Intro: Real
Estate has been the most desired asset of poor’s and the dearest asset of
wealthy. There were several reasons for its spectacular performance as an asset
class, like opening of Indian economy two decades ago took out many from below
the poverty lines, newly created jobs provided a descent income for the
educated class, towns got bigger, consumption patterns and lifestyle changed,
aspirations only got bigger. That was the period during 2000 to 2008.
a. Healthier growth (2000 to 2008): Economic
growth of the last decade led to a steep rise in demand for housing, and land requirement for infra
projects. Real estate prices soared overnight but the valuations were
justified. There were lenders lined up for all these projects which were
expected to produce superior returns. Real Estate, construction and
infrastructure industry created the new billionaires. (But many are off the
list already). There were real estate brokers on every street helping the buyers and sellers conclude deals in a hurry. Govt.
registrar offices got a new lease of life with ever increasing transactions.
Banks thrived. Any new housing project would be sold off in a few hours. All rich and
poor thought they would miss the bus if they did not do something in this
space.
b. Liquidity
& fight against inflation (2008-2012): Along with growth, inflation too
made its mark. Crisis in 2008 after the fallout of Lehman and the subsequent impact
to housing sector in US led to a slow down in global growth rates affecting
India’s own growth story. Many other financial issues suppressed until then
began to surface. A term ‘PIIGS’ started doing rounds on the newspapers and TV
channels. Central banks, Fed and ECB, took the route of easy monetary policy attempting
to revive growth or at least avoid the possibility of a break down in the
financial system. This led to a stubborn inflation during the times of a
slowing growth. Gold and Real Estate became instruments to lock the wealth for
those who prospered and who were already rich. A portion of the easy money
flowed into commodities and also to emerging countries. This higher liquidity
helped to maintain the real estate prices high.
Forming a top:
So what changed by the end of 2013? It is the reducing optimism
and the belief in India’s growth story. 5% growth rate had become the new norm.
Banks had to lick their wounds inflicted by Infra sector in the form of
non-performing assets. US Fed announced tapering of QE3. Credit growth became
tight with the measures taken by RBI. And the appetite in the house buyers
reduced significantly. Small builders who could not hold on had to sell to
bigger developers. This made the real estate prices stop from reaching new
highs or at least it appeared so. Gold, another asset we are looking in tandem appears to
be in correction zone.
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| Reducing new loans. Source: HDFC Sep'13 Quarterly results. |
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| Declining sales trend at Unitech. Source: Unitech Q2'13-14 results |
Has everything turned bad?
No and cannot be. The fall in Rupee had made the property in
India cheaper by 20% for the Non-resident Indians. Those NRIs who earlier
thought they missed the bus had an opportunity to board it again. And there
were many new projects being launched to cater to this market segment.
What are the warning signals for the sector?
i.
RBI in its latest 'Financial Stability Report’
warned that, in the event of a credit risk due to failure of a major corporate,
banks would fall out and the contagion would spread leading to a major collapse
in the financial system. It identifies infra and construction sectors as being
most risky and public sector banks being more vulnerable to this. If Govt. rescues
these public sector banks it owns partially, it would avoid the collapse of but
profitability of these banks would be gone. While this may or may not happen, this
would limit the funds flowing into the reality and infra sector.
ii.
Liquidity would reduce as Fed increases the pace
of its QE3 program. This would mean the end of easy and cheap money and markets will witness those funds
leaving India back to their home country. This would make the cash king again
at the expense of gold and real estate prices.
iii.
Drop in demand to due to slower economic expansion,
fewer jobs being created than earlier decade, salaries not rising like in the
last decade will impact the demand. A slump in new car market during last year proves
that purchasing power of consumers has taken a hit.
iv.
Many (well most) real estate companies are
running in losses, their stock prices are trading at multi-year lows and they
are struggling to raise funds for their new projects. They may not be in a
position to hold on the rising inventory for long if demand does not come back.
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| An analysis by Liases Foras shows correction is due. Source: Liases Foras company website |
Conclusion:
While it is difficult to say whether there will
be a correction or not, which depends on how long the co-operation or nexus of banks
and developers last, one can be sure that this industry is in troubled times. If it
is a bubble already, it may not get any bigger this year.
