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Commentary

Real Estate To Fall Big Time, Says Ambit. The Data Seems To Agree.

A big Ambit report is doing the rounds – they predict that real estate will fall big time.

We are seeing a broad-based real estate pullback, with prices correcting in most tier-1 and tier-2 cities alongside sharp drops in transaction and new launch volumes. The drivers for this slowdown are a mix of supply-side factors (banks have pulled back lending to developers) and demand-side factors (the Black Money Bill has created fear amongst speculators). The result is not just a drop in demand for building materials and challenges for lenders with big mortgage, LAP and housing finance books, but also a generalised slowdown in GDP growth, as the sector which drives 50% of India’s capex and 30% of its jobs conks off.

The drivers, they say:

  • Heavy inventory (Mumbai and Delhi have over 10 quarters of unsold apartments)
  • Property prices are falling in Tier 2 cities as well
  • Foot falls at registration offices have fallen
  • Banks have cut lending to RE esp commercial RE
  • Subsidies have been cut, so pilfering and parking in RE has been curtailed
  • Squeeze on black money through the black money bill
  • Rise in the “guidance value” rates that increase the “white” component of a purchase

Some Good Charts

ICICI has the most exposure to RE:

image

Indiabulls housing has the highest relative LAP (Loan against Property) portfolio:

image India has one of the highest spreads between rental yields and interest rates:

image

Our view:A Fall is on the Cards

We have been noticing a slow down in real estate for around a year now, and it’s looking rough. From our own research (anecdotal, though):

  • Prices in Delhi and Gurgaon are down or falling. Transactions have fallen a lot
  • Bangalore, too, is seeing cooling off. Our recce trips to a few sites show us deserted marketing offices and desperate salesmen.
  • Real estate credit is still a huge part of all new credit lent out by banks, and that percentage has been increasing. A fall will hurt banks a lot:

image

  • Real estate companies are already in the dumps.
  • Cement sales have fallen big time. ACC results showed a drop of over 40% in results and we expect Ultratech results to be bad too.
  • This will hurt companies like the ceramics giants, home loan financiers etc as well.
  • But if there’s a bust it will be a slow train wreck, rather than one mega fall. This is macro, so it’s slow by definition.

More data as we see it!

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  • Bhupesh says:

    Bangalore, projects in which I am interested are not giving significant discount but others are. 😉 Any way, would say that Blr market is function of project’ standing and , builder’ liquidity position, not yet a clean sweep correction. Land prices in the Sarjapur road area where you stay has gone up by 10% min in last one year, while apt prices are stagnant.

  • Vineet says:

    Builders are not cracking yet but resellers are, esp white collar workers who panic at the sight of capital loss.

  • John says:

    Bangalore property prices are not falling at least from the ones like purvankara, shobha etc. I see the heat in chennai but somehow bangalore seems to be an exception… not sure how…

  • kumar says:

    which other industry verticals are going to be affected? the RE guys raised indiscriminate funding, to preserve their margins. Some diamond merchants and jewellery houses have invested huge sums as funding…
    Some PE investors have also bought heavily, and run apartments as rentals. Does blackrock fund you, Deepak?

  • rkg says:

    Malaysia is the place to be 🙂
    Zero difference between return and cost

  • DJ says:

    So, the question is, where will the black money/new investments go to, if real estate is not the place to be. I wonder if we can draw some trends from other countries. China seems to have inflated a stock bubble, but it might be a while away for the same conditions to take hold in India. Maybe Indian e-comm will see the money flow in and we get a tech bubble? Are there any biotech plays as well in Indian market? I wonder what other sectors could see the inflow of black money, as there is plenty of it in India, although, maybe a lot of it is spent outside the country.
    PS: If there is an upcoming e-comm bubble, lets hope CapMind is well positioned for it. 🙂

  • Ranga says:

