equity of Noble Realtors, a company involved in construction and development of real estate projects.

Indiabulls Financial Services is transforming into a financial services power house. The company, earlier focussed on stock broking, has warmed up to consumer finance and realty businesses.

For Q2 September 2006, the company reported 59.20% rise in net profit to Rs 30.63 crore (Rs 19.24 crore). Revenue advanced 21% to Rs 65.87 crore (Rs 54.42 crore).

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Indiabulls property arm valued at Rs 15,125 cr

Indiabulls Financial Services Ltd (IBFSL) today said leading international real estate consultancy Knight Frank has valued the company’s stake in its real estate projects at Rs 15,125 crore.

Pursuant to the demerger of its real estate business to Indiabulls Real Estate (IBREL), Indiabulls Financial Services had signed up with Knight Frank for doing the valuation.

According to a release issued here, the company said Knight Frank has estimated the present value of 100 per cent of the six development projects, in which IBREl is involved, at Rs 21,569 crore.

The total present value of IBREL’s effective ownership in project companies undertaking the proposed development is Rs 15,125 crore.

The company further said the board has fixed January 9, 2007 as the record date for ascertaining list of IBFSL shareholders, who would be entitled to be allotted shares of the real-estate arm, in terms of the scheme.

Real Estate's Unreal Returns - Sanjeev Pandiya

Last month, I argued that real estate 'investing' returns were simply the result of liquidity and savings flows and was therefore 'accidental' and unpredictable. They did not represent any substantial (relative) wealth creation, because 'all boats rise with the tide'.

Puritanically speaking, such 'skills' cannot be called investing, which can be loosely defined as the tracking of value across the economy. Investing is a part of the asset-allocation process; good investing is supposed to transfer money from where it is surplus, to where it is needed/ deficit. The metric used to track surplus/deficit is the cost of capital (k). The cost of capital drops where money is surplus, and rises where money is in deficit.

Very quickly, capital is of two kinds: debt (fixed- return, non-risk seeking capital) and equity (also called risk-seeking capital). The cost of debt is fixed and measurable but the cost of equity is neither fixed nor perfectly measurable because it incorporates return expectations, which are perceptual in nature. I am ignoring quasi-equity as a category, just to keep things simple.

Which brings us back to 'store of value' investments. Like I mentioned before, store of value assets like gold, real estate, etc. do not create value, hence investing in them should never be done with debt funds. Only savings (i.e. equity) that cannot find an economic use should be used to park in store of value investments.

Real estate is bought for two kinds of purposes. The first, honorable purpose is to live in the house. This kind of real estate is a consumer durable, little better than a car. It depreciates at a lower rate and has a longer life, typically longer than the loan tenure that funds it. So it leaves some asset (residual usage) in the hands of the investor, who has used debt to fund his purchase.

The second, less honorable purpose of buying real estate is to arbitrage the flow of need (which has an economic 'value'). People bought bungalows in Gurgaon and have held on to them for 20 years. So, for 20 years, this consumer durable has been lying in disuse/ misuse in order to find a desperate buyer/ tenant who is actually willing to pay through his nose to stay in that bungalow.

So a person, who bought a bungalow for Rs 2 lakh in 1985, now expects to get Rs 1 crore. The probability that he will find someone willing to pay him that kind of money is directly dependent on two things: the income levels of people wanting to live in that area, or liquidity/ debt flows into real estate in that area. The final buyer will have to be a person who wants to live in that bungalow, right? And the price he can finally afford to pay will be dependent on his income and debt capacity, irrational exceptions apart.

Hence, what the real estate investor is actually arbitraging is economic growth in the area, which is represented by the wages prevailing in that area, which drives the purchasing power. The supply of home equity comes from savings flows, which are directly proportional to income levels. Areas with a higher propensity to save have higher levels of real estate prices, with greater stability of prices (I gave Jaipur as an example of this phenomenon).

The other kind of capital, i.e., debt, is mostly composed of housing finance. In the short run, incomes and savings are less volatile, but debt flows into a real estate market can be very volatile. That is why most of the volatility in house prices is provided by debt flows. A sudden increase in bank funding for say, Gurgaon, will spike up prices. Other banks will follow and there is an explosion of credit into a local (real estate) market. Equally suddenly, a perception that prices have peaked will take over and fresh lending will disappear.

This is the key risk to a real estate market. It is very important to distinguish between the qualities of various bubbles. An equity-financed bubble can hold out for very long like I mentioned Jaipur and Abohar/Fazilka in my last article. But a debt-financed bubble may be very volatile, e.g., the new urban agglomerations attached to major cities like Delhi, Bangalore, etc. Investors do not seem to appreciate the qualitative difference between these two kinds of capital flows and the bubbles they create.

The only fundamental that a real estate investor should arbitrage is the build-up of infrastructure. A person who invested in village land in Gurgaon (at some Rs.250 per sq.yd in 1986) would have got real (inflation-adjusted) returns on his investment. The risk he took: whether Gurgaon would turn out the way it did. Every buyer of village land around Delhi will not find himself sitting on land that is attractive to the next BPO player entering the city. If you have managed to anticipate that event, you deserve the money you made. If you know a way to do that repeatedly, then may be real estate investing is for you. If you know how to make that happen, then may be you should get into the real estate business.

