Realty Corner with Deepak Varghese - 2014 marks the beginning of value-based buying
The year 2013 is one the realty sector would like forget as being the worst year in a decade. But the December quarter seems to be indicating green shoots for those developers that are in the mid market segment with end users making purchases.Developers have wooed purchasers with waivers on registration costs and stamp duty besides giving them free fitted kitchens and home furnishings, instead of discounts on the sticker prices. And, in the Rs 4 million to Rs 9 million segment, the strategy seems to have worked. Most of the home loan institutions have also shown steady state disbursals in the last quarter, confirming that end users are buying while investors are staying away.Nationally, the last two quarters have seen probably the highest number of launches of new projects, with Bangalore and Pune with the highest number of new home bookings - both markets known to be dominant end user markets with IT sector employees. The process of getting development approvals seems to have settled in the Mumbai Metro region as this city has finally started seeing new launches at prices that are beginning to look reasonable. That being said, home sales in the National Capital Region (NCR) still remains to be a challenge with an oversupply situation and investors continuing to offload their holding at a discount.While developers have seen a positive movement on the sales side, the issue of liquidity remains and the cost of funds for Category B developers range from 16 per cent to 19 per cent. NCD issues targeted at HNI investors have dried up after the defaults of late 2012 and early 2013. The structures that seem to be operating now are straight forward sale and buy back transactions where investors pay only half the valued price of the apartment and have an option to convert it into a registered sale for the paid value in case the developer does not pay on due date.Given that exits have been challenging for private equity players, investments have been only in A grade developers and developments with Bangalore, Pune and Chennai seeing an average of Rs 3,000-4,000 million of deployment per city, excluding one-off transactions. The largest stand-alone transaction has been the $150-million transaction executed jointly by Blackstone and Embassy group.Prudential Mutual Fund, Piramals-controlled India REIT Fund and Reliance Fund have had successful in raising funds from retail and HNI investors in the last quarter and given the high cost of debt, they are staring at interesting opportunities where their returns will be PE like but in structures that are fundamentally collateralised debt.Emerging trends seem to point towards integrated 100 acre+ townships in Bangalore, Pune and Chennai. These townships have commercial, residential, retail, hospital and hospitality integrated in them. Walk to work being the mantra given that commutes in these cities are by road, made unpredictable due to traffic jams.With Hyderabad realty prices looking to be one of the cheapest nationally besides having comparably much better infrastructure, Novartis and Cognizant have purchased more than a million square for their own use. Market rumours say that other large corporates too are scouting.Maybe favourable economics might be the binding factor for the simmering Telangana issue.
Deepak Sam Varghese, the founder-director of Moonbeam Advisory, is a regular columnist for India Inc on property related matters. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalore based, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros faces The above article was published in India Inc′s print edition of the India Investment Journal launched in April 2014 in conjunction with the Global Wealth Management Conclave 2014.