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After an explosive one-off boom period one can now expect Indian realty sector to stabilise and emerge as a better organised sector growing in line with GDP
The last five years in Indian real estate constituted a one-off boom period triggered by the emergence of India as a global investment destination. This is a general phenomenon that every sector goes through before maturity – we can compare it to the Dotcom boom of 2000-2001 or the stock market boom of 2007-2008. The end always comes as a surprise, and can never be accurately predicted.This is not to say that the good times have come to an end - real estate is one of the basic industries of any economy and will always be an important component. In times ahead, we will see the industry revive and accelerate, though through smaller and shorter cycles. We already know that every industry has a life cycle of explosive growth, stabilisation and maturity, followed by moderate growth. Real estate used to be a niche industry in terms of stock market exposure and private equity funding, but now, it will emerge as a larger, more-organised industry with realistic growth in line with the GDP, and it will represent a better and more sustainable value proposition.
Over the past six months, the real estate industry in India has undergone various changes. Now that the popular myth of India being a de-coupled economy is finally broken, we are faced with new challenges that will see the progression of the industry into the next phase of a general industry cycle.
Consolidation
It is historically established that as an industry matures, it gives way to fewer and stronger players who help to bring some sense in the industry. The coming months will see consolidation in an industry that is on a journey towards equilibrium price discovery, resulting in a win-win for both the developer and the end-user. Developers may not get the high margins, which they were used to, but they can still make money through higher volumes and a faster cash cycle. Consolidation will happen at different levels. Such consolidation will mark the extinction of the fly-by-the-night operators who had entered the industry and had made it deviate from its fundamentals.
Economic Recovery
Both GDP growth and exports growth are slowing down; there is also a pain of rising unemployment. Post Satyam, questions are being raised about corporate governance in India. However, I do believe that India will be able to recover faster than other economies, since its people are inherently savings-oriented, subject to moderate leverage and typified by caution. In comparison to the rest of the world, our growth is still fairly fast, we have the maximum number of people in our collective skilled work force and our financial sector has maintained a cautious approach. We will see the results of this before too long.
Residential Revival
The projection of India needing approximately 22 million units still holds true. Therefore, demand still exists, and increasing affordability in housing will help tap this demand. Also, affordability has to transcend the current far-flung locations and kick in at the suburban levels, closer to CBD areas. Currently, developers must not only complete projects under execution but also re-strategise to sell them quickly. Once they get out of the existing inventory and execution pipeline, they can look at new land parcels and new business ideas.
2009, especially the second half, will bring excellent bargains for investors, as well as for those who have a medium-to-long term view on the industry and the necessary risk appetite. Much will depend on being bang on target in terms of location, product and entry valuation.
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Source : IIPM Editorial, 2009
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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