We picked off on the same subject line which Economic Times came out with on July 16th 2012 about a nose dive in property investments by Keralites who are NRIs. You can read the full article here:
http://articles.economictimes.indiatimes.com/2012-07-16/news/32698366_1_property-sales-property-prices-nri-investment.
We also post our analysis and recommendations on the basis of the article below.
ARTICLE SUMMARY (Source: Economic Times)
1. NRI's account for 70% of the investments in real estate in the State and this has
come down by 40% in the last three quarters.
2. Sahara, DLF, Unitech, SRK have
delayed their projects or cancelled their launches.
3. Key reasons for lack of interest is pointed out to be long delays and as per the article a staggering 70% of the projects in
2700 to 4000 square feet bracket are delayed by upto 2 years.
There are 10,000 such properties.
4. People are investing in projects which are nearing completion to remain safe with their investments. There is also an example of an NRI investor who put in
70 Lakh in 2005 and is still awaiting possession.
5.
Wait and watch strategy by NRIs in the hope that property prices would come down or investment in asset's which give return of
8-9% and are relatively safer.
6.
Small builders are more affected due to working capital requirements not being met
OUR ANALYSIS
A careful second look at the article and a root cause analysis will give you little more insights into what is the real cause behind the problem. We take up one at a time.
Lower Investments
A drop in investments in the last three quarters in the real estate sector is not just typical of the Kerala market. A global economic down turn and less money in the global system and even people losing jobs in markets like Abu Dabhi & Dubai are reason for the same. A sceptical personal future outlook means people want to stick on to their money than invest in real estate. However if you look at the broader picture of the boom - bust cycle, investments tend to work cyclically and you might see most of the world at a peak again in the next 4 to 5 years. Kerala and Trivandrum are particularly ranked as
highly competitive and good cities to invest in by most
real estate surveys which were done this year and in 2011. Hence the opportunity is still quite good to invest in real estate as the fundamentals of the Indian economy are still good although GDP growth rates have slowed from 8% to about 5%.
Delays by Larger Builders
Delays and cancellations by larger builders are not just typical of Kerala. There have been huge drops especially by large builders in cities like Mumbai and Delhi. Please read more here on an article published in July 5 on Hindu Business Line.
House sales slump in Mumbai due to oversupply. The article mentions that developers have been more open to negotiation in the premium segment, reducing prices upto a maximum of 25 per cent. What we would like to highlight are the fact, that as mentioned by us already real estate is a high leverage business. Groups like Brigade could take loans of upto 300 crore for a Villa project from banks at the prevailing interest rate. When supply overtakes demand, developers tend to slow down on the construction to keep the costs low, since they would want to sell their unsold units. This is particularly evident in the highly valued segment. Often larger builders take up larger projects or announce them in advance to garner market attention or even for share price escalation. However when their earlier projects in cities like Mumbai or Delhi get stuck due to lack of demand, they are bound to cancel their existing plans or put them on hold. We believe the reason for cancellations are also due to undercurrents across India and not just due to a lack of demand in Kerala. Larger builders having a stake in projects across the country will take a look at their working capital as a whole before committing to new projects.
Premium and Luxury properties
The point to note here is that 10,000 properties mentioned here are premium or luxury properties since a typical 3BHK house does not exceed 2000 SQ. FT. in any apartment. A 2700 to 4000 bracket indirectly refers to the Villas segment or the 4BHK or Duplex or Penthouses which usually come in that range. In most villa projects especially by smaller builders the number of units are less and hence cost per property and eventually the risk of completion per property is higher. Thus delays could predominantly be attributed to the premium or high value segment above 1crore, since a 70 Lakh investment in 2005 is equivalent to a 1.2 crore rupee investment in today's time. The real delays have not been reported in the budget or larger chunk of the market which is under 60 lakhs range.
Wait and Watch Strategy
In the world of economics wait and watch has never really worked. Warren Buffet invested and bought 5% share in Gold man Sachs when the market was in a bust. Facebook become a 100billion IPO after the bust cycle and Google came out after the 2001 bust. So investors who prudently invest always tend to make more money than others who wait. However investment has to be done with caution and awareness especially since what you want to do is multiply your investment and get a handsome ROI in 5 to 6 years or longer. We believe that since real demand is there in certain sections of real estate in Kerala, investing prudently with sound advice will not leave you in a state of worry.
Small Builders
As advised in our earlier
few articles in this blog, you really need to watch out for the builder and take care of a few factors for new launched properties which deter buyers. For small builders their leverage, track history, ownership and other financial commitments need to be looked at before deciding on a property. Sound advice usually would deter you from a faulty investment and keep you away from
fraud.
Our recommendation from the above analysis, is not to feel disgruntled but to really build awareness about what you are putting your money into before making the decision. Builders can easily do marketing events or road shows or boast of things on the internet, but it is for the investor to come to a decision on what he or she wants to buy.
If you are interested in buying a property in the premium or luxury segment above 1crore, there are
special advisory services which cater to your need ensuring you can be rest assured of a safe investment. Without proper advice and by just going by hear say, you always run the huge risk of your money stacked up in a real estate investment with zero returns.
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