"Real Estate” is a subject close to the heart of every Indian. Over the last few quarters the outlook for real estate prices has been weak with most investors staying away from the asset class. However, some savvy money managers have been adding exposure to real estate stocks. So what is drawing the interest?
Real estate in India, like most other sectors, is in the initial stages of growth, being an unorganised business and fragmented among large number of players. The buyers
so far had very little voice. RERA, a regulation introduced in 2016, has started bringing in accountability, transparency and professionalism to the sector. One provision is, for example, that the builder has to put 70 per cent of the money in an escrow account and that this can be withdrawn only for construction spend. In fact, there are strict penalties in case rules are breached. Consumers can access project-related documents online. This finally puts consumers first like most other mature sectors. RERA and GST have resulted in bringing in two major structural changes:
A) transparency standards have just seen a big improvement
B) the change in cash flow structure is extremely capital intensive and will drive out fringe players
We should also not forget that real estate remains the second largest employment generator after agriculture and is expected to be a $180 bn market by 2020. Poor experience of the customer with fringe players and availability of low cost capital from private equity capital funds and sovereign wealth funds only to the players who are compliant with RERA and GST is likely to help industry consolidation. So going forward, like any other mature sector, three to five players will have the lion's share of the market.
Private equity and debt investment in real estate in the first quarter is estimated to be $2.6bn, highest for last eleven quarters. We believe it is the start of a mega trend and it will catch momentum as we see more clarity emerge around R.E.I.Ts’. Commercial real estate is recovering as rentals are moving up in most parts of the country. The unsold inventory in residential is slowly getting exhausted.
If we look at some of our neighbouring countries, even with much smaller population and land mass they have large companies in real estate with market cap equal to the sum total of market cap of the real estate sector in India. For e.g. Philippines has Ayala Land with MCap of US $11bn and SM Prime with MCap of US $20bn, Hong Kong with Swire Properties which has a MCap of US $23bn. The market cap of all real estate companies listed in India is approximately US$20bn.
Smart money is betting on this opportunity of growth over the next decade. We have been early movers to spot this trend and have participated through exposure in our PMS offerings. Equity markets are witnessing the tug of war between worsening macros and improving micros. Investors should use opportunities
provided by the market to add exposure to quality oriented portfolios. Our conviction on fixed income continues to be on the short term and accrual funds. Asset allocation remains the key.