Recession Touches Tailspin in Real Estate

Recession Tailspin

A series of initiatives currently underway to bring the real estate sector back on the track have not just pushed the pace of project announcements, price correction and absorption level in the housing sector but also rekindled hopes that realty is staging a strong revival across metropolitan cities and tier II and tier III towns. Reversing the trend, builders in big cities offer 18% discount to clear inventories resulting in an unprecedented increase of 46% in sales in the housing sector. Adding to the momentum, Budget turned the Rs.5 to 20 lakh categories of housing as the most sought after segment injecting renewed interest from new developers, investors, home finance firms and corporate groups currently chalking out pan-India expansion plans indicating that recession has virtually bottomed out of the Indian real estate sector. Reports Jeet Singh.

Stats and Facts

Apart from interest rates cut on home loans, single window clearance, ECB facility and infrastructure status to affordable housing, the Budget proposals like an additional interest benefit of Rs.1 lakh for first-time home buyers and setting up of the urban housing fund worth Rs.2000 crore by NHB gave an added impetus to low cost housing. In their bid to make the most out of the combined market size worth Rs.11 trillion comprising 22 million in low cost housing and five million units demand in the Rs.10 to Rs.25 lakh and the rest in the mid and luxury segments. The Task Force set up by the government on housing requirements in urban areas during the Twelfth Five Year Plan Period (2012-17), concluded that the requirement in urban areas is 18.7 million units, of which 18.5 million are for the economic weaker sections and low-income housing (EWS/LIG) segments. Moreover, the inner view of the NCR realty is that the region has a requirement of 10.2 lakh housing units and Gurgaon leads the pack in demand in residential, office, retail, and hospitality space sectors. While commercial capital Mumbai requires 16.4 lakh sqft residential and 249 lakh sqft office space besides, 6.6 lakh sqft retail by 2013. The Delhi Master Plan 2021 aims at making Delhi a "Global Metropolis" and a world class city propagating PPP model and entrusted DDA with the task of large-scale acquisition and land development with the agency building 65,000 housing units for the urban poor in the next couple of years. In addition, DDA has decided to build five new sub-cities similar to Dwarka and Rohini providing 70 lakh housing units on the outer fringes of Delhi on PPP module.

dsk Sundarban

"Apart from significant buoyancy in construction activities in recent months, the worker strength on sites has also reached new high. The improved sales and customers' enquiries helped players to get back on growth track in the IIIrd and IVth quarter of the last fiscal, which indicates that slump in realty is on its way out," says Managing Director, Unitech, Sanjay Chandra.

On the finance side, housing finance penetration in India increased from 4.5 per cent in March 2004 to 7 per cent in March 2007 but it remained at 7 per cent in past 5 years and the current housing finance penetration level, however, is significantly lower pointing to a significant scope for further growth in the near future. The total housing credit outstanding in India as on March 31, 2012 was over Rs.6,26,100 crore as compared to Rs.5,34,500 crore during the corresponding period in the preceding fiscal, recording growth of about 17%. Affordability has declined for new home buyers on account of rise in property prices; lower income levels; rise in interest rates and high inflation leading to reduction in net disposable income. According to ICRA's assessment, in the 2007-2012 period, property prices appreciated by around 200% in Chennai, Gurgaon and in Mumbai areas like Mahim, Matunga, Lower Parel. In the same period, property prices went up by around 100% in Faridabad, Lucknow, Pune, Bhopal, Kolkata, Mumbai metropolitan city covering areas like Bandra, Cuffe Parade, Andheri, Goregaon in Mumbai. As a result of which there are currently about 83,000 unsold units in the inventory at the end of 2012 in Mumbai alone. The increasing level in inventories, stagnation in absorption level, rise in interest costs and shrinking margins have forced developers to lighten inventory levels by reducing prices to de-leverage their balance-sheets.

Inspite of the global gloomy scenario, Caushman & Wakefield in its recent report has ranked India as the 20th largest real estate market in the world recording an investment volume worth $3.4 billion in the just concluded fiscal

