by Mr. Ashutosh Limaye, Jones Lang LaSalle India
India’s real estate sector has witnessed two cycles over the past 15 to
20 years, during 1994 to 1999 and 2004 to 2009.
Both cycles had unique characteristics, yet displayed notable
similarities in the manner of their occurrence. A walk through these cycles
reflects some of these peculiarities and distinctions, and helps to gauge the
changing dynamics of this industry.
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| Ashutosh Limaye, Jones Lang LaSalle India |
Period 1994 - 1999: Industrial Boom - The First Known Real Estate Cycle
The genesis of India’s industrial boom, which began in 1994, can be traced
back to the 1991 liberalisation reforms that were undertaken by the ruling
Government of the day against the backdrop of a looming fiscal deficit crisis
in the country.
In addition to several other steps, investments in the real estate sector
were opened up for the participation of Non-Resident Indians (NRIs) and Persons
of Indian Origin (PIOs) for the first time.
The massive investments into the sector that followed coincided with a
broader economic and stock market boom.
Developers / promoters started aggressively reaching out to the NRI / PIO
community by opening offices in major NRI-resident countries. The policy-driven
bullish cycle culminated in an industrial boom, thereby helping property prices
to finally peak in 1995.
However, at this peak, some of the crude realities of the Indian economy
started to resurface. Poor banking penetration, high domestic interest rates, a
lack of transparency in the real estate sector and insufficient availability of
market information, etc. led to a rally in real estate.
As a result, the market tapered
off post 1995. In 1997-98, the advent of the Asian Financial Crisis (AFC) led
to a slowdown in industrial growth, wiping out an important source of this
investment cycle – foreign capital.
Period 2004 to 2008: Services Boom - The Second Real Estate Cycle
The second known cycle began in 2004, again having its roots in critical
reforms that took place in the previous 4 to 5 years. The new Telecommunication
Policy, 1999 and the Information Technology Act, 2000 gave rise to an era of
digitisation, creating a favourable investment climate & ample job
opportunities across many Indian cities. For the first time, real estate
development expanded beyond the Tier I cities, unlocking opportunities in the
commercial as well as the residential property sectors.
In 2005, the Special Economic Zone (SEZ) Act & the Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) - which facilitated huge investments
into building infrastructure to connect larger cities with 60 + smaller cities
& towns - provided a fillip to investment sentiment. The full opening up of
FDI into selective real estate projects provided a thick layer of icing on the
cake.
Consequently, multinational investors queued up for exposure into the
Indian market - rather prematurely, as has been pointed out by Goldman Sachs in
its famous report on Brazil, Russia, India and China (the BRIC report) in 2004.
Institutional funding invested in virtually every commercial development,
largely offering developers equity-style funds. Developers had no problem
funding residential projects, owing to healthy cash flows from preconstruction
bookings. Rising salaries coupled with low interest rates & increased
banking penetration converted every homebuyer into an investor, as properties
were bought not merely for consumption but for investment even by the salaried
class.
Following the peak of the second cycle in 2008 was a large accumulation
of debt with almost every stakeholder - developers (having accumulated land
parcels at increasing prices), small investors / or homebuyers (stretching
loans to purchase additional houses), banks (holding stakes with buyers &
developers) and institutional investors (holding stakes with developers).
Globally, the collapse of Lehman Brothers triggered a panic, leading
investors to scout for rationality in investments across asset classes. The
ensuing economic slowdown and risk of job losses made it difficult for
investors to exit from their stakes. For instance, nearly 80 % of investments
that came via the Private Equity (PE) route since 2006 are yet to find a good
exit.
However, despite a steep slowdown in the Indian economy and financial
markets following the outbreak of the crisis, housing prices in India - on an
average - witnessed a limited fall. On the contrary - prices started to rise
after 2 to 3 quarters of sharp fall, and even crossed the previous peak of
mid-2009.
Similarities In Both Cycles ...!
· Both cycles were created out of
favourable policies & a positive investment climate – both domestically
& globally
· Both cycles had an important
share of funding from external source – NRIs / or PE investors
· Both cycles collided with the
economic and financial boom-bust cycles
Differences In Both Cycles..!
· The bullish uptrend in prices
during the second cycle was longer than that of the previous cycle
· The bearish downtrend in prices
during the second cycle was shorter than that of the previous cycle
· At the end of the second cycle,
there was no prolonged period of stability in prices post-crisis
Housing prices breached their previous peaks merely a year after the bottom
in 2009, while vacancy rates have continued to remain high
Cycle timelines..!
1994-1999
2004-2008
Beginning of the cycle until peak (uptrend)
1.5 years
3.5 years
Peak to the end of the cycle (downtrend)
4.0 years
1.0 year
Lateral price movement (stable prices)
4.0 years
Not more than 6 months
The Second Cycle May Be Yet To See Meaningful Conclusion..!
When we compare these 2 cycles, 2 obvious differences suggest that the
second cycle may not be over as yet.
In the first place, prices recovered almost immediately after reaching
the so-called trough without witnessing a meaningful period of stability.
Secondly, the wide gap between the duration of up-cycle as well as
down-cycle could possibly indicate that the latest cycle is yet to witness an
end.
This leads to a logical question - have real estate prices failed to
reflect market realities of late? The answer is a resounding yes.
To check, we derived the value of properties sold using net absorption,
and fond that the recovery in this sector only started post 2012 and that the
duration of the second cycle is much longer than the prices indicate.
The Indian economy has reached its new normal rate of growth. The
country’s total property sale values have also reached an elevated new normal
level, and we believe they will continue to sustain at this level in the
near-to-medium term. This is because recent trends and the foreseeable outlook
suggest that the volume of sales will rise as developers focus on mid-segment
& affordable homes. On the other hand, increased focus on affordable to
mid-segment housing would help bring the average prices down, hence retaining
the value of properties.
(Note: Please click here to download high resolution versions of the
graphics used in this study)
For Media Contatct
Mr.Arun Chitnis,
Head – Corporate Communications & Media Relations
Jones Lang Lasalle India,
Level 6, Amar Avinash Corporate Plaza, Bund Garden Road,
Pune - 411 001.
Tel: 020 - 3093 0441 Fax: 020 -
4019 6101
Mob: +91 96571 29999
Website: www.joneslanglasalle.co.in
Blog: www.joneslanglasalleblog.com/realestatecompass
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