Good presentation from Liases Foras, which explains disconnect between high real estate prices and their low stock prices

1. Capital Driven Real Estate & its
Consequences
By Liases Foras

2. It is a capital driven market
REALTY IS FACING STRUCTURAL PROBLEM

3. Capital pushes the prices,  Prices pushes the land cost  Requirement of the
capital pushes the construction cost;
Price pushes consumers away  Investors with surplus money are roped in 
Stuck up investors default  Results in construction delays
Capital fails to generate returns
VICIOUS CIRCLE OF THE CAPITAL

4. Inflow of capital (FDI) in housing sector
16,000 FDI Inflow in Housing Sector (Rs Crore)
14,027
14,000
12,621
12,000
10,000
8,749
Rs Crore
8,000
6,000 5,600
4,000
2,121 2,043
2,000
171
0
FY 2006 (Apr - FY 2007 (Apr - FY 2008 (Apr - FY 2009 (Apr - FY 2010 (Apr - FY 2011 (Apr - 2012(till Sept)
Mar) Mar) Mar) Mar) Mar) Mar)
Source - DIPP

5. Capital pushes the prices
Price and cost of flats in MMR increased @22% CAGR since the infusion of capital
12000 Price (Rs / psf) 10,021
8,870 9,235
10000 8,124 7,742
7,962 7,131 9,716
8000 6,179 5,637 6,028
5,326 5,354 8,442
6000 3,013 5,488
4000 2,690 5,775
2000
0
120 Cost of Flat (Rs Lac) 104
93 93 98
100 89 87 86
76 77
80 59 64 60 64 62 65
58
60
27 31
40
20
0

6. Price & Affordability Mapping
Interest adjusted Affordability Index Inflation adjusted Price Index Speculative
market
450
Unfair and Speculative Market 387
400 369
345 354
326
350 302 297
291 Correction Phase
300 275
247 235
271
250 223
201 205 208
Risk Spread
171
200
75
Under Value Market
150 100 112
100
118 144 136 120 133 130 125 127 132 137 135 125 115 116
50 100 109 112
0
The widening gap between the prices and affordability is pointing towards the speculative
market practices. Even if the interest rates comes down to 9% level, still the prices needs to
undergo correction to the extend of 33% to attain the efficiencies of June 2009 .
6

7. High prices push consumers away
Yearly Sales in MMR
70
Millions
Figures in Mn sqft
60.60
60
50 47.84
40
30 26.59
20 16.58
10
0
Dec'07- Dec'08 Jan'09- Dec'09 Jan'10- Dec'10 Jan'11- Sep'11

8. Investors with surplus money are roped in
Investors participation as % total of absorption
60%
52%
50% 45%
43%
40%
30%
22%
20%
10%
0%
2008 2009 2010 2011
Most of the stock is being picked up by investors, within the city, Boisar, Panvel, Gurgaon, Noida…

9. Stuck up investors default  Construction delays
31% of projects launched in past 12 months have already witnessed deferred possession dates
compared to their earlier made commitments
Deferred by Deferred by % of projects with
less than 6 6 -12 Deferred by deferred
Cities No Delay months months 1 -2 year possession date
Hyderabad 44 21 5 3 40%
Bangalore 110 41 19 9 39%
MMR 308 76 60 40 36%
NCR 217 30 55 10 30%
Pune 297 63 31 15 27%
Chennai 171 13 23 5 19%
Grand Total 1147 244 193 82 31%

10. Funds are exiting at 1%, 2% and 3% IRR. Some of them are losing even their
principal
CAPITAL FAILS TO GENERATE RETURNS

11. Price rise hits sales – gap between promise and performance
Input (Rs psf on saleable area) Result (Rs Crore)
Const-
Selling Sales Land Equity Duration CAGR
ruction NPV ROE IRR PBT
Price Velocity Cost Rs Crore (months) Return
cost
Fair Market 7,000 2.75% 1,894 1,325 13 17 50% 66% 42 42 39%
Promised to P/E 10,000 2.75% 2,642 2,050 20 27 50% 70% 64 42 37%
Performance 10,000 1.00% 2,642 2,050 20 1 16% 23% 55 106 12%
In order to accommodate the PE investor
Selling Prices are increased by 43%
Land prices increase accordingly by 55%
Mark up in equity requirement of Rs 8 Crore

12. Missing dimension of valuation is hurting the most
Line of optimum velocity
Price Sales Velocity
MMR Market
12000 4.50%
3.92% 3.86%
4.00%
10000
3.24% 3.50%
3.10% 9,716 10,021
8000 9,235 3.00%
2.55% 8,870
2.51% 2.52% 8,442
7,962 8,124 7,658 2.50%
6000 7,131 2.04%
6,179 6,028 2.33%2.18% 1.71% 2.00%
1.57% 1.55%
5,326 5,488 5,637 5,354 5,775 1.39%
4000 1.19% 1.50%
0.87% 0.86% 1.43%
1.00%
2000 2,690 3,013 1.55% velocity clearly implies 64 months gestation 0.50%
0 0.00%
With the increase in the prices, velocity drops
Slow sales result in delayed construction and also impact the returns of PE investor
Consumer is losing, PE is losing, then who is gaining?

