Motilal Oswal Real Estate

MORE, (Motilal Oswal Real Estate) the real estate arm of Motilal Oswal Group plans to raise about Rs. 1000 crore through its third real estate fund. The funds will be utilized for development of residential projects by reputable developers in the Mumbai Metropolitan Region (MMR), National Capital Region (NCR), cities like Bengaluru, Pune, Chennai and Hyderabad. The money will primarily be raised in about a dozen transactions of Rs 80-120 crore each from high net worth individuals and family offices.

Explaining the move, Sharad Mittal, director and head of the fund said, “the realty market is consolidating right now and prices are expected to remain stagnant for some time. This therefore, is the correct time for investors to invest through indirect investing since we would participate in the project profits rather than relying entirely on the future price rise.”

The fund has been set up as an alternative investment fund or AIF category II, registered with stock market regulator SEBI. “We expect to achieve first close by mid-January 2016 and conclude fundraising in the next six-nine months depending on the market conditions. Given the current scenario, direct investments may not fetch superior returns,” he added.

Motilal Oswal has in its two earlier funds invested capital under a mezzanine structure in top five property markets with developers such as ATS, Shriram Properties, Godrej Properties, Rajesh Lifespaces, Ahuja and Casa Grande. The new fund will also focus on top six property markets in the country. The first fund worth Rs 200 crore, raised in 2009, has been fully deployed and is currently in exit mode. The fund has exited its four out of total seven investments and given returns of about 82% of the capital. In March this year, MORE had raised Rs 500 crore through its second fund which is presently in investment mode wherein around 80% of the capital has already been deployed.

The third & the new fund, with a tenure of five years from final close looks to target a gross internal rate of return of about 23 – 25%. “We shall continue to undertake mezzanine investments with established developers for their mid-income housing projects across top cities. We shall also undertake structured equity investments depending on the market scenario,” said Mittal.

Image Credits : DNA

Festival season is considered auspicious for real estate purchase and therefore developers gear up for boosting their sales. In a research report by JLL India, it was noted by its Chairman & Country Head Anuj Puri that traditionally real estate sales increased by up to 25-30 per cent during the festive season. However, this year it is anticipated that sales may not increase more than 15-20 per cent as the sentiment is still somewhat subdued and there is an affordability gap in larger cities.”

The real estate market, especially residential segment, has been experiencing a slowdown for last 2-3 years, leading to sluggish sales and long delays in the completion of projects.

JLL said that the property market is rich with options for prospective buyers with developers offering discounts in almost all the projects, particularly those which are ready-to-move-in. JLL also advised buyers to cautiously examine the offers and freebies to ascertain their true contribution in terms of the overall value of the property and the deal.

Puri added that buyers may perhaps consider the offers wherein stamp duty and registration fee is waved off, as this translates into an actual saving. He further stated that to improve the demand for housing, the government needs to review the taxes and duties that affect the pricing of any project. The process of granting approvals also requires swiftness to reduce the time taken from conception to actual delivery of homes.

moody’s investors service

According to Moody’s Investors Service, in past two to three years the capability of the Indian real estate developers to execute commercial and residential projects in market has been challenged because of late approvals and stretched liquidity. And such delays have slowed the flow of payments from buyers and investors as well as it has also reduced investor demand for new projects because of low returns and locked up capital. The more they added that India’s premium and largest property developers will face new challenges in next 12 to 18 months over the environment operation including; flat sales, stagnant prices and weak cash flows.

Recently, Moody’s releases a report on the Indian property market with title “Cash Flows to Remain Weak Amid Flat Sales and High Costs”. According to Vikas Halan, VP and Senior Credit Officer at Moody Investors Service, “A the same time, apart from many difficulties, we are expecting solid economic growth for the year 2014-2015  and it will provide some support to the sales in real estate sector, which will enhance the confidence and investment activity of the investors and buyers”. The more he added that if the cuts of interest rates by the Reserve Bank of India will be passed by banks, so it will filter down the property market by reducing the cost of borrowing for buyers as well as real estate developers and it will support the demand. But declines in savings rates and high residential property prices will act as the major factor, especially in the cities like Mumbai and Delhi where property market exhibits a notable degree of variation when it comes to affordability and cost of property.

