Housing Can’t Be Both Affordable and a Good Investment
As India focusses more on affordable housing - Investors need to log out … and End users need to log in …
Real estate value chain is interesting . Lets look at where value is generated and who captures that value …
-
Agri Land to commercial land - Highest value generation - Value capture by developers and Govt / Intermediate brokers
-
Commercial Land to Developed properties : Medium value generation : Higher value capture is by financers and to much lower exent by developers and least by final consumers …
-
Holding / Leasing Developed properties : Low Value generation : Max value capture by Mortgage lenders . Medium value is captured by savvy customers .
Now in this thread we have restricted discussion to developers without focussing on their competency in value generation across value chain and how much of generated value they can capture
In 1990s : DLF was king of Value chain formula 1 when large portion of Gurgaon agri land was converted to commercial and developed properties – They did a great job in capturing value across all three components … But they failed in other cities precisely as they were not able to do Step 1 of value chain in those cities …
Today if we look at real estate companies so interesting competence is visible
-
Mahindra Lifespace - Focus & ability on converting agri/ barren land to SEZ and Industrial sheds across states
-
Oberoi Realty : Ability to buy " non core assets (land)" from companies @ reasonable valuation ++ Ability to capture higher / equal value from value generated … Probably this one of few companies that is able to capture value equal or higher than financers in its project - on account of strong balance sheet.
-
Piramal Realty : Leveraging finance arm to buy asset ( land / properties ) @ distressed prices .
I think Ashiana Housing also deserves place along with Mahindra Lifespace
Yeah True, that is because there was political backup & no process in place to stop the land sharks earlier. Now, the game is changed with GST, RERA, Law against conversion of agri records, digitization of land records.
But, what if the government changes at the center in the coming election? all these rules are diluted to certain extent to favor their own men. 
Kindly highlight the competency and value capture of Ashiana Housing .
Bank of England’s scenarios under a “disorderly” Brexit:
• Britain’s GDP drops 8%
• House prices plunge 30%
• Commercial property falls 48%
• Pound slides 25%, beneath $1
• Unemployment rises to 7.5%
• Inflation accelerates to 6.5%
Under this circumstances a desperate builder Lodha hopes to get IRR of 18% in London real estate sales … I like optimism of Indian Real estate developers …
This is just the city’s hyped up alarm to get people to rescind Brexit. Do you think the rich people from CHINA and INDIA care if London is in EU or not. It’s the englishmen who enslaved us, not the germans-french-or polish.
The financial district was the most shocked when voters voted for Brexit. BoE just happens to be their agent.
Since this not thread to discuss brexit and its impact on London Real estate … I will keep it short
With Brexit - people expect EU will withdraw favourable terms of trade from UK . This means manufacturing and export to EU will be unviable … Hence JLR is shifting is plants , Unilever wanted to move registered office from London to Netherlands etc … People have feeling that London will lose its status as financial capital of Europe .
This is reason for lower demand for real estate in UK .
Real Estate Sector in a Consolidation mode…
Players with Negligible Debts and Strong Execution capabilities will strive well…
Godrej Properties
Oberoi Realty prestige
DLF
Will be Leaders
Sector poised to do well after consolidation of 10 Yrs.
Interest Rates will add more positiveness to the Sector
Sobha, Prestige Estate Projects, Brigade Enteprises, Puravankara: Government of Karnataka is planning to deny permission for building new apartments in Bengaluru for the next five years until the water crisis in the city is resolved. (Media Reports)
Real Estate Sector showing revival despite of negative Noises.
Most quality Real Estate Stocks near 52 weeks High.
-
although most investors have the competence to evaluate a real estate developers book of assets, this still makes for a tricky investment.
-
real estate (mainly residential dev) is a deal making business. the book/value today is actually the deals made some years back and some cases many years back. and given most projects run for 5-10 years and the money recv is re-invested in other deals. there is a great churn. so to predict the future quality of book, the focus on the competence of the promoter/deal-maker becomes much more important than in other industries when looking at this as a long term investment. also, given this nature of the business it becomes relatively easy for the promoter to swindle (overpaying of land/buying end products at a discount/overpaying for services). and once you filter for competence and ethics what remains in a very small subset.
-
however, there arent any good quality names that are trading at a substantial discount to book/nav. and there are quite a few trading at a huge discount to book.
-
but, i still find focus-on-quality a better strategy to play the real estate sector currently than possibly buy a basket of crappier names who are apparently trading for a fraction of book. this at best can be treated as options and should be sized at such. because
a) discount is overstated in crappier/leveraged names. as almost all cos capitalize a portion of interest/admin/legal fees etc. in some cases this can form a fair bit of the reported book-value.
b) for the crappier names to do well we will need the underlier real-estate prices to start going up. it is hard to know if that is likely in the next 2-3 years.
c) stronger balance sheets lead to lower capital intensity because : 1) jda and/or distress sales means lower cost of raw land. 2) funding costs 9% v/s 17+% 3) and because of the above higher confidence of end buyers to buy in-development properties in quality players which further reduces the need for equity/debt. there is nothing like float. this is a positive loop which could continue for a while esp. given individual developer are very small relative to the market size. and this works in reverse for weaker developers.
the good thing is this is not all theory. this is already happening and can be verified independently fairly easily. look at the funding cost. look at pre-sales of some developers numbers growth rate over the last 2-3 years. compare the execution intensity/debt now vs a few years back.
all of these points dont mean much if we are at the top of the real-estate cycle in terms of price/volume of the underlying product. but i think the peak was about 3-5 years back. so we are closer to the bottom than to the top.
the market is distinguishing between the 2 buckets well, i think. good dev at close to my estimate of fair value of current book. and a free optionality on a) return of pricing power b) expansion of book at favorable terms. i however havent found any good developers in the bad bucket now. unlike post demonetization where you could find good dev at less or substantially less than book. even though its not a statistical bargain i think the “good bucket” would make a good investment over the next 5-10 years.
I believe Real Estate Sector providing Great opportunity. Instead of all negative noise sectors registered highest sales of last 4 Years.
Real Estate Sector now can be seen as Branded Consumer Products. RERA brought lots of transperancy and discipline among Builders.
Already 50% gone out of the Business and expected another 50-75% won’t survive.
That will lead to massive opportunity to well managed Cos. Consolidation already going on.
I have invested in a Mumbai based Real Estate Co Sumit Woods LTD.
Business Model is Asset Light.
JV, JDA, Development Management.
Top notch execution since 3 Decades.
Visibile Cash flow & Great Project Cycle.
Scalability with Quality.
Discussions welcome
One could also consider investing in physical real estate as an alternative to shares of real estate cos. The rental yields are attractive and there is a strong possibility of 6-7% appreciation over a 10-12 year horizon. If you can get a 4-7% yield then one can get a good 12-13% stable return and more if rents are invested in an FD.