    This is akin to falling growth in smartphone sales in India.
    There is only so much money with buyers. People cannot keep buying new flats endlessly just because someone shows extrapolated upward graphs in XLS.
    With these items, there cannot be growing sales year after year endlessly.
    Also one possible reason could be : fewer onsite opportunities at the big India IT cos (courtesy that discriminating visa fees & fewer H1B approvals). If 10 guys go abroad, they’ll buy 10 flats. If only 5 guys are sent abroad for double tenure, they’ll buy only 5 flats.
    Builders can start renting out the unsold inventory, certainly there is good demand for rentals.
    Also, this is a high-profit business, price reductions from builder might not happen at all. (if that happens, it will hit current speculative owners, they’ll start selling resulting in more price fall, hitting banks & lenders.). Builders can & will wait even for very long time to sell at their prices.
    As Vineet said above, resellers (esp tax-paying white collar folks) will be hit badly. They’ll also begin to hold longer, unless some dire need to sell.
    In search of quick profits, reputable builders chose to make very big luxury units. More mistake: thousands of such units. Plainly there is not much demand for these.
    Practical sized flats are built by untrustable ones: documents, permits, quality, everything.
    This slow-down will certainly affect future projects, and hence the allied industries will be hit (suppliers, banks etc). Also there will be sudden unemployment in labor force, perhaps resulting in hiked crime rate.
    When people are not buying houses (big ticket), they will indulge in smaller ones (automobiles, entertainment, travel, eating out, making babies, etc).

  • Mehul says:

    IMHO significant reduction in real estate price will only happen when sources of funding to developers will evaporate. Two major sources are parking of cash (investor money) and bank funding (through construction funding and loan to housing buyers). Being from the industry, I can say that investor money has been drying up in a way that investors are not blocking residential flats / shops at pre-const stage at discounted price. This funding mechanism is still not completely dried up but now it is pure debt with high coupon rate. As far as bank funding goes, your post itself shows that proportion of RE funding to overall credit extended by banks is steadily going up.
    Now, of course RE prices are un affordable to market, there is 10-11 quarter unsold inventory and buyers are not showing up. Of course there is liquidity and working capital crunch being faced by developers. However, lets take cognizance of the fact that almost 97% of unsold inventory in Mumbai+Navi Mumbai+Thane is made up of under construction types. These are the projects stuck either because they haven’t got permissions yet or developers have no money to construct further. Customers, investors and banks are stuck with these projects. This under construction inventory has piled up over last 4-6 quarters. But, have we seen any bank taking any action? Taking over projects? Selling them to other interested developers and recovering their dues? Just one or two examples comes to mind. Have we observed tag price coming down? No.
    Builders are not yet duress-ed enough. Banks drag their feet in taking action for reasons we all know. Customers end up paying EMIs without getting possession of their homes. Banks are either greening their loans, transferring them to ARC or private NBFCs are picking them up at higher rates and initial payment moratorium. Developers are not paying anyone and hence not under pressure. Yet.
    I wish I could back this is up with data but well,if there had been recovery procedure initiated by lenders than we would have seen it, right? Either through mass attachments or price drop. (Price drop means drop in quoted ‘tag’ price. Not like you sit with cash on table with stressed developer)

  • Vamsy says:

    With all due respect Deepak, I’m not laughing because I heard this joke before. Just get your mind around the fact that Indian RE is not a free market. Prices will never drop here even if the consumers are nose deep with debt and others had stopped dreaming about owning a house in their lifetime. The best thing they are going to do is one or a combination of the following things (which our RBI and the govt have already done before):
    1) Cut down interest rate (but house prices can NEVER come down. All our masters have high stakes in RE. Do you really think they will bite a bullet and take losses. No way! They will pressure the RBI and the Govt on this and the Media will do its usual role of pushing the agenda that low interest rate will somehow make all the people’s problems disappear)
    2) More inflation will be on cards. As ours is a banana republic, RBI will immediately intervene and purchase Rupees artificially holding the value of Rupee. The media will, as usual, hail the Governor as the savior of the day and no one will remember six months down the line that Rupee had eventually find a new low.
    3) The RBI will allow banks not to publish (or obscure) the kind of NPAs that banks have on their accounts.
    4) The RBI will take ‘unusual steps’ intervening the markets and hand over freshly printed money to the Govt
    4) The Govt. will now take its ‘enormous duty’ of going on a spending spree telling people (with Media singing the praises) that Keynesian is the best medicine for all the troubles
    5) The Rupee will be slaughtered and with it all the hopes and the future of this nation.
    The NDA Govt. at least seems to be honest in their efforts to be reasonable with its policies but they are really not in control you know.

