Predicting the commencement of a new phase in the real estate market cycle may be a difficult task, but there are some pointers to the pace of real-estate activity, says Mr Ramesh Nair , Managing Director, Jones Lang LaSalle Meghraj. In an interview with Business Line, he discusses the reasons for decline in real-estate prices in some pockets, private equity funds’ evolving approach to the sector and the entry of foreign developers.
Excerpts from the interview:
What are the indicators of real-estate market peaking?
A real-estate bubble occurs when housing prices take an unhealthy climb instead of rising gradually with the rate of inflation or the rise in median income. Correction also occurs in pockets where property prices have risen without the support of fundamentals such as infrastructure.
If employment rates were to fall due to overall economic slowdown leading to decrease in purchasing power, one would find housing prices immediately softening and eventually dropping. Fortunately this is not the case in most parts of India.
Cycles are common in every industry, not just in real estate. If one looks at volume of sales and performance of the housing finance sector, there has definitely been a slowdown across the country. The number of apartments being sold in the fourth quarter of 2007 is definitely lower than in the corresponding quarter of 2006.
Also, the home loan market, which was growing at over 30 per cent in 2005 and 2006, has logged only 10-15 per cent growth this year. Volume of sales and housing loans are, therefore, two key indicators.
Buyers need to exercise caution and good financial judgment before investing in real estate today. Although the India real-estate story is real, large in size and will pay in the long run, developers need to realise that volumes are inversely related to price; lower the price higher the opportunity.
What are the key reasons for the slowdown in some pockets?
Higher prices and interest rates have been impacting affordability; to a lesser extent, excess supply in a few micro markets, rather than slowdown of economy, are the key reasons. Developers who were selling their entire projects in a few days are now taking months to sell their unsold stock. However, no major drop in prices is expected immediately as the vacancy rate of unsold completed residential real-estate stock is still low.
What are the factors that would enable developers to carry through various market phases?
Understanding what drives the ups and downs of the real-estate cycle can prove valuable to developers. Phases of a real-estate cycle are not consistent in length, making it difficult to predict when a new phase will begin.
Projecting current trends indefinitely into the future is therefore risky. One should view market booms with caution and search for opportunities in downturns. Developers should also resist excess optimism at the top of cycles and instead focus on understanding why the market conditions are changing.
Successful developer strategies that achieve above-market returns over the long run are dependent on understanding the macro and micro market cycles, differentiating end-users from investors, good market timing and a degree of contrarianism.
Overseas funds have been pouring money into the realty market. Have you seen any change in their approach towards investing in the sector?
The sector opened up in February 2005, after the announcement of Press Note 2 by the Cabinet Committee of the Central Government. The last two-and-a-half years have seen nearly 70 PE funds establish operations in India. Most of the funds that have come in are opportunistic in nature. On a lighter note, 2005 was the year of the REITs — Real Estate Investment Tourists — coming to India from all over the world to get a feel of the opportunities!
The year 2006 was one of searching for partners who have access to land. And 2007 has been the year for searching for partners who have good execution skills. Most funds have gone through a learning curve. The initial preference was to look at opportunities wherever it emerged in the country.
Most funds today are focused on specific locations and asset classes. For instance, a number of them are focused on west and south India, investing in technology parks and residential townships. In the future, I think middle class budget housing and warehousing are two segments that may attract interest.
While funding was a welcome move, there are overseas construction players and developers entering the market through joint ventures. What is the impact?
The impact has definitely been positive. With international developers and PE funds entering the market, the local players are getting more organised, professional and corporatised. This would help in increasing quality and timelines will be met. Thanks to the deep pockets of the international players, the scale of projects will also increase. This will not only help create pan- India developers but will also bring about innovative financing and exit strategies. Most importantly, the supply will go up, benefiting end-users — as increased supply can bring down the prices.
From a stock market perspective, players with a pan-India presence appear to be enjoying high premium vis-À-vis the regional players? Do you think the regional players are at a disadvantage?
I would not think so. Being a regional player in a niche market is a positive. Real estate is still predominantly a local game. A local player would know the land pockets, tenants, consumers, brokers and local authorities and rules better.
Moreover, when the market conditions get tough it may not always be prudent to diversify into little known markets. During such phases, it makes sense to focus on one’s core competencies either in terms of specific asset classes (such as residential, commercial or IT parks) or well-acclimatised markets.
But regional developers need to build a strong management team, a high-quality asset base and a long-term differentiation strategy. Many of them just take up deals that are relatively opportunistic.
In future, there would be two critical dimensions of success for such developers. The first is finding good deals… finding those projects, tenants and locations that are going to be economically attractive. The second critical dimension of the business is executing those deals well. These would provide them with a sound competitive strategy against large developers.
Developers here have been comfortable with the ‘sell model’ for long? There is now an increasing change towards projects through lease model as well? What has brought about this change?
Leasing of space by a number of developers is a welcome move. The change has been driven by the needs of the end-users and the increased availability of debt and equity capital. Most developers realised that selling strata title was not the right strategy. Property management and renewals are a nightmare when properties are sold in parts to multiple investors.
The developers also lose control over the tenancy mix. Especially in a mall, one needs to have control over who the tenants are going to be to make it a successful destination. Faster and easier access to debt and equity has brought about this change. Large financial institutions are willing to invest in a whole building, instead of in parts, and securitisation options have helped bring about this change.
No comments:
Post a Comment