Price Correction

In view of this, builders in big cities have already started bringing down prices to push home sales clearing inventories to start new projects and the move has send cheers among home buyers. Ready instances to quote are that of Mumbai builder Lodha Group, which recently sold its entire inventory of luxury apartments in 10 days by offering an 18% discount to the prevailing market rate. In all 750 homes priced Rs.3.5-6.75 crore sold like hot cakes. Another Mumbai builder, Godrej Properties also sold all its 700 apartments on the day of its launching in Delhi's upcoming real estate hotspot on the Dwarka-Manesar expressway adopting similar strategy. That apart, L&T Realty launched Emerald Isle in Mumbai's lake side in Powai area at Rs.15,500 per sqft, creating a flutter in the area where the market rates are around 17,000 per sqft. Joining the bandwagon is the Nirman Realtors & Developers, which recently launched its project at Malad at a 20% discount for bulk buyers and sold most of its inventory in one go. On the Dwarka-Manesar Expressway Emaar MGF also sold 250 units in its project Gurgaon Greens. In fact, this happens at a time when projects builders around it are still chasing buyers. It is all about finding the right price point, Chairman & Managing Director, CBRE South Asia, Anshuman Magazine, said adding that in Indian cities, real estate prices are much higher than they should be which is why big builders who are taking lead in cities across the country forcing others to readjust and rework their price lines.

Lodha

According to credit rating agency ICRA in its recent report, the softening in home loan rates, attractive finance schemes offered by financers and higher project ticket sizes are all set to push about 19% growth in the home loans market in the current.

Project Announcements

With drastic home loans interest rates cut by the RBI, country's Rs.5 to 20 lakh housing segment has attracted countless new players to cater to the housing shortage in the category. Sheltred Housing, a new company has announced plans to build homes priced at about Rs.15 lakh in eight cities and has already launched its first project on an area spread across 150 acres on the outskirts of Chennai recently. The Pune-based firm has bought about 2,000 acres of land across cities to capitalize on affordable housing development, where it invests in acquiring land in partnership with the local developer. Tata Housing and Janaadhar Constructions, which had initially entered the so-called affordable housing space, traditionally a government-dominated domain, have also announced socres of new projects. LICHFL Urban Development Fund, invested in a Pune residential project so far, is looking to deploy most of its capital of around Rs.500 crore. Apart from this, a large number of developers including Element Capital, Mahindra Lifespace and Home First Finance, Wave Infratech are among others, which are entering into the segment in a big way. House of Hiranandani fixed Delhi-NCR as its next destination to start new residential projects and is looking to develop at least one million sq feet in the Delhi and NCR region. The region is the largest residential market in the country by sheer volume of residential units launched. Currently, Delhi-NCR has more units than the combined tally of the other five metropolitan cities of Mumbai, Chennai, Bangalore, Kolkata and Hyderabad. Builders including DLF, Unitech, MGF EMAAR, Tata Realty, Ansal, Orris Infrastructure, Assotech Ltd, Raheja Developers, CHD already have a strong presence in the NCR market. In fact, the company has segmented its properties in three distinct categories–Signature (luxury housing), Upscale, (mid-segment) and Urbania. With about 450 acres of land bank in various cities its projects in Hyderabad and Mumbai for redevelopment are in advanced stages of approval and the construction works are all set to start very shortly. The country's largest real estate builder DLF aimed at a significant pickup in launches during 2013-14 where in the thrust will be on pan-India residential projects, office and retail launches, too, will add up to make for the realtor's project mix of 12 to 16 million sqft during the coming year. The realtor is eyeing a 20% increase in rentals for leasing office and retail space, to garner Rs.3,000 crore by the end of 2015, from Rs.2,000 crore currently. The company is in the process of starting construction work on its luxury mall project, Emporio, in Delhi and also similar project in Gurgaon.

"In fact, the rise and growth of Mumbai as the luxury capital of India has been by default and emergence of Gurgaon as the destination luxury has been by design. Gurgaon is the first comprehensive planned city that visualized the emergence of lifestyle and luxury living in urban India with new idea of live, work and play something that luxury market could not resist," says spokesperson, DLF Limited, Sanjey Roy.

Hiranandani-Gardens

In addition, "there has been a significant buoyancy in construction activities in recent months and the worker strength at sites has reached an all-time high, Managing Director of Unitech, Sanjay Chandra, said," claiming that his company is focused on ramping up the construction activity in the coming months to clear the backlog. It is heartening that improved sales and customer enquiries are helping listed realty players get back on track and most players have reported growth in net profit in the third quarter ended December 2012, prompting industry watchers to claim that the slowdown in the real estate is on its way out.

New Initiatives

In a recent move the planning body of Delhi is all set to allow houses that are built for the poor and middle-class to go vertical by tripling the floor area ratio (FAR) from 200 to 600 to meet the acute shortage of housing in the national capital. In fact, the urban development ministry has directed DDA to increase the FAR and include the revised figure in the Delhi Master Plan 2021 and hereon DDA can potentially build high-rise apartments, which could reach up to twenty floors. The increase in FAR will first be extended for the economically weaker sections and low income groups and then be extended to housing for more affluent sections, built by both government agencies and private builders. The city currently has a shortage of 0.49 million homes, which could reach 2.4 million by the end of this decade of which close to 90% of the shortage is in the economically weaker section (EWS) and lower income group (LIG) categories.