It is expected that some of the major real estate developers such as; Lodha Developers Private Limited (Ba3 negative), Unitech Limited (unrated), DLF Limited (unrated), India-bulls Real Estate Limited (B1 stable), and Oberoi Realty Limited (unrated) will face challenges in the operating environment and they will experience more pressure on cash flow, sales and high inventory volume because they are operating in the city like Delhi and Mumbai, where prices of properties are the highest. However; in contrast developers such as; Prestige Estate Projects Limited (unrated), Brigade Enterprises Limited (unrated), and Sobha Developers Limited (unrated), which are Bengaluru based will face better and stable demand for housing sales.

Currently, instead of reducing the prices, real estate developers are modifying product and offering some lucrative schemes. On the other side the confidence of consumers are getting boost due to Real Estate Bill (Regulations and Development), which is planning to set-up new  regulatory authority and guidelines for residential and commercial development. However; still developers are facing stricter terms over the receipt of capital and use of advance cash. But according to Moody’s the new bill will promote the transparency, accountability and discipline in the real estate market which is positive indication for homebuyers.

RBI cut key interest rate

With the recent news that RBI has decided to cut the key interest rate, it is expected that this move of RBI will boost the affordable as well as premium housing demand and it also improve sentiments in the sluggish property market. Property consultants and real estate developers have demanded that interest rates should be further reduced. According to one of the realty Magazine, “This move is hope for the reduction in mortgage rates, which would improve residential sales in all over the country that have been suffering from general slackness in recent times. As per the recent research of JLL India, “Housing sales drop by 1.75 lakh units in the primary markets of 7 major cities in 2014 against nearly 2 lakh units in the previous year due to less demand. Happy with softening inflation, RBI decided to cut the benchmark interest rate by 0.25 per cent to 7.75 per cent with a view to boost growth.

Positive views of leading realty developer:

According to Rajeev Talwar, Group executive director of DLF, “It’s an awesome New Year gift and it seems that the finance ministry has putting his effort to convince RBI governor. Given the background of RBI governor, even the small beginning will be marked as big signs of hopes for the Indian economy”. The more he added that, this move would definitely encourage buyers now to invest in new homes or second homes.

Anuj Puri, Global property consultant JLL India Chairman & Country Head stated that “I expect this cut in interest rate to be the first of several to come and these will cumulatively make a big difference for home loan borrowers, as in present, the current interest rate cut will help revive market sentiment, which is very timely”.

Parsvnath Developers Chairman Pradeep Jain, appreciated the RBI decision and stated that realty sector has been struggling from the last 3 quarters with lower demand and more inventories. This decision would help reduction in EMIs and thereby encouraging fence sitters to conclude deals. Developers would also get funds at comparatively lower rates.

This move will instill hope as well as confidence in the real estate industry which is recovering from housing sales is around the corner, stated the Sanjay Dutt, Cushman & Wakefield Executive Managing Director, South Asia. Whereas; David Walker, MD of SARE Homes, said, “This step of RBI will cheer up the markets and hoped that financial institutions will pass on this reduction to customers, which in turn would boost housing demand”.

As per the Lalit Kumar Jain, Chairman of CREDAI, the apex organization of real estate developers, RBI’s decision is as a good beginning but said this is not enough as a reeducation of 200 basis point within short span is needed. Whereas; the Consultant Knight Frank India CMD Shishir Baijal, stated that This decision of RBI is positive approach that would benefit the debt burdened developers and stretched households alike and to comment on this RBI decision Anshuman Magazine, Chairman & MD of property consultant CBRE South Asia, said that this decision is good and in current market situation this reduction in the base rate is an important step in improving home buying sentiments.

According to CREDAI (NCR) President Rohit Raj Modi, “The rate cut will help the real estate developers to expedite projects that were otherwise facing tight fund crunch”. The more he added that home buyers are dreaming to own a home that would also get a boost as we expect an accelerated purchase cycle. Mohit Goel, CEO of Omaxe stated, that this move clearly shows RBI’s shift in stance in favor of positive growth and it is also correct time to usher in a slew of out-of-policy measures such as; to allow the banks to lend more to real estate, easy funding norms and more. Now real estate sector will play role of a catalyst in driving the overall economy.”

