The Indian real estate market continues to evolve from being an unregulated and fragmented segment of the economy to a much more focused, growing and regulated segment.
Indraneel Karlekar is a senior vice-president and head of global research & strategy with ING Clarion Real Estate Securities. His eight years of experience as a strategist covering the Asia-Pacific region for the Economist Intelligence Unit and then as AIG Global Real Estate's head of research & strategy gives him a firm grip on the pulse of the global real estate scenario.
As an Indian, he has the added and distinct advantage of offering a unique perspective on the fund to Indian investors. ET Investors's Guide caught up with Mr Karlekar to discuss his views on the Indian real estate market. Here are excerpts from the interview:
How do you view the Indian real estate sector? Where is the industry right now, how has it grown and what lies ahead?
The Indian real estate market continues to evolve from being an unregulated and fragmented segment of the economy to a much more focused, growing and regulated segment. The past few years have seen consolidation within the industry, more strategic holding patterns, improved transparency and of course, in terms of monetisation, there has been a significant increase in the value of Indian real estate over the past four or five years.
There are a number of reasons for this price appreciation, not least of which is the realisation that India's structural reforms have finally entered a phase that will drive economic growth to 8-9%. Moreover, there is tremendous shortage of quality real estate, commercial as well as residential. As a result, the fundamentals of this market will be very strong going forward, both in the short and long term.
But asset classes go through a boom-bust cycle or a correction cycle, so I won't be surprised if the Indian real estate market cools off a bit in select sectors over the next 3-5 years as investors and developers take breath and stock of their investments.
Do you agree with the statement: “The property boom is a bubble”? Is this the right time to buy a house?
The key to this question is the purpose behind the purchase i.e. is the purchase for end use or for investment? If it's for investment, the domestic economy and local demand-supply factors should determine whether you should buy a house or not, fundamentally. On the other hand, if you're looking for a long-term purchase for end consumption, then there's no perfect time to enter the market. You need to figure out your comfort level in terms of affordability and whether you can live with the price valuation changes in the property or not.
End users complain that prices are too high and developers are not willing to reduce prices. On the other hand, developers complain that the regulatory norms are too stringent. How can this blame-game cycle stop?
Consumers will always complain that prices are too high. To some extent, this has to do with supply-demand mismatch, as well as the Indian regulatory set-up, which can be a little challenging. However, this also suggests that the supply shock (from new developments) that the Indian system can potentially expect will be smaller, because you wouldn't have the same volume of property hitting the Indian market as say, in China, where the regulatory regime is a bit friendly towards the developer and real estate investors.
Part of the supply shortage is also because of the scarcity of skilled labour and escalating cost of construction material. As supply starts ramping up, the supply constraint will be solved. Right now, it is a short-term issue which should be resolved soon. The market will find its own equilibrium over a period of time.
Where are prices headed?
Prices vary from city to city, India is too large a country to generalise. Price correction or price over valuation is a localised issue. The beauty of real estate is that the situation in Ahmedabad will not be the same as Bangalore or Delhi. Prices are excessively high in Mumbai, but the same may not hold true for Ahmedabad. So, this issue is very location-specific.
Even if prices have gone down, so far, evidence suggests that this has been marginal. I don't think prices will go down drastically, because there is so much demand. Statistics say there is a shortage of 20 million residential units, so it is hard to say there will be a dramatic decline in prices. The other way to look at this question is that local factors will ultimately be the criteria for valuing real estate.
How do you see the Indian interest rate regime, going ahead?
This depends on the Reserve Bank of India's (RBI) view on domestic inflation, as well as the increasing strength of the rupee versus the dollar. A relatively higher interest rate regime will obviously attract high inflows into the rupee and I am not sure whether the RBI wants to further push the already appreciating rupee. So, we can see a bout of easing in interest rates in the next 10-12 months to gently remove some support from the rupee and also because inflation is still pretty low at 3-3.5%.
How can one keep up with the volatility in the domestic real estate market?
The Indian real estate market is going through some growing pains, a lot of sentiment and emotion is driving the market, which has resulted in volatile prices in the real estate securities market. Many listed real estate companies continue to see a lot of investor interest, which is making them highly volatile.
Having said that, there is a whole world outside India. Indians love property, so they should also look at the global market to mitigate their risks. Global real estate mutual funds, which have a diversified portfolio, may be the best option to tackle high volatility and give investors exposure to real estate as an asset class.
How are the dynamics of the Indian real estate market different from that of international markets?
The Indian real estate market is largely a development market at the moment. Perhaps there are some similarities with China, since both countries follow the land bank model. This is a big part of the story for both these economies. Here, it's important to understand the monetary value of the land and determine the execution strategies if real estate companies want to derive value from that land.
One should also know how much cash flow the entity will ultimately generate. In the Indian case, the story is more of development. In other developed markets, the model is to hold properties for cash flows which, in many countries, is facilitated by the REIT (real estate investment trust) structure.
A lot of private equity (PE) money is flowing into India, but China is way ahead of us. What is so different in China?
China is a land of tremendous opportunities, like India. It has undergone a structural change similar to the Indian economy, but the Chinese real estate market had a head-start compared to India. PE funds have been investing in China for over 10 years now.
China will remain a high growth market. India is becoming a real estate high growth market, which is why we see such intense interest from PE funds. The Indian market is expected to see the same transformation as China. In the short term, the market will be very competitive and many PE funds will find it hard to conduct deals. The money has been raised, but for many of these funds, deploying it will be a challenge in the short term.
As an investor, should I put my money in Chinese or Indian real estate?
Both markets have different advantages and disadvantages. If I have a short-term outlook, of say 12 months or so, I would probably marginally prefer China at this point of time, since the earnings outlook is more visible, which gives me comfort. There are a number of high-growth companies in the Chinese market.
Moreover, that market is bigger and more liquid than India, where the option is restricted to only 5-6 companies. On the other hand, from a long-term perspective, the Indian market is likely to provide competitive returns, especially since the long-term benefits of economic reforms are beginning to be felt and India is catching up with China.
How should one differentiate between two real estate companies?
Execution is the key parameter. Given the large number of promises made by developers, one should look at early signs of delivery.
Which companies in China and India have given maximum returns?
Among Chinese companies, Guangzhou R&F Properties and Agile Property Holdings have delivered over 100% returns year to date. In India, Unitech and DLF have delivered over 60-70% returns for this year. Besides these two countries, Singapore and Japan are also very strong markets.
Source: Economic Times
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