Real Estate Prices May Drop in Metropolitan Cities

Real Estate Price May Fall

• Property prices in India’s metropolitan cities is likely to fall down

• Ambit Capital a brokerage firm says, that a sharp correction in property is in the offing

• Mumbai is likely to witness the sharpest fall of around 50%

• One of the major reason behind the fall is the curb on black money in the realty sector

Year Over Year Fall

• RBI’s Housing Price Index have put forward that prices have weakened on pan-India basis

• Data from property websites show that, there is a price fall by 7-18% Year Over Year (YoY)

• Their are significant drop in transaction volumes

Down Fall in New Registrations

• Property registration offices in Mumbai suggest a sharp drop

• The registration of new residential properties has also fallen

• Data from property valuers in Maharashtra suggest that transaction volumes have fallen by 10-15% p.a. for 3 consecutive years

New launch volumes are down by 40-80% on a pan-India level

Supply Side Triggering Slide

• RBI suggests that as the banks have turned off lending for property developers, resulting into halt in construction or cut prices

• NDA has cut subsidies sharply & is shifting subsidies to Direct Benefit Transfer

• As a result, the abilities of politician & builder who steal subsidies to fund real estate construction has been checked

• The unsold real estate inventory in most of India causes investors to hold back further purchases

Demand Side Triggering Slide• The drastic Black Money Bill when went live

made HNW families unwilling to invest into real estate

• The 8% point gap between the gross rental yield and bank base rate highlights the unattractiveness of real estate for investors

• Key State Govts. have hiked “Ready Reckoner” rates sharply this year, thus preventing prices from dropping to a market clearing level

Investment Implications

• Real Estate is accountable for half of India’s capital formation & 30% of its job creation

• GDP growth is under pressure due to drop in investment & through pressure on wages

• FY16’s GDP growth is forecasted of 7% (vs consensus 7.8%)

• Beyond real estate itself, the sectors most impacted are: – (a) Cement – Ambit expects YoY volumes to

remain flat in 1Q of 2015– (b) Paints – Ambit expects weak volume growth of

3- 4% again – (c) Lenders – 15% of the banking systems assets

are directly exposed to real estate• Ambit’s key large cap SELLs on this theme are:

Ultratech, Asian Paints, HUL and ICICI Bank

Property Prices may fall by 25%: Orbit

• Orbit Corporation MD Pujit Aggarwal said that though there was little room to cut prices due to high costs, builders were now willing to reduce prices and sell units even at a loss

• "They will sell in order to meet cash flow requirements such as interest payments, overhead costs or further construction," he told CNBC-TV18 in an interview

• According to Aggarwal, prices in some pockets of Mumbai could fall about 20-25 percent

• "Till now, builders had been reducing prices through indirect means such as the 80:20 schemes and interest free EMIs, but a direct price reduction is absolutely on the table now," he said "We will witness that in the months and quarters to come."

Conclusion

• For a developing country, which is struggling to create economic growth, this is clearly not good news

• Real estate prices will have to fall more if the huge amount of unsold inventory of homes that has been built up needs to be sold

• Hence, if you are a buyer looking for a good deal, it might just make sense to wait a little more and see how things pan out

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