Since our childhood days our parents, neighbors and friends
programmed our mind in such a way that we are in a firm belief that Real Estate can
never depreciate and an ever appreciating investment.
But this is not true …. Let me tell you a story …..
Suppose ABC is a place where no
business was there, no job was getting generated. But one day one rich person
came to that place and bought the property with 30 lakh Rs. Now what will happen?
The other property owners also will try to sell the land with the same price or
above… The rich guy had black money and paid in cash. After sometime in that
place some business has grown up and people started getting good job and
handsome salary. When these salary people went to land owners/builder to buy,
they get afar high quotation of 50 lakh J
… To fulfill their so called dreams these guys rush to bank and took loan and
bought the house. Like this rat race started one after another joined the race
of house buying …. Making builder and Bank rich J
These people also now started working for two companies one is their day job
company other is for their bank (from where loan was taken and EMI they are
paying)
After some year election came and
a new government came and made curb on black money to some extent .So super
rich people/business man cannot risk their money in property business. And on the
other side the salary guy’s salary did not grow and inflection started going up…
because a inflection is healthy for a developing economy to some extent. Lay
off started in to the salary guys , because low demand or better automated
process. They now cannot pay the EMI L
and other who are in the job fear to risk their money in real estate…. What
Bank did started taking property back from salary guys and started to look for
other second buyers through different option. But bank also find it difficult
to sell because there is almost no buyer or very less buyer. Hence Bank NPA (Non
Performing Asset) reach an all time High. Then RBI also stopped lending money
to banks as there is risk of losing money for Govt.
Now Property price is at all time low … J Good time to invest
for Wise and Value Investors who did not participate in the rat race!
This is not a story guys …. This type of situation is now happening
in all the cities of India. This week I was studying Ambit Report and got shocked
with the figures! The report is bit big but I will highlight the gist here.
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 generalized slowdown in GDP growth, as the sector which
drives 50% of India’s capex and 30% of its jobs conks off. Our four large-cap
SELLs on this real estate correction are Ultratech, Asian Paints, ICICI and HUL
Supply Side
Factors:
(a) RBI data suggests that the banking system seems to have
turned the tap off for property developers over the past year. This has in turn
made developers either stop construction or cut prices.
(b) The NDA has cut subsidies sharply (down 9% in FY16) and
is shifting subsidies to Direct Benefit Transfer. As a result, the ability of
the politician-and-builder to pilfer subsidies to fund real estate construction
has been checked.
(c) The knowledge that there is many years’ worth of unsold
real estate inventory in most of India’s tier-1 and tier-2 cities is causing
investors to hold back further purchases.
Demand Side Factors:
(a) The draconian Black Money Bill went live on 1st July and
has made HNW families reluctant to invest in Real Estate.
(b) The 8% point gap between the gross rental yield and bank
base rate highlights the unattractiveness of real estate for investors.
(c) Key state governments (Maharashtra, West Bengal, Delhi)
have hiked “ready reckoner” rates sharply this year and thus prevented prices
from dropping to a market clearing level.
Investment
implications:
The sectors most impacted are as below:
·
Cement
·
Paints
·
Lenders (Banks , HFC)
How The India Real
Estate Burst is getting Shaped :
Fact 1: Real estate prices rose due to higher
construction sector growth coupled with higher per capita income (PCI)
The Analysis shows that per capita income is decreasing and
Construction GDP is also forced to decrese.
Fact 2: New launches have dropped by 40-80% YoY in Jan-Feb
2015
The analysis clearly indicates the trend YOY basis for
Jan-March.
Fact3: The six-month moving average (MMA) for cement
production dropped to 0% in May 2015
The Govt of India report says the drastically decrease in
cement production.
Fact4: Experts suggest that sluggish demand has led to piling
up of real estate inventory which will take at least 11-14 quarters to clear
The analysis clearly shows how many unsold unit of
properties are there with builders and a real burden for builders J
Fact5: Real estate prices have fallen both in Tier I and Tier
II cities
This clearly shows cities like Bhubaneswar is as equally
beaten as like Bangalore .
Conclusion:
- Real estate inventory is at its peak means unsold properties are all time high.
- Land prices have stagnated/reduced means less buyers .
- Footfalls at property registration offices have fallen sharply (Since less buyers , hence less registration)
- Further price correction is inevitable (We have reach at certain point where builder has to reduce price in order to get rid of unsold properties, no escape. But buyers has to have patience till that time)
What as Investors I
must do?
It looks like the current bear
cycle in real estate has started some time in 2013. Real estate had a good run
between 2004 to 2013. The earlier bear cycle for real estate started in 1996
and lasted till 2003. Assuming this bear cycle lasts for 10 years, we
may expect the real estate to rise again only in the early part of next decade.
Indian
real estate prices have been kept very high and unaffordable for common man due
to black money. During the current bear cycle in real estate, the black money
also would be largely brought under control. If that happens, in my opinion, we
can longer expect mind boggling returns in real estate even in next bull cycle.
Real estate would give around 2% to 3% more than inflation. If inflation is 5%,
we can expect real estate to give 7% to 8%.
The house price to rent ratio should be around
15. If a house cost Rs.1 Crore and the annual rent is Rs.3 lakhs; the price to
rent ratio works out to 33, which is very expensive. Going by the thumb rule,
if this ratio is above 20, then the cost of owning is considered higher than
cost of renting. This means you would be better of paying rent. If the
above ratio is 15, then the rental yield will be 6.7% per annum (example:
Property price is Rs.30 lakhs and annual rental is Rs.2 lakhs). So the ideal
rental yield should not be less than 5%.
The Guys who has already taken long term commitment,
we cannot help them but new buyers be aware …. The Burst has just started ….
Learn to
accept the following returns from asset classes over long run:
- Fixed Deposits: Inflation + 1%
- Gold: Inflation + 1.5%
- Real Estate: Inflation + 3%
- Equity: Inflation + 7%
Disclosure :
My writing has been inspired by Ambit Report and Wise wealth Adviser Analysis.
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