On a tangential note, have you tried counting the number of unheard-of builders advertising on FM radio these days? On one stretch of 15 minutes, I counted five different ads from different builders. Reminded me of 1995, when all the stations from Bandra to Churchgate only had ads of finance companies. A couple of years later, the whole thing blew up in a series of scams.

Compare this to the equity market, where you anticipate demand for a product, the change in margins, and the strategic position of a company that seeks to benefit from these economic trends. The wealth that such companies create is real (relative to the rest of the economy) and predictable. If an investor learns how to track such value across various sectors (and companies) in the economy, his returns and his wealth creation is real.

Does that mean that I am suggesting that real estate investors are mere speculators (defined as people who cannot control the investment returns that they get) as opposed to relatively scientific investors in the equity markets?

Not really……remember the random walk theory in equity investing? If you believe in that kind of stuff, may be real estate investing is better for you. The tangible assets that you can see, gives great comfort to most people. And it is, after all, a consumer durable, which you can 'enjoy' even if you don't get a positive, inflation-adjusted return if you have bought at the top of a bubble. So your mind will not stew much over the (absence of) returns that you get from a bad investment.

So how does one find out the right time to sell? Difficult to say, in a market where bid-ask spreads can rise to 30% in periods of illiquidity, rigging is rampant and most demand comes from the new project launches. But try the following the behavioural indicators:

• Month-on-month returns (i.e. price spikes in general housing prices) are at rates similar to stock market returns
• Rental yields have dropped below half the rate of bank interest
• Input supplies (cement, steel) are stretched, with runaway inflation
• There is a drop in liquidity, with a sharp increase in prices
• New project launches are at an all-time high
• Land scams have started
• Occupancy demand is crowded out by speculators and HNIs
• With 80% of the market population at the bottom of the pyramid, 80% of the housing projects are for the top-of-the-pyramid. 20% of the population is buying 80% of the housing stock. Do a dipstick survey!
• Industrial demand (for bank credit) starts to get crowded out, with retail asset books being built up in the banking system.

Business Today - Real Estate And Reforms

If you thought real estate was catching the high tide in terms of fund flows, then think again. Were it not for a few snags, the industry could be attracting far more capital. Topping the list of impediments is the opaque nature of the business in India. "The challenges of investing in Indian real estate relate to transparency, limited market history and forecasting difficulties, as well as title complexities and imperfections," says Kurt Roeloffs, Head, RREEF Asia Pacific. Ownership records and land titles are one of the biggest blind spots in property valuations. Further, there is no title insurance in the country. Title insurance, as the name suggests, guarantees against massive losses in case of a faulty title. While domestic funds are able to negotiate these issues, foreign funds too are learning to handle them.

One interesting fall-out of such intense scrutiny by global and domestic funds is that transparency in the market is increasing. According to a global transparency index evolved by realty consultant, Jones Lang LaSalle (JLL), India stood at #41 this year in a list comprising 56 countries-its rank unchanged since 2004. On a scale of 1-5, with a score of 1 showing highest transparency, India's transparency score was a low 3.46. However, as India was among the top 10 countries (the 10th though) in showing the largest improvements, it moved from "low transparency" status to the band that includes "semi-transparent" countries. A flood of major retailers and other MNCs looking to capitalise on India's recent exceptional economic growth, plus an increasing presence of international property consultancies, have significantly improved the quality and availability of market information across all sectors," the JLL report says.

As more transactions between foreign firms and local developers get done, the general accounting and reporting processes are expected to improve, since the local firms will need to start matching global reporting benchmarks. The public offers by real estate developers and the attendant disclosure norms will also lead to more information about real estate assets being released into the market. Similarly, the introduction of real estate mutual funds will aid the process further.

The opaqueness is evident in customer sales as well, where the rampant malpractices are significant enough to inhibit demand. Issues such as cost of property related to built-up, super built-up areas or carpet area have created a lot of confusion in the market. Land use issues, as evidenced in the sealing drive in Delhi, are pointers to an overall lack of urban planning. Stamp duties and archaic laws such as Urban Land Ceiling Act and Rent Control Act need to be rationalised or scrapped. However, as with many other institutional reforms, much of the initiative rests with the state governments.

Even as the government talks of a real estate regulator, many in the industry are wondering what will be its terms of reference. "Considering its importance in economic growth, foreign direct investment and employment generation, it is high time to have a federal regulator for the sector," says Cushman & Wakefield's Verma. Fortunately, he won't have to wait for too long.

Citigroup - India Property

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Thanks Vishesh

Business Today - A Tall Story

Vijay Devarajan, 28, is worried. For the last several weeks, he has been using his weekly off to scout for a suitable place to buy. He visited Adyar, Thiruvanmiyur and Kottivakkam in Chennai. But, no luck. And, not because there is no supply of houses, but because they are well out of his range. A team leader at the Chennai office of Covansys, an it services company, he got a 15 per cent pay hike last year and wanted to use the equated monthly instalment (EMI) instead of the monthly rent to fund his acquisition of a house. Today, however, he is feeling priced out of the market.

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