I invite your views on Real Estate sector which has been beaten down out of shape.
A lot of macro changes are happening which are long term positive for Real Estate :
- Decline in inflation and therefore fall in interest rates which is boon for both Developers and Home buyers
- Passage of Real Estate bill to bring much needed transparency and `Governance' in the RE industry
- Government push in form of Smart cities and Housing for all
- Real Estate is a basic necessity and Sector faces no threat of competition from China or other country or threat of devaluation of currency, etc.
There are 2 business models currently followed in the industry:
- Traditional land banking where Developers hoard huge land banks e.g. DLF, Unitech, Ansal API, etc.
- Joint Venture wherein Developer ties up with Land owner in form of JV thus reducing Capital investment e.g. Godrej Properties, Aashiana Housing, etc.
Though many Developers have tried to have pan-India presence but its still predominantly a regional play because of peculiar regional characteristics like approvals, procedures, local customer preferences, culture, etc.
Geographically, we can classify developers: (list not comprehensive)
- North India: Ansals, DLF, Unitech, Anant Raj, Aashiana Housing
- Central India: Kolte Patil, Sunteck Realty, Tata Housing, D S Kulkarni, Oberoi Realty
- South India: Sobha Developers, Prestige Estates
But I believe the best way for purpose of stock picking would be Debt levels on Balance Sheet and Corporate Governance:
Category A: No Debt / Negligible debt and good corporate governance - Godrej Properties, Oberoi Realty, Prestige estates, Sobha Realty
Category B: Manageable debt and fair Corporate Governance - DLF, Anant Raj, DB Realty
Category C: High Debt and Bad Corporate Governance: Unitech, Ansal Properties
Market has its own ways of rewarding companies in bull run hence, it is not necessary that Category A Companies will get the highest premium when the Real Estate sector picks up. Category B or C company having good customer understanding can also be one of the top plays due to its land bank acquired very cheaply and understanding of local political system and the requirement of the customers and network of brokers and agents.
I think Companies with business model of having JV with Land owners will initially be more favorable as sector recovers but later, they may lag behind due to non availability of land at reasonable prices or JV at reasonable stake. Recent passage of Real Estate bill and Land acquisition act will definitely increase the cost of acquisition of land.
The Real Estate sector till date has been supported and funded by inflow of black money which played a huge part in 2003-2007 boom but in future it may not play as big a role because of strict rules and monitoring.
Disclosure: Have started building portfolio of Real Estate stocks