What are you waiting for?

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Rising property prices in India may have dented investors’ sentiments but the bottomline is that real estate has always been a lucrative destination for NRIs

Most of the investors have adopted a ‘wait and watch’ stance over real estate investment in India. Question is, what are they waiting for? The notion that the real estate bubble is set to burst and then plunge in at an opportune time, seems fallacious. As Indian real estate has always been a lucrative destination for NRIs, the recent slowdown in real estate may be good time to buy, especially in projects and locations that would have been difficult to secure in good times.

Rising property prices in India have dented investors’ sentiments but given the demand-supply imbalance, the trend is likely to continue. As per the National Housing Board (NHB) data, the urban population of India has been growing at a rapid pace. NHB’s recent report on Trends and Progress of Housing in India (2012) suggests that for Census 2011, 31.16 % of total population is in the urban area and the shortage of housing units for the urban area for 2012 is estimated at 18.78 million units.

With the rupee depreciating in the past couple of years, there has been a good amount of remittance going back to India. Additionally, the bank deposits are yielding good returns making that as a good investment alternative. However, properties continue to be a preferred choice for expat Indians for investment and asset creation. What they look for is a good brand to invest and a price point, which is good to enter.

State Bank of Travancore, which commands the numero uno position in Kerala with respect to inward remittances, said that quantum of remittances has moved up by 33% on a daily basis. According to RBI, the net NRI remittances into India are rising, with US $8.98 billion deposits during Apr – Dec 2012 compared to only US $0.82 billion during Apr – Dec 2011. About 40% of these inflows have gone in the real estate sector. This had buttressed rising property prices in 2012 despite low confidence in India’s economic condition.

Magic Bricks’s National Property Index (NPI) rose by 14% in Jan-Mar’13 compared to same quarter last year. Premium properties valued at US$169K and above witnessed healthy buyer interest. Six out of 11 cities saw over50% demandfor 2BHK units. Share of residential property in the US$50,778-$84,63063 (INR 30-50lakh) range continued to top the consumer demand chart at 23%.

NATIONAL PROPERTY INDEX (NPI)
NPI
Source: Magicbricks

However, prices of major cities in South India such as Hyderabad, Kochi and Bengaluru failed to perform much in 2012. According to Balaji Raghavan, CEO & CIO, Real Estate Fund, Hyderabad, Kochi and Bengaluru have different demand drivers. For example, Bengaluru is driven by the information technology industry, and prices there largely follow the industry’s fortunes. The Residex data show that prices fell around the 2009 period and then slowly recovered from 2010. Kochi, on the other hand, has not developed at the same pace as other urban centres. The demand for homes in Kochi tends to be driven a lot by population working outside the country and so prices dropped during 2011–2012 because of the global recession. In Hyderabad, political uncertainty and its impact on business growth may have had a role to play.

CITY WISE HOUSING PRICE INDEX
CWH
Source: NHB Residex

Sumansa Exhibitions Survey on NRIs’ investment behaviour
A recent survey conducted by Sumansa Exhibitions, organisers of Indian Property Show amongst 16000 NRI’s across Europe and UAE, reveals that NRIs place a higher intrinsic value to property owned in India over that owned in Dubai or elsewhere. Apart from strict visa rules in the Middle East region along with certain regulatory obstacles, critical triggers that could help sustain their interest in Indian property market include higher economic growth in India, improving infrastructure, renewed political focus on timelines for new infrastructure initiatives, rising demand for commercial space in the market, social infrastructure and price trends. Putting these things into perspective, the recent fall of INR could potentially act as a trigger amongst the NRI community in the Middle East to switch their focus towards the properties back in India.

According to Sunil Jaiswal, CEO Sumansa Exhibition, “NRIs in UAE mostly prefer investing in property as it is one of the safest option and gives good return as the capital value of any property appreciates. Plus there is always feeling of returning home since NRI’s don’t get citizenship in this region, so property investment becomes natural choice. We can support this further as the survey also reveals that Mumbai, Bengaluru and Delhi feature in the top five destinations list. This shows that they are looking for cities which will give them good returns. Even if the NRI takes a home loan his payouts are much cheaper as compared to last year. Hence, the overall investing in this sector when rupee is low makes sense.

RBI’s softening monetary policy stance
WPI inflation in India stood low at 4.7% in May 2013 and Credit Suisse expects it to slide to 3.5% in September 2013. To boost growth, on 17April 2012, RBI slashed repo rate by 50bps (after 3 years) and then in 2013, it reduced repo rate twice by 25bps each to 7.50%.However, market expects that pass on effect by banks onto end consumers would be limited in near future. Good news is that, RBI’s monetary stance has softened and its quest to infuse liquidity in the banking system would provide much needed relief for the real estate sector.
WPI

Government’s recent initiatives to increase transparency in the real estate sector
On 5 June 2013, the Union Cabinet approved the draft Real Estate (Regulation and Development) Bill 2013 that allows for the creation of a regulator in the real estate sector. Some more aspects that are expected to make Indian Real Estate more transparent by 2014 are noted below:

Performance Measurement – The availability of time series data and indices on real estate returns will improve with the increase in the number of listed real estate companies and institutional investors in India.
Mandatory disclosure of project details: Developers will be required to disclose details, including minor ones, about their projects on the company website.
Regulatory and Legal – The introduction of GAAR (General Anti-Avoidance Rule) & CLR (Computerisation of Land Records), and further strengthening of real estate regulations is expected to improve transparency in the application of tax and building codes.

Overall macro-economic outlook turning favourable
As per Jones Lang LaSalle’s Global Market Perspective Quarter 1 & 2, 2013 report, “The economic gloom of the last 12 months (2012) or more appears to be lifting. The most obvious sign of revival has been the rally in equity markets, with some bourses touching their highest levels since 2008.” Real estate is benefiting, with institutional investors in particular allocating more capital to the real estate sector. There is clear evidence of an increased tolerance for risk amongst investors.

Money

India’s real estate sector is set for robust inflows of US$ 4-5 billion from overseas investors in the next couple of years, with Bangalore, Delhi and Mumbai emerging as the favourites, according to Jones Lang LaSalle. Between April 2000 and April 2013, India’s real estate sector (including townships, housing, built-up infrastructure & construction-development projects) has attracted a cumulative foreign direct investment (FDI) worth US$ 22,111.98 million.

Overall, the real estate market looks favourable for NRIs in view of depreciating INR, softening of interest rates, lower inflationary expectations, Indian government’s easing regulatory moves, harsher domicile laws restrictions in the Middle East, improved macro-economic fundamentals and eternal emotional bond with the country. Possibly the two key themes for the coming year will therefore be increased macro stabilisation together with abundant liquidity.

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