[JUSTIFY]Looking Back on 2013:
Looking back on the year that has gone past, a bear market is looming large. A number of factors which were negative for the real estate market occurred in 2013 which have resulted in a slowdown. Some of these factors were:
1. Saturation of the real estate market, as a result of the real estate bull market of 2011 and 2012, during which time a majority of people in steady jobs booked a flat.
2. Poor job market in 2013 with lesser growth in the economy did not add enough people with steady and well paying jobs and hence they were unable to participate in the real estate market
3. Too many new project launches in 2010-2011, which were still under construction in 2013, left little space for new launches
4. Inventory overhang in most of the cities, especially Delhi/NCR, Mumbai and Bangalore, putting a halt on price appreciation.
5. Inflation in iron, cement and labour prices pushed up cost of construction
6. Increased environmental regulation for developments in green or forest areas, usage of ground water for construction and sand for raw material also amplified the cost inflation for developers.
7. Escalation in cost of land for developers due to acquisition issues and the land acquisition bill being passed in parliament
8. Cost of capital markedly increased for builders due to central bank tightening of bank lending rates, increased provisioning requirements for non performing loans by public sector as well as private sector banks and rise in risk premium for real estate loans both due to RBI action as well as defaults and stress in repayment of existing real estate loans
9. Non performing loans of real estate developers like Unitech, Orbit etc caused a crisis of confidence in real estate developers, increasing cost of funds and liquidity issues.
10. HNI and foreign investment in private equity as well as private debt placement of real estate projects stopped coming in from 2013, anticipating as well as precipitating a poor financial performance by real estate companies
So a double whammy of reduction in demand due to saturation as well as increase in cost of construction amplified the real estate slowdown.
A very large number of projects were launched in NOIDA region – in NOIDA main, NOIDA - Greater NOIDA Expressway, Greater NOIDA West (or NOIDA Extension) and Yamuna Expressway from 2010 onwards. An estimated 70% of fresh inventory launched in NCR over 2010-2012 amounting to 350,000 of a total of about 500,000 units were in these regions of NOIDA. Easy terms of lease rent for government acquired land which was payable over 10 year extended period of payment made entry cost cheap and caused a massive bull market. Most of the launches were in the middle income segment and were booked by working middle class in large numbers
Gurgaon region (Golf Course Extension Road, Dwarka Expressway, Southern Peripheral Road and along NH8 as well as Pataudi Road) of the NCR saw the second largest launches of over 100,000 flats during the same period. Most of these were in the higher price per square feet ranges sitting squarely in the premium or luxury property segment. Majority of these were booked by investors or higher income category.
The remainder of the 50,000 units launched in NCR during the same period were in Raj Nagar Extension, Gobindpuram, NH24, Kundli, Faridabad and in main Delhi where DDA flats and a few projects like DLF Capital Greens were launched, after which a large number of builder floors were also made on plotted developments.
In Bangalore, the Whitefield and Hebbal regions saw maximum number of new launches because of their easier connectivity to main city and airport. Because of good price performance, projects distributed throughout the city were also launched. The region around the airport was preferred by villa and second property investors. After the marked slowdown of 2008 which lasted for over 2 years, there was heightened interest in middle and upper middle income flat buyers causing a bull phase over 2012-2013.
In Mumbai, the suburban regions like Thane and New Bombay, especially near the proposed airport saw a large number of projects being launched while the main city was largely quiet from 2010 to 2013. Instead, in Maharashtra, Pune witnessed a bull market in flat prices during this period.
A number of factors caused projects all over India, launched during this period of 2010-2012 to shoot up in prices by 100 to 200% depending on the location and the segment. High demand from investors was the main factor – the retail investor of India moved away from equity and shifted wholesale into real estate with the perception of wonderful returns with high margin of safety. Most of these were middle class investors, many of whom already owned property and were enamoured of the returns seen in the 6-7 years prior to 2010. Since Indians have a traditional preference for property investment, this movement away from equity and mutual funds resulted in an exaggerated boom and pushed up prices to levels where they became unaffordable for most of the middle class wage earners.
The unaffordability factor was largely responsible for the slowdown of 2013. Combined with an industrial recession, slow job creation and inflation in prices of essentials and fuel, there was reduced investor appetite. Projects slated for completion in 2012 were not delivered and this caused end users to halt purchases of unfinished flats at unaffordable prices, since there was no certainty of timely completion. As 2013 drew to a close, there were still no deliveries in the NCR. Bangalore and Mumbai region had a better record of deliveries, but the increased inventory depressed price performance.
All of these events in the real estate market were captured in real time on IREF. Each of the factors discussed above was discussed in great detail. Especially, the impact of supply overhang, density factor in NOIDA, sand usage issues, ground water related issues, and macroeconomic issues like interest rates set by RBI, home loan rates and project specific price movements as well as project construction updates with pictures were posted by IREF members based on their personal knowledge, deals and actual site visits where members captured and uploaded their own pictures.
