India's real estate sector which tanked last year is reportedly on the uptick, but don't be fooled by the aggressive advertising and suspiciously attendant news reports of a turnaround just yet. This biggest bubble of the heady pre-recession days of 2007 and early 2008 is still overblown and bang on target for another possible burst. But wait, there's still money to be cautiously made, tons of it, in what may well turn out to be the best realty buying opportunity in decades for non-resident Indians (NRIs) and foreign institutional investors (FIIs) – including Saudis – who have the capacity for a long-term play or at best a wait of at least three years – that's the government-regulated lock-in period for FII realty investments. Look at the numbers and it would appear that realty stocks are set for a rally, especially those of mid-cap companies like Shoba, Brigade, Puravankara, etc., which have done better than the large caps since Jan. 2009. These developers are primarily into residential realty, the prices of which have improved in most cities, especially Mumbai where the advertised price levels are nearing pre-recession highs (though realtors maintain that the ground reality is still quite something else). Of all the numbers out there, the BSC Realty index is the one to watch. The index, which had underperformed the Sensex for the past three months, is now showing signs of outperforming it. One reason for this is that the market, in general, is upbeat as India's remarkable economic recovery continues with more than expected results coming in this month from manufacturing, exports and domestic consumption. More pertinently, realty stock prices are improving because the heavily debt-ridden mid-cap companies are visibly putting up a fight by restructuring their resources and coming up with new and innovative residential offerings at rock-bottom prices. Value homes in gated communities is their latest tack, with 1BHK studio apartments in new townships in the big cities available for as little as Rs15 lakhs (approximately SR122,000), 2BHK for around Rs 22 lakhs (SR187,000) and 3BHK for 26 lakhs (about SR211,000), all down about 50% from the pre-recession days. But here's also where the problem lies. With economic recovery, cement and steel prices are soaring again and it remains to be seen how or whether these developers will deliver on their new projects that are due for completion by late 2012. Reputed players like Shoba, Brigade and Puravankara, though still asset-heavy, remain far short of liquidity to keep their growth momentum going. They own prime properties in cities like Mumbai, New Delhi, Bangalore, Hyderabad, Chennai and Cochin, which were competitively acquired during the heyday of the bubble. Now, in their desperation to raise funds and deleverage their balance sheets, these developers are selling off their ready-for-development lands at marked down prices. In late January, Shoba sold one eight-acre plot in Bangalore for Rs.54 crore (SR44 million) and it has plans to further monetise around 100-125 acres through land sale. Puravankara has already announced that it is looking for an overseas investor. No doubt, the big buyers targeted are FIIs. There are good bargains to be struck now since the developers aim to finalize the deals before the second half of the year when the Reserve Bank is expected to further act against inflation by raising bank lending rates and tightening credit. For FIIs, the opportunity is buy as much as a 75% stake (SR200-400 million) in these properties which have the potential to rise in value by at least 35-40% in about three years – the mandatory lock-in period after which, in all probability, the developers themselves would be in a buy back position to still make a killing by floating housing schemes on these prime lands. For NRIs too the chance is now to pick up an apartment or villa cheap – ideally on loan – in well located and plush gated communities. But be warned there's no guarantee that such projects would be completed on schedule, given that many of them are by desperate builders struggling to stay afloat by accessing fresh liquidity to service debt. At this point, the only precaution one can take before making a commitment is to examine the financial strength, grit and track record of the prime movers of the realty index. On the positive side, a well-placed investment in a gated community project that's completed on schedule will definitely rise in value chiefly because of its prime location – at present, only the reputed builders have such properties. Bear in mind that investments in individual apartment-block schemes (the so-called builder apartments) run the risk of depreciation from oversupply as the building boom continues, driven by population pressure, growing affluence and so long as India maintains a GDP growth rate of even 6-7%, which is not unlikely for the rest of this decade. Another reason why now's the time to invest in residential real estate is that the developers are trying and revive themselves with IPOs over the next few months, which, if their financial targets are met, will increase their bargaining power. Moreover, large caps like DLF, India Bulls Realty and Unitech – which accounty for 71% of the realty index – have not yet triggered a parallel stock price rise in the commercial property space. When this happens, most likely in the next two quarters, the overall real estate sector will see a rush of buyers and it may be too late for NRIs to pick up a good apartment on the cheap or for Saudi FIIs to make a killing in the Indian market. – SG Feedback: [email protected] __