Emerald-Court

"In view of unprecedented property price spiral in Gurgaon, corporate and businesses are looking for viable options for their realty space requirements and shifting to adjoining areas like Dharuhera, Bawal and Jhajjar thereby turning these areas as emerging real estate investment hubs in Haryana", says CEO, Operations, Jones Lang LaSalle India, Santosh Kumar.

Speeding up the project delivery mechanism the government has decided to set up a single window clearance system as a large number of real estate projects, require clearances from multiple agencies leading to project delays and cost escalation. Making sufficient land available for the housing sector at reasonable rates by using underutilized land assets lying unused with agencies like CPWD, DDA, Railways, Defence, public sector undertakings and other government undertakings, the government is setting up a Land Authority of India (LAI) putting the vacant land in the sale basket. The budgetary concessions would offer a welcome impetus to budget housing, first-time home buyers with current interest rates hovering around 10% for home loans, the entire year's interest at current rates will be eligible for deduction within the extended limit of Rs.2.5 lakh and the move will have a dual impact—impetus to the growth of affordable housing segment and push the employment opportunities in the construction sector to new high.

Realty hotspots

Delhi and its suburban areas in the national capital region are currently the choicest and largest residential market in the country and it is being considered as the second most promising area after Mumbai to invest in residential real estate. Moreover, Noida Extension and Dwarka Expressway are the fourth and fifth most attractive destinations, Knight Frank investment Advisory research report said that prices in Noida Extension are expected to increase to Rs.6,760 per sqfeet by 2017 from the current levels of Rs.3,200 per sqft, giving a return of 111%. Similarly Dwarka Expressway is likely to give a return of 108% over the next five years, from Rs.4,900 per sqfeet at present to Rs.10,200 per sqfeet by 2017.

In totality, the property prices ranging from Rs.3,200 per sqft to Rs.15,000 per sqft and price appreciation in the range of 91-145% in tier I cities residential real estate will emerge as a promising asset class for the next five years. With property prices ranging from Rs.3,200 per sqft to Rs.15,000 per sqft and price appreciation in the range of 91-145 % in tier I cities, residential real estate will emerge as a promising asset class for the next five years. South Delhi is likely to see a price appreciation of 30-40 %, Gurgaon 50-60% in the mid-end segment and 30-40% in the high end segment. Noida, on the other hand, with limited supply in the high-end segment is likely to experience price appreciation of nearly 50-60%. The emerging micro market of Dwarka Expressway will see a price appreciation of nearly 50-60% as it is strategically located in close proximity to Delhi and Gurgaon. The top three investment destinations with price appreciation in excess of 125% per annum, are from Mumbai. But Delhi and NCR is the largest real estate market. The region has seen a launch of 5,18,200 residential units since 2007, of which 3,95,650 residential units have been absorbed. Since 2009, the average residential launch per year has increased two fold to 1,20,000 units in the Delhi NCR. So far,18,649 residential units have been launched along Dwarka Expressway in Gurgaon since 2007.Enhanced connectivity and the proposition of the diplomatic enclave will significantly benefit the Dwarka Expressway, placing it on a high rank on the investment-return radar.

Emerging hubs

With the real estate prices skyrocketing in Gurgaon corporate and businesses are looking for viable options for their realty requirements and surging towards new areas like Dharuhera, Bawal and Jhajjar in Haryana and they have turned to be hot real estate destinations. A case in point is that of the dynamics governing Jhajjar's realty market, where pockets with virtually no economic or commercial activities but players have started buying realty property in the district as many companies are planning to establish their warehousing facilities in this belt. Leading companies are also targeting the region for manufacturing facilities as the Jhajjar Special Economic Zone alone is estimated to result in the creation of around 1.5 million jobs. In addition, the western peripheral expressway and Bahadurgarh have also emerged as the latest hot spots for real estate. Elsewherei n the country, Visakhapatnam with an investment of Rs.58,180 crore, has seen growth through metals and metal processing sectors, followed by petrochemicals. Vadodara in Gujarat also witnessed significant investment of Rs.24,720 crore from similar sectors, including real estate and engineering sectors. The growth in these cities will be led by primary sectors such as metallurgy and power, though services and manufacturing will play a pivotal role in creating a more holistic socio-economic environment in these cities.

