Jt. Managing Director, Capital Markets, Jones Lang LaSalle Meghraj
The last five years in Indian real estate constituted a one-off boom period triggered by the emergence of India as a global investment destination. This is a general phenomenon that every sector goes through before maturity - we can compare it to the Dot.com boom of 2000-2001 or the stock market boom of 2007-2008. The end always comes as a surprise, and can never be accurately predicted.
This is not to say that the good times have come to an end - the real estate industry is one of the basic industries of any economy and will always be an important component. In times ahead, we will see the industry revive and accelerate, though through smaller and shorter cycles. We already know that every industry has a life cycle of explosive growth, stabilization and maturity, followed by moderate growth. Real estate used to be a niche industry in terms of stock market exposure and private equity funding – now, it will emerge a larger, more-organized industry with realistic growth in line with the GDP, and it will represent a better and more sustainable value proposition.
Over the past six months, the real estate industry in India underwent and continues to undergo various changes. Now that the popular myth of India being a decoupled economy is finally broken, we are faced with new challenges that will see the progression of the industry into the next phase of a general industry cycle.
It is historically established that as an industry matures, it gives way to fewer and stronger players who help to bring some sense in the industry. The coming months will see consolidation in an industry that is on a journey towards equilibrium price discovery, resulting in a win-win for both the developer and the end-user. Developers may not get the high margins which they were used to, but they can still make money through higher volumes and a faster cash cycle.
Consolidation will happen at different levels. Primarily, however, we will witness it at the national as well as regional levels - there will be niche-specialized players who are experts in local municipal approval processes, as well as national players who operate with a much larger focus. This consolidation will mark the extinction of the fly-by-the-night operators who had entered the industry and had made it deviate from its fundamentals
GDP growth and exports are slowing down, there is also a pain of rising unemployment. Post Satyam, questions are being raised about corporate governance in India. However, I do believe that India will be able to recover faster than other economies, since its people are inherently savings-oriented, subject to moderate leverage and typified by caution. In comparison to the rest of the world, we are still growing at a fairly fast rate, have the maximum number of people in our collective skilled work force and our financial sector has maintained a cautious approach. We will see the results of this before too long.
The projection of India needing approximately 22 million units still holds true. Therefore, demand still exists, and increasing affordability in housing will help tap this demand. Also, affordability has to transcend the current far-flung locations and kick in at the suburban levels, closer to CBD areas.
Currently, developers must not only complete projects under execution but also re-strategize to sell them quickly. Once they get out of the existing inventory and execution pipeline, they can look at new land parcels and new business ideas such as affordable housing and innovate. While there is certainly demand, it is essential for this strategizing to take place, so that affordable housing schemes become a win-win for both developers and end-users.
HALLMARKS OF THE YEAR AHEAD
1. The advent of affordable housing
2. Increased consolidation, corrected valuations and a focus on delivery to exist
3. Decreased leverage
4. Decreased land banking
5. Increased focus on execution and timely delivery to gain end-user confidence
6. Emphasis on and more focused expansion in Tier-I and Tier-II cities, where demand is already proven
7. Decrease in speculative supply in commercial real estate
8. A better comprehension of the fact that buyers’ and sellers’ interests need to match for the market to exist
9. Players re-examining their valuations to make sound acquisition decisions
10. The return of the fundamental market focus – “An industry survives because of the users, and not vice-versa”.
2009, especially the second half, will bring excellent bargains for investors, as well as to those who have a medium-to-long term view on the industry and the necessary risk appetite. Much will depend on being bang on target in terms of location, product and entry valuation.