13. 1. Has this capital created stock – constructed floor space?
2. Has it created affordable housing?
BIG QUESTIONS

14. Construction floors space has decreased
Increamental Construction
120
FY 2010 ( Apr'09- Mar'10) FY 2011 ( Apr'10- Mar'11)
98
100
85
80
Mn. Sqft
58
60
45
40 35 34
28 26 24
21
20 18
13
0
NCR MMR Pune Banglore Hyd Chennai

15. Premium Prices create Premium Housing
Inventories targeting high-end investors
Distribution of Supply in MMR
Upto 25Lac 25Lac-50Lac 50Lac - 1Cr 1Cr - 2Cr Morethan 2Cr Price
100% 12,000
9% 8% 9% 10% 11%
15% 16%
90% 22% 20% 22% 22%
11% 9% 24%
13% 10% 10% 10,000
80% 12%
15%
22% 15% 15%
70% 23% 21% 17% 18%
22% 18% 8,000
Distribution of Supply
25%
22%
60% 20%
20% 23%
Price
50% 6,000
26% 26%
35% 27%
32% 30%
40% 35%
31% 27% 25%
4,000
30% 27%
27%
23% 24%
20% 22%
2,000
26% 26% 27% 24% 24%
10% 21% 23%
17% 14% 11% 10% 9%
0% 0
Nov 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11

16. The nodal agencies meant to act as regulators, in practise were scaling up the
land prices
MIS-ACTS

17. The high price land deals were responsible for spurt in prices. Later controversial
FSI policies were framed to turn projects viable
It may be good for a few but for the city this cycle is creating urban imbalance
LEAVING THE CITY PRICES LURCHING AT UNAFFORDABLE LEVELS

18. Chronology of Events
Inventory Sales Price
400
Prices again start to increase, as liquidity
condition relaxed due to bank
350 Kohinoor Mill restructuring and funds availability
Deal @Rs
Drying up of funds, brought back
10,000 FSI and
focus on consumers ;
300 DLF deal of Prices touch all time high of Rs
result in 30% price correction
Bombay Textile 10,021.
Mill @Rs 7,000 23% higher than previous peak,
250 FSI cost locations show no significance,
Index Figures
Supply stalled price in Wadala, Chembur,
due to TDR Andheri & Borviali Same
200 Inventory also increases with
corridor, Increasing supply
focus on luxury product
environmental with retarding sales,
issues Introduction of results into inventory Only 23 out of 1600
150 FDI built-up projects selling; avg
Results in sales in remaining
price increase Good sales projects is 3,000 sqft
Sales reduce by 55%
100 by 40% CAGR volumes recorded
from Jun 09 high per quarter
50
0

19. Inference
• Developers justify the escalating prices to increasing land cost and construction
cost.
• With increased land productivity (FSI), the cost does not come down..
• With the induced capital, production is less
• The Funds are failing to generate return
• Problems of housing has only aggravated, Slums have increased 55% to now 70%
• Is this what we mean with our housing policy

20. Market:
Driven by capital
Catering only to investors
Struggling due to inefficient policies
THE CRUX OF THE PROBLEM

21. Reforms Required
• Private Equity capital should be restricted to capital intensive assets such as
commercial, hospitality etc
• Residential development work on bookings and the sales proceed can take care of
entire development of the project. The capital is only creating unaffordability.

22. Lesser benefits to needy and more to the investors
• Income tax exemption for an enduser, the first property buyer is limited to
1,50,000 on home loan interest whereas to the investors who is buying
second, third.. Property, entire interest amount is exempted provided he
rents his property.
• All the affordable housing schemes are plagued with investors, you have
empty buildings while the needy living on the road and resorting to slums.
• While we are trying to emulate China in terms of growth, we should also
learn from their lessons

23. Recent steps taken by China to curb investor activity
• Down payments for second homes increased to 60% from 50%
• Second home interest rates at no less than 110% of the benchmark rates
• Regional property purchase policies to be formulated strictly and local residents
with two homes to be banned from further purchase
• Transaction and additional tax to be levied in cities with overheated prices
• Lending for third or more home purchases restricted
• Local government asked to set price targets on new properties based on regional
disposable incomes

24. Last but not the least
Regulatory and policies also need to be accountable.

25. THANK YOU
26

26. About Us
Liases Foras initiated in 1998, is a brainchild of Mr Pankaj Kapoor, and is completely a “non-brokerage” real
estate research firm. What makes it stand out among the various other firms is its works in the real estate
industry, more specifically in the field of valuation, and future forecasting models. The scientific research based
approach adopted by the company stems from its developing an organised database for the real-estate
industry. The data and trends provided by the company has been an eye-opener for various financial firms,
government agencies and developers.
Some of our clients include HDFC LTD, Aixs Bank, Standard Chartered Bank, L&T, India Reits, Birla Sunlife, TCG
Real Estate, Essar Goup, Urban Infrastructure, Sun Apollo, University of Miami (USA), Maharashtra Chamber of
Housing Industry (MCHI), Hiranandani Constructions, K. Raheja Universal, Kalpataru Construction among
others.
Liases Foras is engaged in:
• Data Services:
– Providing quarterly updated data on real estate projects across six cities in India
– Quarterly market trends through Ressex.com and presentations
• Advisory Services:
– Best Use Analysis
– Valuation & Pricing Analysis
– Feasibility Studies
– Real Estate Projects Rating 27