With their back to the wall – Real Estate Developers

If you are one of the numerous buyers who are holding up their negotiations for finalizing property, then you may be in for some disappointment. Let me try to answer some probable questions you may have on the real-estate prices for the few months ahead.

But, before that, here is why the developers would be hard-pressed to drop rates.

Cost of Debt: Almost all realty companies are now reeling under the cost of debt. According to one report in Economic Times yesterday, the country’s top 11 listed real estate companies have a combined net debt of over Rs. 38,500 crores. The cost of debt to these real estate companies, range from 12-15% on an average. The interest rates have been revised 12 times in the last 18 months. With Interest rates again being revised by 25 bps by RBI, cash flow from operations (bookings and installments) might just be insufficient for the builders to cover interest and principal repayments.

Most of the builders have been reducing the outstanding debts in the last few months. However, any expected reductions in the interest payable have been diluted due to increase in the interest rates. Alternative sources of funding through market funding however are limited only to builders with favorable debt: equity ratio – an unlikely situation for most developers. For those who have that, the sailing is still not smooth. For instance, DLF’s net debt has not changed in the last 12 months despite having repaid higher cost debt with QIP. As per Dinesh Gupta, AVP Ansal API, at least 10-15% of their interest outgo was on account of interest rate hike (ET).

At this stage, options with builders are very limited. Sell off inventory through reduction of prices – understandably a double-edged sword and therefore will not find too many takers. The other option is to sell off their non-core assets. For those who have this option, the time-lines are stretchable in terms of disposition and returns. This will prevent any sliding of prices in the short run. Gains if any will be quickly re-absorbed by builders to meet cost over-runs in the ongoing projects, debt-repayments and acquisition of new land-banks or JVs. Very few of the builders today would have the third option of reducing their interest charges by debt repayment through internal accruals -Unitech and Sobha Developers being such exceptions. 

Is there a likelihood that prices will drop down in the following months?

Based on my discussions with a number of developers, both large and small, the prices will remain fairly range-bound with little or negligible bargaining possible.

What about festive season discounts?

Festive discounts are generally open with a small window and limited range of discount. If you are in the market, you might want to explore the possibility of beating the crowd, and talk to the builder ahead of the people lining up outside his office. If the developer’s discount scheme is successful, he is unlikely to accommodate any requests / negotiations for further discounts.  

Seven Tips for investing in Real Estate

While there are numerous tips, seasoned brokers will have for you, I have found these seven to be extremely useful in evaluating properties to be bought.

1. Invest in affordable housing 

• No matter what your budget, you will find that smaller budget properties generally appreciate better than high value trophy houses. Look out for rentable property which will give you a fair return and is resalable. Beware of properties located in far off suburbs with low connectivity that limit the rental value, as well as, resale value.

2. Diversify your pool 

• Do not invest your entire surplus in that one “golden” opportunity. Instead start a small chain of investments, gradually, into a small number of properties as well as property types. This will also allow you to divest as you require rather than getting stuck with a high value property (relatively speaking). Differential appreciation of the properties will make it a lesser risky portfolio to manage.

3. Invest in commercial space 

• Most of us naturally go in for residential properties rather than commercial properties. Apple for apple commercial properties will give you a higher return. Returns on residential properties range from 2.5% to 4% as compared to commercial which ranges from 7% to 9.5%. However, do your home-work well on total costs of ownership and check for ownership details.

4. Invest in parking lots. 

• The mayhem created by vehicles of the owners and their visitors has created a unique opportunity to invest in parking lots. Keep aside a good budget for parking lots. Negotiate hard with the builder or seller for buying extra lots. You can then rent these out for generating a good rate of return (8-10%), besides being highly saleable with good appreciation.Compare that with the rate of returns mentioned above.

5. Location is the most important criterion for selecting a property for investment. 

Invest in properties which are well-located.

• Evaluate Infrastructure surrounding the project –Roads , bottle-necks, one-way access, shopping centers, hospitals, parks, connectivity, Distance from commercial centers and your work.

• If you are an investor, stay away from properties in “future growth areas” read that as "Located in remote areas". Most projects suffer from delays in approval, delays in implementation and cost over-runs which may delay them as much as by 2-4 years. 
• You will need to hard-sell such a property to dispose it and appreciation will be minimal. If at all, you are attracted to these properties, look out for existing socio-economic benefits. A 5-10 year growth story will benefit only someone, coming years later, or, someone who does not need to count his returns till the next few years. My view is that all projections for future economic growth in a location need to be accepted with a large pinch of salt.

6. Invest in old but well-maintained properties.

• Try and buy an old property which is well-maintained located in a good and efficient society. Do it up and sell or lease. Your initial outlay for acquisition could well me much lower, and therefore, returns effectively higher.

7. Invest in properties with amenities 

• Times have changed. Everyone I know and their families like to have a gym , swimming pool and a walking track in the complex they buy. Similarly, in a commercial complex, people look for parking, lobby, centralized air-conditioning, Building Management Systems (BMS), security and back-up generators. Your property value will grow in these properties. So use this yard-stick for comparing the properties.

Regulating the Real Estate Business

Ever wonder why the real-estate market is not regulated in India. Simply put, there's too much money in this sector not to regulate this market. Real-estate directly and indirectly contributes to more than 40% of most wealth sharing.

Yet micro interests dictate the industry to the disadvantage of the vast majority. I do hear voices from mature Developers, Brokers, Regulators asking for some sort of regulation however, no credible regulatory framework has been assigned.

Code of conduct drawn up by wise participants are all shared on superficial basis as a marketing tool. Code of conduct needs to be adopted for fair practices comprising of fair pricing, fair compensation, fair negotiations, fair adjudications and fair justice for all stake-holders.

Are there any real benefits for the industry if this gets regulated or should they fight for self-regulation? To my mind, self-regulation is only possible in an advanced society which is aware and has ways to enforce their rights in a timely manner within a judicial frame-work for timely justice. That kind of brings a Utopian picture to mind. Therefore, in my limited perspective we need to be governed by the law of the land enforced through a Regulator who is well-versed with the issues and has powers to enforce.

The service providers of the Industry, the army of Developers, Brokers, Contractors, workers will benefit from an image make-over brought about by transparency and demonstration of right conduct. This will get easier and cheaper funding from Banks who will be able to trust the industry, better valuations in the stock market for the industry who provide high level of services in a transparent manner.

That said, self regulation will still remain important for Companies and Individuals who value their name and enjoy the trust of their customers thereby bringing more loyalty and referral business.

Let's try that for now. Having a Statutory Regulator is now a question of "when" and not "If".

Take care..until the next time, Anjan

Rising Activity Levels Across Asia Pacific

Hey there, Its been a long time since I delved back into writing. However to set off this season, I am sharing this interesting video on the real estate forecast by JLL. Especially note the prospects for Office space. Therein lies an investment opportunity.

Cheers,