Market Watch

Receding Housing Demand May Hamper Real Estate Recovery

The demand for residential properties, a major revenue source for most real estate companies, is receding. An expected increase in borrowing rates and the near-peak realty prices may reduce the demand further. This will affect most realty firms that had started showing signs of recovery in the recent quarters. This explains why the 29-stock ET Realty Index has underperformed the broader benchmark Sensex in the past three months. During the period, the realty index fell by 16% while the Sensex gained 13%.

The negative impact of the tapering housing demand may be partially offset by the gradual recovery in the commercial segment. The pick-up in business activity last year has led to a revival of demand for commercial properties, especially in the past six months. The segment was previously struggling even as residential housing demand bounced back from the slowdown. As much as 70% of commercial realty demand is for office space, followed by retail leasing. Under office space, demand is dominated by the information technology (IT) sector followed by banking & financial sectors. Better growth in these sectors over the past few quarters has improved demand for office space across various pockets of the country.

This is reflected in the 2-4% sequential increase in office rentals in commercial business districts of Mumbai, Delhi and Bangalore during the September 2010 quarter. The improvement in commercial property business has propped up earnings of realty firms for the quarter ended September 2010. It is likely to provide some relief if demand for residential properties dwindle. Companies who derive a significant portion of their business from commercial segment include DLF , Unitech and Anant Raj Industries . These firms could be relatively less impacted by the expected slower growth in housing demand.

Managing borrowing costs and supply absorption would be key for realty companies, given the spiraling interest rates and higher supply by builders. Besides 161.1 million sq ft of office space that is under construction, developers launched commercial projects with cumulative space of 88.2 million sq ft in the top-seven Indian cities as of October 2010. The ET realty index trades at a P/E of 20 compared with 35 a year ago. Given the relatively benign valuations, the stocks of realty companies with diversified assets and better operating cash flows may regain momentum in the near term. In the long term, execution capabilities would be crucial to justify valuations.

Real Estate News

Pangs Of Growth As Retail Goes Places

India’s fast growing retail sector, considered a sunrise segment is learning to live with what a leading retailer describes as “pangs of growth”. Many retailers are now finding it difficult to manage the runaway growth in the sector. Given its latent potential, organised retailing has been attracting new players- like Bharti-Wal-Mart- even as existing players are expanding operations beyond the metros by investing not just in real estate but also in information technology [IT] solutions. The key challenge before the retail sector is how to handle the growth, according to Nikhil Chaturvedi, managing director of provogue. “A lot of people were unable to handle the roll out plans.” He said . The other challenge is getting the catchment right.” During 2006, retailers learned a lot more about the customer i.e what is relevant and what is not to the customer. The challenge is to get real estate at the right price and to get the right people ,” said Aniyan Nair Head operations and marketing, crossword Book stores.

“Every year is a year of learning since the customer is changing very fast”, said Anshuman Singh, CEO – Value Fashion, Furture Group. Incidentally, Kishore Biyani, the promoter of the Furture group of companies, made retailing a fashionable business much before the advent of the modern retail formats.

Retailers like Subhiksha chose to spread out across the country with their supermarket and pharmacy outlets. “We put 600 stores on ground in one year and retained the spirit and soul of a Subhiksha store that provides genuine value as understood by the customer,” said Atul Joshi senior president, Subhiksha trading services.

“Each day brought new opportunities for entrepreneurs, making the task of what to choose and what to ignore a difficult one. Most entrepreneurs, finally, chose to pick the low-hanging fruit,” said Manjunath Jyothinagar, president, jewellery business, Gitanjali Gems.

The growth was not restricted to the mass-end of the retail market. The luxury market too showed an upward movement. “In 2006, there was a very big movement in the ticket size of the customer spends, especially in fashion and accessory spends,” said Biren Vaiday, MD, Rose group of
companies.

While most retailers are looking at catering to the needs of the customer, Raju Shete, chairman and managing director of Radhakrishna Food land, a company that caters to the back-end, said: “The independents need to be supported. We are capable of serving a broad set of customers”.

The challenges posed by the fast growth in the sector was a point of discussion for top leaders and professionals at a round table organised by The Economic Times recently. The merits of value shopping vis-à-vis experiential shopping, the roles of the government and the industry when it came to investing in infrastructure, and the future of the retail industry were among the issues discussed by the retailers at the meeting that was moderated by Gibson Vedamani, CEO, Retailers Association of India ( RAI).

Subhiksha’s retail model is based on the concept of value shopping and it offers deep discounts to customers. “Buying grocery is not the interesting thing in the world. We want loyal customers and are focused on customer retention rather than footfalls. So we offer everyday discounts,” said Mr. Joshi

However, Mr. Vaidya felt shopping had to offer more than just value if it was to be considered a form of entertainment as seen in the overseas markets. Provogue’s Nikhil agreed that his retail model chose to attract customers throught the experience it offered instead of only through value offerings. In order to chase the consumer, Gitanjali Gems has decided to follow the customer wherever they are and not wait for them to come to them. “We are available on the mobile phones of the customers, in their personal domain,” said Mr. Jyothinagar. Speaking about the fast-evolving retail model, Mr. Chaturvedi said,” Indian fashion is likely to change in the next ten years.”

Retail is a key focus across the world. Being the fastest growing market, now the challenge is to cope with the growth of customers. “The challenge in the future is how to do it more cost-effectively,” Dep Deep Sengupta, vice-president, SAP India.

REALTY PRICES TO JUMP 10% SOON

THE REAL estate juggernaut is showing no signs of slowing down in India. According to a Business confidence survey, real estate prices in the country are expected to further climb up by another 5% to 10% in the next 6 to 12 months

The survey was conducted on the sidelines of the IQPC conference held in Mumbai earlier this week. As per the survey results, there exists a huge demand in the residential services sector with nearly 80 million dwelling units required in next 10 years. The market also expects the cost of funds to increase in the year. But it is not perceived to have any impact on the growth of the markets. RBI’s recent interventions are likely to rein in speculation rather than impede growth. In established IT/IteS centres like NCR and Bangalore, retail and hospitality are considered to be the main drivers. For emerging IT/IteS centres like Kolkata, Chennai and Hyderabad, IT/ITeS is expected to drive the market. Interestingly, the residential sector is not perceived to be the main driver individually in these cities, there by indicating that Tier II and III towns, which have tremendous untapped real estate potential, shall be driven by the residential segment

Industry experts also expect mild price corrections in certain pockets in the country’s mature real estate hubs. The survey participants- prominent international investors private equity players, property developers and investment bankers- noted that the indian real estate market is evolving fast and growing at an exceptional pace. However it is plagued with information asymmetry as information dissemination is constrained and not regulatory mandated, unlike in capital markets.

The survey says return expectations also vary across sectors giving an indication about the perceived risk-return profile in various market segments. IT/ITeS is perceived to have lower risks compared to retail and hospitality. The lack of adequate infrastructure is the biggest challenge facing the real estate sector followed by regulatory ambiguities rather issues like taxation structure and availability of funds.