Saturday, December 30, 2017

The Indian Real Estate Industry: Pros and Cons
Photo: Business Today
It was another tough year for the real estate builders – with sales of residential housing units remaining weak in the 1st and 2nd quarters of 2017.

Overall, the year 2017 has been a mixed bag – as far as the performance of real estate stocks are concerned. Real estate has been the most affected sector post NDA government's decision to implement the process of demonetization of around 86% of Indian currency. On the eve of demonetization nearly 87% of transactions in India were in cash, meaning the country is more cash driven than Russia, Brazil and Mexico. This rocked the boat of the cash driven Real Estate sector. 

This year saw the effects of the implementation of demonetization, with land sales reaching stagnation due to more involvement of cash transactions. But this somewhat reduced the land prices making the end products more affordable to the consumers. 

By April 2017, when the markets were looking to stabilize, RERA and GST were announced in succession which again caused some inertia due to confusion among buyers and developers alike, with both awaiting the final set of RERA notifications/legislation from their respective state regulatory bodies. 

The triple effects of demonetization, RERA and GST, saw the sales in almost all the sectors nosediving, the 1st and 2nd quarter being the worst in case of real estate. However, at present we are observing some pickup in demand as green shoots have started to be seen in the Indian economy. The buyers of premium properties have again started to flock for site visits.

The coming year 2018 is expected to be a year of consolidation  in the real estate sector and will help the big players who already have a command in the market. More joint ventures/joint developments will be the order of the day with financially distressed developers being taken over by larger players. Cutting of debts, completion of existing projects, focusing on the affordable housing projects, etc will be prioritized over launching new ones.

The NDA Government's efforts to boost "affordable housing" by conferring "infrastructure status" to this segment and announcing various tax incentives will continue to attract more prominent developers to realign their products. Infrastructure status to the segment, will enable the real estate developers to access cheaper funds and other concessions. The finance minister also said that under the profit-linked income tax deduction for promotion of affordable housing, the carpet area would be counted (up to a limit), instead of built-up area, making a compelling case for affordable housing.

The Union Cabinet's decision to increase the carpet area of affordable units to 120 sq.m and 150 sq.m for MIG-I (income category 6-12 lakhs per annum) and MIG-II (income category of 12-18 lakhs per annum) segments respectively, coupled with an interest subsidy of upto 4%, will benefit both buyers and sellers since options increase for the former and inventories are cleared for the latter. 

Affordable housing is therefore likely to become an important segment in every developer's portfolio in 2018 and share price of the companies, in this space could show a phenomenal upward march in 2018. Moreover, if the government lowers the rate of GST (Goods and Services Tax) on affordable housing, from 12 to 8 per cent, as has been suggested in some quarters, this could benefit the development firms and eventually, reduce the rates of housing.

Meanwhile the Credit rating agency, ICRA, in its report, said that it expects the growth rates in the affordable housing segment to be in the region of 30% , adding that it would be one of the key drivers for the Indian mortgage finance market.

In the meantime, there are media reports that  a galaxy of top-notch real estate developers has lately descended with a bang on the affordable housing segment. Even lesser known ones like Puravankara Ltd (Rs.167.90) and Mumbai's Sunteck Realty Ltd (Rs.419.85) have taken similar steps, with the former setting a wholly-owned subsidiary, Provident Housing. The realty firms like Housing Development & Infrastructure Ltd (Rs.65.80), Unitech Ltd (Rs.9.25), are already into the segment. Owing to low interest rates, various sops from the government and demand from consumers, more and more development firms are likely to venture in this segment, which was once considered to be a low-profit segment by many in the industry.

Tata Housing, CEO and Managing Director Brotin Banerjee, said:  "While the 12th Five-year Plan pegged the country's housing shortage at 12.78 million units, I maintain it is higher. Our research showed a much larger opportunity in this area. We estimated a total housing shortage of 24.7 million units with 70% of it in the affordable housing space."

With India's urban population growing at an estimated 2.1 per cent per year and expected to reach 600 million by 2031, it has been obvious for years that affordable housing was a huge market. The last Union Budget spelt out the government's own commitment to this segment by promising to provide housing for all by 2022 under the Pradhan Mantri Awas Yojna, which would include building 10 million houses for the poor and homeless by 2019, and 20 million by 2022 - a forthcoming bonanza for developers willing to take the public-private-partnership (PPP) route.