The last few months of 2013 has seen a slight reduction of online users on IREF – largely because the brokers and investors stayed away due to the slowdown. Instead, a new breed of end users who are less active in real estate dealing but interested in solving problems related to real estate investment has started frequenting IREF. These IREF members interact on project specific problems related to customer service, delays in construction, development of roads and other infrastructure, posting details of shops which have opened in a particular region etc.
Discussions on IREF are of great help to investors trying to analyse a specific project for buying a flat. Moreover, IREF provides a great platform for communication between buyers in a project for each of which a separate thread is present. Pictures based on personal site visits speak louder than words and are seen in abundance on IREF threads.
Moderator activity dramatically increased on IREF over 2013, with a main focus against spamming by sellers and breaking up off topic conversations and personal attacks. As a result, despite the marked increase in online activity, IREF continues to remain a well ordered community which dispassionately discusses the merits and demerits of both real estate in general as well as project specific information.
The most spectacular of these end user activities were the demonstrations and protests carried out by DLF New Town Heights customers. Reported by national media, the buyers used IREF in addition to their own internet groups for gathering members and disseminating information to a wider audience. Similar associations were also formed by buyers of other builders like 3C Greenopolis, 3C Lotus Boulevard and Ramprastha. The threads detailing activities of such associations are listed below:
http://www.indianrealestateforum.com...aon-19138.html
http://www.indianrealestateforum.com...aon-21138.html
http://www.indianrealestateforum.com...ard-71241.html
http://www.indianrealestateforum.com...cwa-69024.html
Off topic discussions on politics, seen in a few threads, captured the essence of political activity in the country. The success of Aam Aadmi Party was anticipated by an IREF poll about 5 months prior to the actual events and the submitted comments in the thread gave a cross section of the common perceptions which are being carried by the media only now.
http://www.indianrealestateforum.com...ote-64830.html
In this way, IREF continues to remain relevant for people in managing their property investment. More importantly, IREF plays a role in early detection of changing trends. The real estate slowdown of 2013 was anticipated early by the expert commentators of IREF. Similarly, the real estate market is bound to become attractive once again – and in all likelihood this will be well anticipated on IREF discussion threads which is likely to prove very profitable.
2014 - The Year Ahead
(Indian Real Estate Scene in the first quarter of 2014)
The consensus of opinion on IREF is that the slowdown of 2013 will continue well into 2014. All the factors which caused the bear market of 2013 are even more active in 2014. Until the economy turns around, the industrial recession gets over, the job market recovers and inflation is controlled, the bear market will continue.
NCR market:The main Delhi market dominated by builder floors has seen actual reduction in prices from the peak by upto 30% in some areas. Dwarka which is one of the large micromarkets within Delhi dominated by apartments has also seen reduction in prices. Now that the correction is over, 2014 is likely to see stagnant prices.
In Gurgaon, the resale market in under-construction flats has almost died out completely, because of poor delivery record by real estate companies. Dwarka Expressway is the region with the maximal stagnation and absence of deals since the road infrastructure is yet to be completed.
Prices in completed complexes and ready to move (RTM) flats in Gurgaon, especially in Sohna Road are stagnant with few takers at such high prices. There are no price drops since the investors are holding at current prices and are likely to continue to do so in 2014 as well. Further price escalation in this category is unlikely in 2014 although price drops are also not on the cards. Much of the inventory of ready to occupy flats is already in the hands of the end users or long term investors.
Prices of under-construction (UC) flats in Gurgaon on the other hand are likely to correct in 2014. In 2013, deals died out, but the prices were stagnant. In 2014, the prolonged stagnation, demand for payment from builders and no visibility of further price appreciation is likely to see liquidation of holdings by investors ready to book the remaining profit and limit outgo as constructions complete. This is therefore an opportunity for end users to strike good deals. The maximal such deals are likely before the central and Haryana assembly elections which are about 5 months and one year away respectively. Potential completion premium, usually estimated at 30% is likely to reduce to a much smaller number of around 5 to 10% and thus the benefits of holding on to the flats has reduced for investors. This is likely to result in dropping resale rates of under-construction property. The reduced completion premium will be more marked in Dwarka Expressway since the road and other infrastructure is lacking and hence end users will not wish to move into suboptimal living conditions. In contrast Golf Course Extension Road might maintain premium due to better surroundings and living conditions.
Plot market is stagnant in Gurgaon in central and peripheral locations and this is likely to continue in 2014, making it unattractive for short term investors. Because of inventory overhand in apartment segment and escalating construction costs as well as changing trends of end user preference, very few people are constructing builder floors in Gurgaon.
NOIDA: A similar stagnation of prices to Gurgaon is likely to be seen in NOIDA and Greater NOIDA West, but to a lesser extent since NOIDA has more middle income apartments rather than luxury apartments and hence downside is limited. Since almost all builders have drastically slowed on delivery, and because middle class end users are ready to occupy flats even without infrastructure due to affordability factor, a potentially larger completion premium of 20-30% is likely in NOIDA, quite the reverse to Gurgaon where completion premium is likely to reduce, since most of the property is in the luxury sector. Thus majority of NOIDA investors are likely to hold through for long term and a stagnation in prices is likely throughout 2014 without the anticipated price falls of Gurgaon.