Amit Modi the ABA Corp Director said, “This was the most awaited change and development in policy and now easing interest rate will help to revive the health of businesses such as; Real-Estate which are highly sensitive to interest rate movements.” According to Ansal API Vice Chairman Pranav Ansal, “This is so positive step from RBI, which will boost housing sales and improve overall sentiments in the real estate market. The more he added it is a good sign and now real estate sector will look forward to RBI take the drastic steps in its forth coming monetary policy”.

Minimal drop in property sale in Mumbai

Even as Delhi and its surrounding region witnessed a 20% drop in sale, Mumbai saw marginal drop at just 2 per cent while Chennai and Hyderabad and Mumbai saw 18% and 13%, according to the 2014-15 real estate research survey by Liases Foras. Liases Foras, a non-brokerage firm, is into real estate researches. The survey was released on Thursday. It says that property sales across tier I cities in the country have dropped.  Proving that change in guard at the Centre has not changed the property market scenario.

The survey says that construction activity has increased in affordable and ultra-luxury segments in Mumbai. Flats that cost less than Rs50 lakh are selling more. Besides, the average prices have gone up in Greater Mumbai and Mumbai metropolitan region. In Greater Mumbai, this year a 2BHK costs Rs2.30 crore. Last year it was Rs2.14 crore… in MMR, a 2BHK flat cost is Rs1.32 crore while it was Rs1.20 crore last year, according to the report.

According to Pankaj Kapoor, MD, Liases Foras, “Currently, property market has been quite inflated and over-stretched. No one, including end-users and investors, wants to invest his/her money… and that has resulted in decline in property sales” . “Besides, there is a huge gulf between the current rates and expectations of end-users. They are still waiting for price correction. All things are attributed to the stagnant sales in Mumbai and other cities,” he told a newspaper. “Buyers cannot afford such costly houses. But developers have little choice. The land cost is already high and buyers have to pay various government taxes. If we meticulously calculate, buyers are forced to spend almost 10-15% of total flat cost on stamp duty, registration, valued added tax, service tax etc. To make houses affordable, the government should slash taxes,” Manohar Shroff, general secretary of the Maharahstra Chamber of Housing Industry (MCHI) demanded.

The Narendra Modi-led government cannot increase peoples’ income overnight. The current property market is beyond the reach of common man. An ineffective market will continue for some time. Despite low sales, developers are not bringing down prices. But they are offering sops such as waiving off stamp duty and registration charges to lure buyers.

Maharashtra and Haryana, the two states which went for legislative Assembly elections on October 15, have another thing in common. They are among the most prominent property markets and together are estimated to constitute 30-40 per cent of the pan-India real estate universe.

While the polls might not substantially impact the property prices in the state, these could slow down policy clearances and infrastructure projects critical to real estate, say analysts. Since the elections happened just about a week ahead of Diwali, a time for the biggest real estate launches, those tracking the sector say there could be some changes and delays in new projects.

A short-term impact on real estate activity and approval processes is likely because of these elections, says Anshuman Magazine, chairman, CBRE, a global consultancy in the sector. “It is usual for project approvals to come to a standstill before elections.” he said and added that infrastructure projects in the states could also be hit, affecting real estate. A Cushman and Wakefield study put the total estimated unit launches at 172,500 across major eight cities of India in 2013. As for prime residential, Mumbai made for 17600 new apartment units in the first half of 2014 and Pune 5,000, according to CBRE data.

The study also shows Mumbai is one of the biggest chunks, constituted 2.2 million sq ft of new prime grade-A commercial supply in the first half of 2014 of a total of 14 mn sq ft across this segment in India. So, in grade-A commercial space itself, Mumbai is the primary real estate driver in Maharashtra and together with Haryana forms more than a third of the pan-India new supply.

Real estate players are a bit cautious and do not want to dampen the Diwali spirits. Lalit Jain, chairman of the Confederation of Real Estate Developers’ Association of India, told a newspaper: “In Maharashtra, the political system has no role to play on project approvals.” Niranjan Hiranandani, managing director, Hiranandani Constructions, said there would not be any perceptible change due to elections before Diwali. However, people would look forward to new policies in housing and incentives for affordable housing. Those policies would depend upon the result of the elections and who forms the new government. Many issues in real estate are governed by state laws. The actual loss to real estate caused by policy uncertainties will be clear after the poll result and how quickly the new government is able to take charge, an analyst said. “The silver lining in all this is that the real estate market is already slow, limiting the impact of elections,” he added.

