Real Estate Market Overview & Financing Methodologies and Options

Contributed by: Arun Ramaswamy

Indian Association of Investment Professionals (IAIP) Bangalore Chapter witnessed a very practical learning session on “Real Estate Market Overview & Financing Methodologies and Options” presented by P. Ravindra Pai. The session focused on the history of the Century Real Estate Organization, the Indian Real Estate and Construction Industry, the Industry Jargons, its Evolution and Contribution to the Country’s Economy & Growth, Financial Requirements, and the Future Road Map.

It was the vision and insight of the Speaker’s Grandfather formed the Century Real Estate and its continuing success. The critical success factor is the land parcels held by Century on various parts of the Greater Bangalore. Ravindra joined the family business in 2003 and is steering the growth thereon.

Currently, Indian real estate industry contributes about 6% of the GDP and is expected to grow to 13% by year 2028, second only to the agriculture industry. In monetary terms, currently, the industry is about US$ 121 Billion and is expected to about US$ 853 Billion in year 2028. The factors for the anticipated growth were rapid urbanization, demand due to shortage of homes, fund availability through FDI route, and intra-industry simulation and employment opportunities.

The evolution of the industry can be viewed in three periods. Pre-2005, 2005-2008, and Post-2008. In Pre-2005, it was the start of urbanization, mainly in Metros, the industry was largely unorganized and lacks transparency. 2005-2008 was an action packed three years where lot of money chased few good projects, the industry witnessed high cash flow and many corporates went public during this period. Post-2008, the industry took turn from extreme optimism to extreme pessimism. Banks couldn’t lend for land acquisition and working capital. Now, in 2014, the pendulum is moving towards the equilibrium. The industry is realistic in terms of assumptions and valuation.

The key triggers are mainly due to two events – Press Note 2 of 2005 and Lehman Crash. Press Note 2 of 2005 allowed FDI and sets minimum parameters for capitalization requirements, development size, and lock-in periods. Lehman Crash aggravated the situation by drying up the FDI funds and injecting negative sentiments and pushed the developers to scout for alternatives and efficiencies in construction.

The future road map of the industry looks very promising. Some key initiatives like housing for all, 700 smart cities, REITs, affordable housing, real estate bill are put in motion and the experts feel that these initiatives set are in the right direction. The implementation and development remains to be monitored. It will take some time to gain momentum in all these initiatives. For the investment world, real estate is an asset class considered for most portfolios. Though, liquidity risks are high, cash transactions have been reduced significantly. Professional management and transparency are brought into play. Real estate is another avenue, similar to Gold. Rent yield is about 8% – 10% in India.

In conclusion, light was thrown on the way the real estate markets in different regions (for example, Gurgaon and Mumbai) operate and how it differs from the South India (for example Bangalore). Each market is different in terms of the requirements, land availability, owners, intermediaries, by-laws, pricing, customer segmentation, project duration etc. At the end, it is about perception and risk tolerance levels of the customers.

During the Q & A session, Ravindra gave a brief talk on REITs, the introduction on REITs in India and the typical margins in this industry. The points discussed in the REITs were on rental return (e.g., 8%), rental escalation (e.g., 5%) and capital appreciation versus the risk-free return (e.g., 8%). Capital appreciation is linked to rental escalation. The points discussed in the margins were on joint development model, about 30% margin in good times, and about 15% – 18% currently due to increase in input costs.

– AR