More peripheral locations in the region like Yamuna Expressway, Greater NOIDA main, Kundli and Faridabad are unlikely to see much activity in 2014. Prices are likely to fall in these regions, but more dramatic will be the absence of resale activity as end users stay away.
Mumbai: Stagnation in main city is expected. Suburban locations are likely to see reasonable price performance linked to Indian economy coming out of recession. Stagnation in the 5000-10000 psf price range and better performance in the 3500-5000 psf price range is likely.
Bangalore: Saturation of the Bangalore market in the last two years will lead to stagnant prices but slow and steady off take by end users on the back of numerous launches seen in 2013.
Chennai:If industrial revival takes place in latter half of 2014, then Chennai might see a good number of launches in the affordable housing segment in the periphery. As the infrastructure projects slowly get completed, a better real estate market with new launches as well as redevelopment in plotted segment is possible.
Investing in Property in 2014:
In view of the slowdown, property is a poor sector for investment. Long term investors looking to buy property for post retirement self use or for holding periods of over 10 years can enter in select locations, cities and segments and look for bargains. The threads on “distress sale in depressed market” on IREF, located in multiple cities, might be a good place to start for this purpose.
Certain general rules for real estate investment in a slowdown can be kept in mind.
1. In a bear market, one should select property in prime locations and not in peripheral locations, since prime locations will be the first to reverse price direction and will give the most sustained returns once the bull market returns
2. In a bear market, one should invest for the long term. For property, a time frame of 15 years or more is ideal.
3. Short term flipping for quick gains on leverage should not be attempted in bear markets. This technique is reserved for bull markets.
4. The most depressed prices in distress sales will be in luxury property and in plots. These will rise the most when the market turns. Deep pocketed investors with the ability to pick up the distress sale and holding through the uncertainties of the bear market will reap the maximal rewards. Deep pockets and lack of leverage will amplify returns in bear markets – thus bear markets make the rich even richer because they alone can afford to buy and hold. This is in contrast to bull markets where short term holding and leverage amplifies returns and risk takers benefit rather than long term holders.
5. The safest investment for middle class investors in a bear market is already built ready to register flats in the affordable segment in the main central areas of the city with existing infrastructure
Luxury property as a whole is better avoided for the year 2014. This is because prices are already high and it is better to wait for lower prices and for bargains to emerge. As the luxury flats booked by investors slowly get completed, investors will be ready to negotiate with bargain hunters.
Plots are also avoidable because of the existing high prices and the lack of performance in plots in the central areas of Gurgaon even during the bull market of 2010-2012. The higher prices for construction of builder floors on plots has made them expensive and out of reach for many. Buyers are also preferring to live in apartment complexes due to better security and amenities. As such, a changing preference of people over time makes it difficult to extrapolate previous price behavior of plots in the past 50 years. Waiting for better bargains but also actively looking for bargains would be prudent for property investors.
Property in the affordable range of 2500 to 5000 psf range will be the best segment for entry, for both end users and investors, due to limited downside.
The main requirement for a boom in property market is a recovery from the current industrial recession. Until the industrial revival generates more well paying jobs, the real estate market cannot revive. The industrial revival is likely to happen in the next 2 years based on cyclical factors, however the strength of the industrial revival is crucially dependent on the general elections of 2014. A strong decisive pro-industry government will cause a dramatic improvement in the industrial climate and a sustained stock market performance followed by an equally sustained real estate market performance will follow. A fractured mandate will cause a weak revival but consequent turbulence in exchange rates can have unpredictable results on real estate price inflation. High imported inflation, escalation of raw material prices, escalation of capital cost etc can have paradoxical results in the real estate market by making the cost of new construction prohibitive. Existing property which is registered may therefore become more valuable while under construction projects might be abandoned.
The prudent real estate investment is therefore to buy only ready to move ready to register flats in the affordable range in central locations and having good infrastructure – or to wait for the general elections and perhaps the Haryana elections also to get over before making any fresh commitments into property market.
As with equity, the best option is to wait for the general elections to get over.
The best locations for investments in 2014 are:
1. Chennai
2. Bangalore
3. Dwarka in Delhi/NCR
4. RTM property in Thane and other similar locations in Mumbai
The locations to avoid for 2014 are:
1. Dwarka Expressway, Yamuna Expressway, Kundli, Faridabad for location
2. Under-construction property in NOIDA, Gurgaon, Mumbai suburbs, Pune – in all of these locations prefer property which is ready to move and register
3. Plot investments in all locations
4. Land in tier 2 and tier 3 cities – prefer ready to move built up property only
Despite property being in a bear market, it is a good hedge against Rupee depreciation in the long run and hence every person should have some exposure to property. Buying small ready to move in flat (I BHK or smaller if salary is inadequate) based on a small portion (<20%) of salary going towards EMI would always be a prudent investment and for such investment, question of timing does not arise and buying can be done at any time.
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General Predictions for 2014: Click here