Astrum Homes

"As household income in tier II and tier III cities is rising at a rapid pace and customers are looking for facilities and quality of life similar to the metros, the company is going all out to deliver projects not just meeting customers' aspirations but also matching global standards," says Chairman Astrum Homes, Om Choudhry.

Jones Lang LaSelle in its report concluded that as for as the total value of ultra-luxury projects in various stages of construction is concerned NCR has the biggest chunk of Rs.5 crore and above in the country with a 35-40% share, Mumbai has another 20%; Bangalore follows with 15-20%. But developers are betting big on Bangalore as the city has about Rs.6,000 crore such properties currently under construction the demand environment is much more stable in the IT city than elsewhere. In another instance, Propequity, in its finding said that while NCR registered a decline of 42% in residential unit absorption and Mumbai by 34% during January-August this year, Bangalore declined by just 3%. While 60% of the NCR and Mumbai markets is driven by investors and resultant speculation, Bangalore is an end-user market even in the luxury market as the capital values for residential property in Bangalore have increased 25% from mid-2009, not factoring inflation. On the other hand, Cushman & Wakefield in its recent research has shortlisted 10 Indian cities including Ahmedabad, Bhubaneswar, Chandigarh, Coimbatore, Jaipur, Kochi, Indore, Nagpur, Vadodara and Visakhapatnam with huge future business potentials as the volume of investment by various companies in these cities increased by over seven times in the past couple of years. Among them, Ahmedabad attracted nearly 39% of the total investments announced for these cities since 2010, followed by Visakhapatnam at 32% and Vadodara at 13.5%. Ahmedabad saw approximate investment of Rs.71,270 crore, the majority of which is in the automobile and auto components sector followed by telecom and real estate and infrastructure. In addition, the new DMRC corridors, which are currently under construction to cover areas like Greater Noida, Bahadurgarh and Faridabad, will again add to the momentum to the NCR real estate market. Moreover, adding two new industrial corridors and 9 new cities, along the industrial DMIC route like Chennai Bangalore and the Mumbai Bangalore industrial corridors of which work on two smart industrial townships is set to start during fiscal.

estate tennis court

Funding Flow

The real estate sector, which confronted severe cash crunch was stymied due to cascading impact of high cost of domestic borrowings, was extended the facility of external commercial borrowings for low-cost housing projects in the pre-budget policy initiatives. In fact, the financial institutions including banks, state-owned Housing and Urban Development Corporation (HUDCO) announced an interest rate cut of 0.5%, which sees floating interest rates for housing schemes between 8.50% and 8.75% coming down resulting in huge positives. The move not just pushed the pace of project announcements but also rekindled fresh hopes for fund managers to deliver the promised double-digit returns to investors. The National Housing Bank (NHB) has received applications from about half-a-dozen housing finance companies for raising $1.06 billion through External Commercial Borrowings to support low-cost housing projects. The housing ministry has already clarified that once the existing cap of $1 billion is exhausted in 2012-13, the limit would be revised upwards to give further boost to affordable housing.

"In terms of luxury homes, Gurgaon has an added edge over Mumbai, as it is very close to international and domestic airports to entice NRI investors. Moreover, its shiny buildings, malls, MNCs, commercial complexes, golf courses and galloping economy Gurgaon has virtually become an exclusive hub of luxury living," sums up Chief Managing Director, Amrapali Group, Dr Anil Sharma.

That apart, the private equity firms have aggressively forayed in areas where banks fear to trudge as Motilal Oswal Private Equity Advisors Pvt. Ltd currently generating Rs.500 crore to invest in residential projects after the player fully deployed its Rs.165 crore fund in the sector. More than 80% of the deals these days in the real estate space are debt-based and the trend is expected to intensify with banks staying away from fresh exposure. Investors now prefer to either offer pure debt finance or structure deals, combining high-return, high-risk equity with modest assured returns of debt. The Rs.674 crore IIFL real estate fund is offering money by way of debt to the sector, ensuring security by taking land as mortgage and securing development rights. The investments are also flowing into specific special purpose vehicles. As per available stats, NHB has received applications from HFCs, such as HDFC, LIC Housing Finance and Dewan Housing Finance, to raise ECBs worth $800 million and apart from this NHB also plans to generate around $200 million via ECBs. In totality, softening in home loan rates, attractive finance schemes offered by financers and higher project ticket sizes are all set to push about 19 per cent growth in the home loan market in the current fiscal, concluded credit rating agency ICRA in its recent report.

NBMCW May 2013

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