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Real Estate Details

Prices in the residential segment will take time to recover: Puja Gupta

Puneet Wadhwa / New Delhi 07 Oct 14 | 01:26 PM

Puja Gupta, Director – India, talks to Puneet Wadhwa on the current trends and outlook for the real estate sector in India. Edited excerpts:

How have the Indian cities (major metros) performed in terms of capital value appreciation and rental yields over the past 12 – 18 months?

The last 12-18 months have been considered as a low period for real estate market in India. Of course, there are certain pockets that are close to high-concentration and high-paying employment areas where capital value has appreciated even in the last 12-18 months. Typically, a 6% rental yield (defined as “rental amount received/avg. capital value during the rental period") is considered as a good yield in the residential real estate market. Rental yields have remained stable in the last 12-18 months.

A typical real estate cycle is considered to be of seven years – from peak to trough and back to peak again. Where are the Indian markets right now on this cycle?

As per Proptalkies’ viewpoint, we are in second such cycle and have not yet seen the trough for the second cycle. The prices in real estate started appreciating from 2005 post general elections and went on to increase till 2007-2008 when the US sub-prime mortgage crisis hit the economies all across the globe. Big corporates wound up. There was massive outflow of money from India as well.

In the second cycle, that started continuing from 2012 and continued till middle of 2013 saw the prices going through the roof and becoming unaffordable for most of the upper and upper middle class. Post that, 2 things happened: a) In the fresh sale market, the prices became stagnant with almost zero transactions and b) in the resale market, the prices started going down albeit slowly with very few transactions.

There was hope that markets will pick-up after the change in the government with Narendra Modi wave. However, the fact of the matter is that prices are continuing to go down with number of transactions more or less remaining stagnant.

Do you see a pick-up in demand anytime soon in the residential segment and which areas / locations (pan India) are likely to be the key beneficiaries? Is this investment demand or end-user demand?

We don’t see a pick-up in demand anytime soon at the current price level at least in the fresh sale. There are plenty of finished and un-finished inventories lying with the investors and they would like to come out of it at a much lower rate with a lower profit or at cost.

Realty firms have been known to offer huge discounts to consumers / investors and this year seems to be no different. How soon one can expect a pick-up in prices in the residential segment?

Like I said, if the new end-users are intelligent enough, they would first get a feel of resale market where inventories are available at a lower price. In such a scenario, if the builders have to push their inventories, they would have to lower the ticket price. We are already hearing advertisements where builders are willing to give cash discount in some of the projects in NCR region. This is proof that ultimately the fundamentals of economics catch-up.

In my opinion, the prices will start picking up in only in the next two years when existing inventories would have changed hands and bought over by end-users. In this time, we will also start seeing results of Modi’s economic initiatives after which the investors will start becoming interested again. So, this seven year cycle will be different from the earlier cycle where the trough was for a shorter duration.

What would you advise someone who wants to invest in real estate at the current levels? Is this asset class likely to offer better returns to investors over the next three – five years as compared to say equity, gold, government securities etc?

I still believe that real estate as an asset class would give you better returns provided you invest wisely – in the right project/location at the right price. Govt. securities typically give a return of 8-9%, gold and equity are very speculative. Equity market is a forward looking market and at the current level looks very expensive to me from the prevailing fundamentals of Indian companies.

Which areas / cities are likely to see the maximum appreciation in capital values (residential, retail and commercial segments) over the next three years and why? Can you specify the likely range of appreciation?

We feel that the pockets in the country that have concentration of high-income employment opportunities will see the most appreciation in capital values. The new government has proposed to build 100 smart cities in the next 5-10 years. Some of these cities will be built around the Delhi-Mumbai Industrial corridor (DMIC). These areas are likely to see good appreciation. Other areas would be some of the localities in Bangalore, Chennai and Pune.

Besides, the new state of Seemandhra (post Andhra split) having its capital in Vishakapatnam will see significant development because of Chandrababu Naidu’s previous track record. The likely range of appreciation in these places will vary from somewhere around 30% to 50% in the next 3 years. However, please note that there are some pockets around these areas where builders and brokers have already jacked up the prices in anticipation of the investment and growth that these areas are likely to see. Investors would need to tread carefully.

It does not appear that the Reserve Bank of India (RBI) is in a hurry to reverse the rate cycle. Do you think that this could delay the recovery in the real estate sector in terms of prices?

In my opinion, the pain which real estate sector is currently witnessing is not because of prevailing interest rates but because of the points earlier talked about. There is enough tax incentive available from the govt. side such as tax breaks on both principal and interest repayment. But despite all these incentives, market has not picked up primarily because of absurd prices being quoted by builders, dearth of end-users at the prevailing price level and piling up of inventories owned by investors.

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