_Indian Realty: An underrated goldmine
After nearly a decade-long era crippled with economic and political uncertainty the global economy has stabilised and showing healthy signs of recuperation. A reflection of the resurrected economic environment came across in the International Monetary Fund’s latest World Economic Outlook (WEO). The projections indicate that the global GDP would grow above 3.5% per annum over the next 5 years.
In the wake of the changing scenario the era of low interest rates and loose monetary policies in developed economies is fading away with Central Banks increasing interest rates in anticipation of higher inflation in developed countries such as U.S and Canada.
The unemployment rate in major economies, particularly the US, has come below to its pre-recession levels and wage growth has finally started picking up. The improving job prospects accompanied with higher wage growth poses a threat of inflation rising rapidly. Since the nominal domestic returns on savings instruments in these economies are low, the inflation adjusted real returns would be lower and in many cases negligible possibly even sub-zero.
This is making their pension and sovereign funds as well as domestic investors look for assets abroad which can deliver higher inflation adjusted real returns. A large number of such investors have modified their portfolio allocation strategies to allow increase in exposures to emerging markets which give potential for higher returns despite subjecting the portfolio to higher risk.
The pension funds prefer to invest in regular income generating assets like bonds, commercial assets of private developers and REITs in emerging markets. The increase in interest rates in the developed markets has also caused their domestic currency to strengthen and assets in emerging markets have started becoming cheaper from the investment perspective.
As these emerging markets develop and grow, over a period of 10-15 years their currency would strengthen against the currencies of developed markets and hence at the time of exit, the long term investors would not only gain from appreciation in assets but also gain from movement in exchange rate.
INDIA: RESURGENCE OF THE GEM OF EMERGING MARKETS
Post the financial crisis in 2008 developing countries like Brazil, Russia, India, China and South Africa (BRICS) among others played a crucial role in driving the global economy forward. But over the period of time unaddressed structural problems coupled with high currency volatility in these markets forced investors to move their money back to developed markets. While Brazil, Russia and South Africa were seriously affected by collapse in commodity prices and political instability, weak government, policy paralysis and worsening fiscal metrics crippled India’s growth story. But the tables have turned.
With a stable government having comfortable majority in parliament, the confidence has returned. India has now become one of the fastest growing economies in the world and would retain that status for the foreseeable future. Although China was the only performing emerging market until recently, today it faces imminent threat from high debt and excess capacities. It has also been downgraded by Moody’s.
India on the other hand is projected to grow at the rate of more than 7% according to the IMF’s world economic outlook forecast. Its economic robustness is also substantiated by the performance of its currency. The Indian Rupee has been a top performing currency amongst its emerging market peers over the past 2 years. The volatility in the currency has reduced and the currency has appreciated against the U.S. dollar; which further substantiates the strong macros. In addition to the improving macros, a slew of policy reforms taking place in the country have wooed foreign investors back to its shores.
The new government has implemented several reforms to streamline and formalise the economy across all sectors. The recent roll out of the Goods and Services Tax (GST) Act could be the corner stone in this endeavor. The strong fundamentals, robust economic growth, political stability, controlled inflation and the lower interest rate regime have improved India’s chances of a sovereign ratings upgrade within the next 2 years However, the recent loan wave-offs can be major cause of concern for deferring the upgrade.
INDIAN REAL ESTATE: A NEW PARADIGM ON ANVIL
Real estate has been a key driver for the economy. However, poor transparency in the sector and dwindling consumer confidence had put the industry under strain in the past 3 to 4 years. The recent introduction of the Real Estate (Regulation and Development) Act, 2016 has pumped in a new lease of life into the sector. This is expected to weed out unorganised players from the industry and whip up buyers’ confidence bringing buoyancy back into the sector. The subsequent stride in re-engineering momentum back into the sector was the governments push towards ‘affordable housing’.
By giving it infrastructure status the government would attract private developers towards these projects. At the same time home loan sops and interest subsidies under the Pradhan Mantri Awas Yojna would fire up the demand for these homes. The expected increase in transparency due to implementation of RERA and formalisation of sector with the implementation of GST, the sector would aid the sector in getting access to variety of formal sources of finance. These reforms will go a long way in enticing the institutional investors to invest in this sector.
ARE INVESTORS RESPONDING?
The government’s emphasis on housing and its efforts to mitigate the risks in the real estate sector by introduction of RERA has not gone unnoticed by foreign institutional investors and also the sovereign and pension funds.
A large number of these investors and funds have made changes to the portfolio allocation strategy allowing investment exposure to Indian real estate. The pension and private equity funds are investing in commercial assets (office spaces and malls) and also in under-construction residential properties.
Players such as Qatar Holdings, CPPIB, Blackstone, Ivanhoe Cambridge, APG and Xander are readying blueprints for long-term investments in the realty segment. Not just foreign investors even the domestic investors are raising funds to invest in this sector.
Summary of recent select investments by Global investors in India real estate
Source:
Some of the recent fund raises/investments include
Source:
GREEN SHOOTS OF RECOVERY
The past 3-4 years have been an extremely stressful period for the Indian real estate with markets being subdued in terms of launches and sales across major metros. However, this year is expected to be the year of inflection with new regulations coming into place.
These regulations and reforms would herald the industry into its next wave of growth. Right from buying of land, funding of projects to delivery of the final product to the buyer, the entire process is going to witness a drastic change.
Despite subdued financial performance of the realty companies over the past few years, the share price of the companies and also the BSE Realty index has outperformed the market. The share performance is generally the leading indicator of how the sector is going to perform in the near future.
The reality index has outperformed the market over the past year. The government has realized the potential of this sector to create jobs and also drive the GDP growth of the country. Hence it has been trying its best to revive the sector. It would be just a matter of time before this sector realizes and starts delivering on its full potential.
Table: Performance of BSE Reality index BSE Sensex
To know more, download India Real Estate - January to June 2017 Report