    • While these arguments are good in theory, in practice prices ARE falling, right now. We’ve seen at least three cities now, with drops of 30% (Delhi is the worst). Bangalore and Mumbai in parts too are seeing price drops both in primary and secondary property sales. I have done personal recces to ascertain the issue in BLR and the situation is that not only are builders discounting, there are second sales of under-construction apts that have way lower prices.
      All of this is happeneing right now, and RBI has not printed like mad, the governent has not intervened and the rupee has not been slaughtered. I don’t think there’s a big problem with the rupee – the RBI has a fairly good hand on it, and if crude and gold prices are at this level, there’s nearly no chance of serious damage. But yes, an FII exit will cause jitters.
      The RE problem is not systemic and is unlikely to be. Steel has nearly half the exposure of housing, and it’s a way bigger problem. But RE’s price drops can be huge (we have seen 80% falls in the late 90s) and can impede the sector from picking up – as we see in the report, we could correct another 50% and still be more than fairly valued

      • Vamsy says:

        When I last checked Hyderabad RE (One and half to two months ago), the agent was quoting hefty rates for apartments at Kondapur and Gachibowli. One of the other person I know (one of my cousin so I can take his words as facts) who is in RE admitted that the sales volumes are way below what it used to be, but Builders are not cutting down the price to dispose off their inventory. You can also check magicbricks.com for the confirmation of the situation in Hyd RE.
        Coming to the Rupee – you yourself said that RBI is in tight control of the market which basically means that the true value of the Rupee is not set by the market. RBI has plenty of firepower for the foreseeable future, but what happens if they start draining the reserves? Think from a foreign investor’s perspective : an artificial Rupee at a high value and a stock market close to all time highs and red signals all across the world. What would you sell first if your portfolio contains an entire supermarket of worldwide financial assets?
        I am not trying to criticize you. I really like the information that you put out and I admire your efforts to help common folk like me understand financial jargons. But I admit that I tend to go sentimental (as you can see my strong language) as I still cannot afford a three bedroom flat in Hyd with me being an experienced software engineer working in a fortune 50 company without writing off 20 years of my life to the banks to get a decent flat. It’s kinda frustrating, and scary too, if I think about myself and my family’s future.

    • Nikhil says:

      “house prices can NEVER come down” ?? I have heard this joke before. Have you heard about 1995-2003 RE crash in India? Where prices had dropped in Metros including Mumbai by 50%? Ask seniors if you have not heard about this.
      As for the current scenario, prices HAVE already dropped in NCR, Chennai and few other cities. I live in Mumbai and prices here are steady for past 2 years in Suburbs. But South Mumbai RE is down 10%. And few areas outside Mumbai (Kalyan, Virar etc.) are down by 20-25%. All theses are Ready-to-Move residential units and me or my friends have personally been to sites. So these are tag prices.
      Don’t assume RE as indestructible, almighty asset. Cycles is way of life. And we are currently witnessing down-cycle in RE. Accept it.

    • Vineet says:

      India is not the only country to have corruption, it’s a common mistake that people make. If Zimbabwe can have economic bubbles then so can we.

  • Anand says:

    Deepak, Eye-opening but scary picture indeed. Drop in RE can affect many many sectors (tiles, paints, cement, iron, labour, sanitary fittings, lighting/plumbing hardware etc) and hence our portfolios too..
    I am keen to understand how this affects ordinary folks like me who aspire to buy a small site in Bangalore but would not invest in a flat… Does the slowdown also affect residential sites or is this just an apartment/flat problem?

  • Mehul says:

    Hi Deepak,
    Chart in this post show that lending to Real Estate sector as % of overall advances is steadily increasing, while this report in todays’ Business Standard (Mumbai) (http://www.lintrack.linopiniongh.com/_layouts/ViewArticles_anon.aspx?ID=710881) states that between May-14 to May-15, lending to commercial real estate grew by 7.5% v/s 17.8% same period last year.
    What gives?

  • Mehul says:

    So, if I understand correct, you are saying direct lending to developers (termed as commercial lending) has come down, but retail lending for housing (home loans to end users) is going up. Am I right in understanding so?
    Sorry, it is confusing and need clarity.