Shaken but not stirred!

Sanjeev Sharma

Mercurial stock markets can have a pause-and-reflect impact on the realty markets. Though it is not bad news all the way

The beleaguered real estate sector reeling under the impact of lack of demand and unsold inventories is now facing headwinds from the implications of a global and local stock market volatility and sentiment going south because of fears over the black money Bill.

The latest sting in the tail for the sector is the intervention by the Reserve Bank of India (RBI) Governor Raghuram Rajan asking developers to reduce prices to clear inventories which has caused trepidation in the industry.

Chinese whispers

The global sell off in equities triggered by the meltdown in the Chinese economy and stock markets also cast its shadow on the Indian indices which suffered their biggest single-day fall on Black Monday earlier this week causing erosion of investor wealth to the tune of Rs7 lakh crore. Thereafter, trading has been volatile with bouts of gains and losses but overall the up, up and away trajectory of the stock market sustaining for the last year or so is in a pause-and-reflect mode.

The real estate stocks hit 52-week low on August 25 as the BSE Realty Index hit 1142 points. The index comprises stocks, including DLF, NBCC, Indiabulls, HDIL, Unitech, Godrej Property, Oberoi Realty, DB Realty, Mahindra Life, Sobha, Prestige, Ashiana and Prestige among others.

Implications of a “bear hug”

In the current context, while some windfall gains from the equity markets can flow into property, the flipside is that if there is a slump in equities then property at beaten down prices may again become attractive.

The third option being that consumers and investors decide on a risk off trade and implement the ‘cash-is-king’ strategy.

With the rupee weakening, NRIs may again look at trades as for them property becomes cheaper.

From an investors’ point of view, a meltdown in China real estate prices may prod big-ticket investors to look at India as an alternative. From a corporate standpoint, fund raising may be tough if markets remain choppy.

Hoisting hope

However, the developers say the sector will be not be hurt. According to Amit Modi, whole time Director ABA Corp, “Real estate is a long-term investment, hence it’s a perfect option to invest without worrying about these short-term economic fluctuations. In fact, the current stock market upheaval is an opportune moment for all the expats wanting to invest in Indian market, as a strong dollar value will get them their dream house back home on a discount. Also with recent corrections in real estate prices across the nation, the sector is indeed the best option for a safe investment”.

Aman Singh Gehlot, Director, Ambience Group says, “We don’t think the meltdown in global markets will have any material impact on the real estate sector. As you would have seen markets across the globe have recouped. Fundamentals of Indian market are very much in place and the real estate market has started to pickup which is a good sign and we look forward to a good growth phase from here”.

Fear factor

The Black Money Bill is another “fear factor” for the stakeholders which has cut down transactions and money flow into the sector notorious for its use of black money.

According to a recent research report by Saurabh Mukherjea and Sumit Shekhar of Ambit Capital there has been a broad-based real estate pullback, with prices correcting in most tier-1 and tier-2 cities alongside sharp drops in transaction and new launch volumes.

“The drivers for this slowdown are a mix of supply-side factors (banks have pulled back lending to developers) and demand-side factors (the Black Money Bill has created fear amongst speculators)”, the report said.

The report says a combination of supply-side and demand-side factors have triggered the slide. It says RBI data suggests that the banking system seems to have turned the tap off for property developers over the past year. This has in turn made developers either stop construction or cut prices.

“The NDA has cut subsidies sharply (down 9 per cent in FY16) and is shifting subsidies to Direct Benefit Transfer. As a result, the ability of the politician-and-builder to pilfer subsidies to fund real estate construction has been checked”, the report said.

The knowledge that there is many years’ worth of unsold real estate inventory in most of India’s tier-1 and tier-2 cities is causing investors to hold back further purchases.

The big scare factor is the black money Bill. The report says “the black money Bill went live on July 1 and has made high net worth (HNW) families reluctant to invest in real estate”. In addition, the 8 per cent point gap between the gross rental yield and bank base rate highlights the unattractiveness of real estate for investors.

According to the report rental yields in property markets in India have remained extremely low as compared to its other Asian peers, thereby pointing to the over-valuation of this asset class mainly because it can absorb black money.

Data from the RBI (which is available only till 3QFY15) suggests that property prices in tier-2 cities (e.g. Lucknow, Bhubaneswar and Chandigarh) have also moderated in the past few quarters. More worrisome for the industry is the recent statement by RBI Governor Raghuram Rajan that if real estate developers lower the prices and clear the unsold stock then it will make the demand pick up in the market.

A twisted tango

In boom times, stock markets and property markets move in tandem leading up to what is called heating up of the economy. But there has been discrepancy in this rule if we take stock of the movement in both these fields over the past few years. For the past one year, however, while the stock markets have been hitting headlines and scaling new highs, the property market remained in the slow lane. If you go back a couple of more years, after the 2008 financial crisis, interest in stock markets was low but property markets were booming.