A) Current Status
Over the last one year the residential property in National Capital Region (NCR) has seen it all. While prices in Gurgaon-Manesar area saw a 8-10% fall, in Rohini and Kundli there was a 30-35% jump. Prices in major upcoming locations in and around Delhi, such as Dwarka, Faidabad and Noida continue to grow at a steady pace of about 10-15%.
Gurgaon
Between the years 2002 and 2005, prices in this area had seen a 10 fold jump. But in 2006 has seen residential prices coming down from INR 3,500 – 3,600 per sq ft to INR 3,200-3,300 .
Dwarka
Zoomed on the realty radar towards middle 2005, due to completion of the flyover project and metro connectivity. The prices saw a sudden 40-50% jump. The current prices are close to INR 3,500 per sq ft.
Noida
Prices in Noida sectors bordering Delhi are about INR 4,100 per sq ft. against INR 3,700 almost an year back.
Faridabad
In Delhi bordering areas, such as Surajkund, prices has gone upto about INR 2,500 per sq ft from INR 1,800-1,900 in the last one year.
Kundli
Kundli area, on the northern borders of Delhi, which was just about INR 1,200-1300 per square ft in Jan 2006, has grown by 40-50% and now varies between INR 1,900-2,100 per sq ft.
B) Economic indicators
However, IMF has revised its 2006-2007 growth target for India to 8.9% on 20 December.
“India Strategy” report by ABN AMRO Indian economic growth is being driven by a combination of structural changes and cyclical upswing. Cyclical risks may impinge on short term growth but the structural story remains intact. Cyclical risks are emerging and could affect short-term growth and profitability. Of these risks, the rise in interest rates seems to be the most critical. Rising inflation is the other key cyclical risk. While the current bout of inflation was initially driven by conventional supply-side factors, the contribution of demand factors has increased.
Other Risk Include -
a) the possibility of correction in US growth - Moderation in US growth will take a toll on Indian exports. The degree of association between Indian exports and US growth has increased over the years and is fairly significant. A slowdown in exports is bound to hurt overall growth.
b) Rupee appreciation – The Indian rupee should continue to receive support from Robust capital inflows in 2007. Subdued oil prices relative to 2006 should help bring down the current account deficit and reduce the downward pressure on the rupee.
While structural changes is improving fiscal situation, demographic change is manifesting in consumption growth and improvement in productivity. Infrastructure spending is the key growth driver.
c) Other relevant indicators
Hedge funds are aggressive investment vehicles of the wealthy international investors, known for their complex and high-risk trading strategies. They are buying financial instruments that Indian property developers have sold to raise money from overseas markets. And by doing this, they are indirectly controlling a slice of the country’s fiercely growing property market. No one knows how big the slice is, but bankers say close to 50 hedge funds are active in Indian realty papers in the overseas money market. These deals are happening outside the radar of Indian regulators, in offshore tax havens like Mauritius.
It’s not a one-to-one deal; Indian developers don’t sell securities to the hedge funds. They issue shares and hybrid instruments like optionally convertible debentures and preference shares to global real estate funds owned by big banks and Wall Street bond houses. The money that flows in to India is foreign direct investment (FDI), allowed under the automatic route. But in many cases, these foreign investors don’t hold on to the securities. They simply sell them to hedge funds, often within weeks after the FDI deal is done.
The demand for the securities is fuelled by the move by several hedge funds to diversify their portfolio. Stocks have gone up, crude is volatile and metals have hit them badly. Many hedge funds are looking for new assets, and real estate is one.
Realty transparency index for India
Real estate consultants Jones Lang LaSalle is working towards launching an India-specific transparency index by 2008. The index, first of its kind from JLL stable globally, will offer prospective investors and clients a scientific measure of the non-price factors influencing the country’s real estate market.
Both foreign and outstation players are keeping a hawk’s eye on India properties, primarily because of the labour cost, access to labour and real-estate cost.
Unabated rise in home loan rates
During the last two – and – a – half years alone, (floating) rates have increased from 7.5% to 11.75%, forcing the EMI for 20 year loan to go up by around 35%. With interest rates gradually crawling higher, players are worried that demand for property could be hit. Fears that property prices could be headed for a meaningful correction seem to be prompting investors in stocks of real estate companies to jump ship. Most realty stocks, which until a couple of months ago were being chased by enthusiastic investors, have shed 10-25% over the past one month.
Stocks of real estate majors like Mahindra Gesco, DS Kulkarni, Ansal Buildwell and Parsvanath Builders and Peninsula Land have been languishing over the past one month.
Shares of Mahindra Gesco, which closed at Rs 852.65 on January 8, have slid to Rs 645.35 on February 9, down 24%. DS Kulkarni Developers has come down from Rs 387.05 to Rs 304.10 during the considered period, down 20%. Parsvanath Developers slid from Rs 440.25 to Rs 339.20 during the period, down 23%. Peninsula Land, Ansal Buildwell and Sobha Developers have also fallen by around 23%, 22% and 17%, respectively over the past one month. Short-term investors should be careful about sudden dips in stock prices. At current levels, investors, with a long-term view, can start accumulating stocks of companies with good fundamentals. Those who are currently holding realty stocks need not panic; prices will start moving up steadily once the industry factors in raised interest rates and people start booking spaces all over again.
Over the past three years, the housing sector has witnessed a CAGR of 60% to 65% on factors like easy lending rates and accumulated land bank (land purchased at low prices prior to the real estate boom). Hike in lending rates and peaking real estate prices could force the sector towards a slowdown.
Being demand-driven, the realty sector still appears to hold promise with several housing and infrastructure projects coming up at various parts of the country. Interest rates on home loans may rise, but this will not change the fact that people need homes. It will only result in people buying homes in less-preferred locations. This will, in turn, force builders to move away from metros to two-tier and three-tier cities. This trend will automatically negate the concentration of price in a vantage spot.
The rising interest rate scenario coupled with the rising property prices will affect the off take; however, the impact is not likely to be significant. Merrill Lynch has forecasted that the Indian realty sector will grow 7.5 times from 2005 to 2015.
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