Further, to stimulate housing for the not-so-poor, as mentioned earlier the last Budget increased the ambit of affordable housing, raising the maximum permissible size of such apartments to 60 sq.mt. of "carpet area" (the actual liveable area of a house), instead of "built-up area" (which includes the space taken up by the lobby, elevators, etc.) as before, except in the four traditional metros. 

It raised the time limit for completing such projects from three years to five, and introduced a new section in the Income-tax Act to allow for 100 per cent deduction of tax on profits from affordable housing. In the case of a landowner and developer putting up a housing project together, it deferred the need for landowners to pay capital gains tax till one year before the project's completion. This is expected to prove particular useful for companies like Tata Housing. 

For home buyers too, the Union Budget offered waiver of stamp duty as well as a credit-linked subsidy on loans, while for home sellers, it reduced the period for which they could hold on to their earnings without paying capital gains tax - or buying another property - from three years to two, thereby providing a stimulus to the secondary housing market. It also announced that the National Housing Bank will refinance individual housing loans worth Rs.20,000 crore in 2017/18. Since the launch of the Pradhan Mantri Awas Yojana (Urban), the government has sanctioned 30.76 lakh houses to fulfil its ambitious scheme of ‘Housing for All’ by 2022.

For ready-to-move-in properties, the tax rate is zero. This has made such properties attractive compared to the under-construction properties and is thus helping create fresh demand.

Now coming specifically to my recently recommended Housing Development & Infrastructure Ltd (Rs.65.80), which has already given a return of around 30% from the 1st recommended price of Rs.52, let us examine a few points: 
  • HDIL has a market cap is only Rs.2,842.73 crore, as against its land holding of 200.47 Million
    Housing Development & Infrastructure Ltd 
    Sq. Ft as of September 30, 2016. It boasts of being the Largest Land Bank Owner in Mumbai Metropolitan Region, which it can capitalize to cut its debt. JP Morgan noted HDIL’s balance sheet cost of land is at 50-70%  lower than market value. It expects margins of the company to be above 30% even under affordable housing price points. 
  • Now even if we consider an average price of 5000 per Sq. Ft for the land then this gives a whooping ~Rs.100250 crore for its land bank, which is mammoth as compared to its debt. As of March 2017, the company has a total debt of Rs.2,476.56 crore.
  • The Book Value of the shares of HDIL is Rs.264.59, as compared to its CMP of Rs.65.80. The P/BV is only 0.25. It has a P/E of 19.55 against the Industry P/E of 44.65 giving a chance of further appreciation of the share price. 
  • Housing Development & Infrastructure Ltd (HDIL) on August this year said it is in talks with Union Bank of India for a one-time settlement to stop insolvency proceedings against its arm, Guruashish Construction Ltd, which defaulted crore repayment to the bank.
  • The promoters' holding has increased to 36.49% from 34.25%, a year back. In this A-group Real Estate company, Foreign Portfolio Investors hold 33.98% and Mutual funds hold 3.67%, while Financial Institutions/ Banks and Insurance companies together hold 0.47% making it an ideal medium to long term bet. 
  • On November 17, 2017 Morgan Stanley (France) S.A.S. bought 29,18,400 shares of Housing Development and Infrastructure (HDIL) at Rs.64.26 on the NSE. In May, this year Morgan Stanley (France) S.A. bought 2,423,146 shares of Housing Development and Infrastructure (HDIL) at Rs.91.36 per share on the NSE. It is still more than 95% lower than its all-time high price level of Rs.1,113 hit on January 8, 2008. 
  • We can look for immediate targets of Rs.84-87 (the share price) and upon breaking Rs.93 on the upside, the scrip can touch even Rs.121 in the next few weeks.
    Interestingly J P Morgan gave a target of Rs.140 in March, 2017. The Brokerage  said: "NAV based on valuing ongoing projects is at 15 per cent WACC and the remaining land at 1 time cost is Rs.294 per share”.
    Therefore, remain invested and accumulate on declines. This Mumbai based real estate company is likely to give you good and steady returns going forward.
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