Real estate in Navi Mumbai is all set to witness yet another boom with the prime minister Narendra Modi laying the foundation stone for the Rs 4,000 crore special economic zone at Jawaharlal Nehru Port Trust (JNPT).

Navi Mumbai where the property prices are as high as those in Thane is all set to witness a surge in prices, says Arvind Goel, president of Maharashtra Chamber of Housing Industry (MCHI), Navi Mumbai unit.

According to Goel, the inauguration of government-owned SEZ holds a lot of significance for Navi Mumbai. Currently, a 2BHK in Navi Mumbai costs Rs 70-90 lakh. A 20-30% rise is expected. Arvind Goel, says demand for commercial property will also go up. “There are 250 supplementary industries, directly and indirectly dependent on real-estate sector. A real-estate boom will develop them as well,” he said.

In three years, the SEZ will start. Since land for the 277-hectare zone is already acquired and in possession of the central government, no delay is feared. Widening existing road network to 6-8 lanes and development of service are also proposed to facilitate the vehicular traffic movement within the city.

The Thane-Belapur belt, known as an industrial belt, is slowly turning into a realty belt with the swanky residential and commercial complexes replacing the smoke stacks. “Just as the property market in Pune developed immensely, thanks to the IT industry. Employment is main factor for the growth of the housing industry and cities. Similarly, Navi Mumbai will grow in the next five years as there will be lots of employment opportunities with new start-ups, BPOs, KPOs and other new age industries coming up in the satellite township,” a realty watcher explained.

“Now developers will buy huge tracts of land in Panvel and other locations to develop townships. It’s a good sign that Navi Mumbai is developing. It will become another developed city in the near future,” says Manohar Shroff, chairman of Shivam Developers, adding that housing and real-estate will attract lots of investors to Navi Mumbai.

Some developers have added a note of caution for their colleagues who are gung-ho about the development of real estate on the back of SEZ planning. They say that the builder fraternity should not create a false euphoria about the housing project or it might turn out to be another bubble burst.

Real estate sector has another reason for eyeing the general elections results, which is, expecting to make big business from property buyers! It is very clear that property buyers and developers are very anxious about any action taken by the existing government. A general election is the only time which tells whether real estate market will prosperous or remains intact.

 For the coming next few years the next government’s employment and economic strategies will have greater impact on the growth of real estate sector. Since the last two years were not good for the Indian property market, recovery has become very essential. Developers are expecting a positive response post-poll. But so far none of the campaigns found success in defining a comprehensive offer for retrieval of the real estate market.

 The real estate market is the main financer for elections; developers provide funding to politicians for financing their respective campaigns before the polls. This time slump in the housing absorption has negatively affected developers’ liquidity, as a result In order to support elections; many developers are postponing their projects and cutting down on new launches.

Though there is assumption that property prices will raise post elections but election results do not make or break a market, they do affect market opinions.

 Post elections, if the revival is unobstructed, we may see a large number of property buyers re-entering the real estate market. Political uncertainty surely has a noticeable effect on the Indian property market, and it is also not easy to isolate that political uncertainty from larger economic elements like interest rates and job creation. A superior image of infrastructure will help make the market more cheerful and flexible.

 Currently the key aspects to think about Indian real estate are unsold inventory, absorption and interest charges. Irrespective of which party wins, all these aspects will not change overnight post elections. Over the period of time, what will matter most to the real estate market are FDI in housing, REIT legislation’s and the effective execution of Real Estate Bill. The Reserve Bank of India will also have an important role in the post-election situation, whether it reducing interest rates for home buying, or permitting flexibility to bring back endowment schemes, or reorganizing debt for debt-ridden developers.

 Certainly, a new established government will increase businesses and boost investor’s buoyancy. However, at least for a year the real effects of any changes will not get revealed in the economy. A perfect recovery can happen only with the combination of low interest rates, bottomed-out property rates, and a regain in buyer’s confidence. If the upcoming new government is capable of keeping low interest rates and high employment opportunity, it can provide the right platform for a steadier and investment-friendly real estate market.