Panellists at CII conclave underline a crisis of credibility and procedural hassles that are hampering progress in the realty business. Propose exploring new areas
Anurag Mathur, managing director, Cushman & Wakefield India, says the country is in urgent need of a regulator for the realty sector, as without this it would suffer and also bring much suffering for common people.
Mr Mathur was addressing the 'Real Estate & Housing Investment Conclave' organised by CII in Mumbai today. "Without an umbrella regulator, the real estate sector in India is going to face severe crisis, and also cause much suffering to the common man," he said.
"Capital inflow in this sector is being restrained, and builders have to obtain a ridiculous number of clearances for projects. The small, retail investors cannot invest in this sector because apart from buying a physical unit, there is no other way to invest. An umbrella regulator will ensure a systematic and governable way of ensuring capital inflow for the industry and make dealings more transparent," Mr Mathur said. The view was acknowledged by most of the other panellists at the programme.
Pointing to the Securities and Exchange Board of India that regulates the stock market and the Insurance Regulatory and Development Authority that governs the insurance sector, Mr Mathur said, "We need a similar nodal agency which will not only provide guidelines, but also make the process simpler and punish defaulters, thereby making the sector credible in the eyes of people."
Excessive and fragmented regulation, and subsequently excessive taxation has created problems both for builders and buyers, pointed out Ms Kruti Jain, director of Kumar Urban Development Ltd. "If a single-window clearance is available, it will not only save a lot of time and hassles, it will also bring down the prices," she said. "About 40%-50% of the price that the customer pays today is for the multiple taxes the builder has to pay."
Her remarks were echoed by RK Khanna, senior executive director, Housing & Urban Development Company, who also said that unless the speculator is taken out of the picture, prices cannot come down.
Sachin Khandelwal, managing director and chief executive officer, ICICI Home Finance Ltd, said without a long-term vision, the sector could not prosper. "We have laws and regulations that vary according to the region, and a new law is enforced every time a bureaucrat or a minister catches a whim. If we have uniform, permanent laws, that will be most welcome."
The panellists were unanimous about the need for transparency in the sector. They felt that with all the major scams having a real estate company involved, the sector was looked at suspiciously and that a regulator may restore its credibility.
Ms Jain also pointed out that builders and financers should move out of the Mumbai and national capital regions. "If we see the way the smaller towns and cities are growing, it is clear that rates there are reasonable. If there is a regulator with a pan-India reach, these small developers can be included in the process, and customers who are left at the mercy of local contractors can also live in peace."
Experts believe that the real estate and infrastructure sectors will benefit from higher economic growth in the country. But there is a case for caution in the short-term
Two little-talked about sectors, education and healthcare, will significantly boost the growth of real estate in India in the current decade, according to Jones Lang LaSalle, the global real estate consultancy. Anuj Puri, chairman and country head, Jones Lang LaSalle India, says these generally "invisible sectors" will contribute largely to the growth of the real estate business.
The real estate business is passing through a particularly difficult phase, hemmed in by increasing costs and sharply rising housing loan rates that has resulted in considerably slower sales.
Mr Puri points out that the education industry, which is likely to cross $70 billion by 2015, will require an additional 16 million square feet in the next four years. Similarly, the healthcare sector is expected to nearly double in value from the current $144 billion to $280 billion by 2020.
"Over 150 hospitals are scheduled to open their doors over the next four years alone, and this will by itself account for approximately 22.5 million square feet of healthcare-related real estate," Mr Puri says.
This optimistic view is in line with the global observation by the real estate consultancy of a strong rise of the BRICS group of emerging markets. It says, these countries accounted for 13% of global investment volumes in the first quarter of 2011, compared to just 2% in 2007.
In the case of India, this is backed by a positive economic outlook. "Despite the continuing turbulence and uncertainty in other parts of the globe, two economies-India and China-will continue to grow at an annual rate of 8%-10%. In fact, by 2020 India will become the 3rd largest economy after China and the US," Mr Puri says. Realty and infrastructure sectors should leverage on this growth, attracting significant investments.
However, there are others who are cautious. "The talk about India being a superpower next to the US or China has been around for quite long," said an analyst. "Nothing of that has happened yet. And real estate being an extremely volatile market, it is difficult to predict how it will behave in the next ten years. The world over, there are people who feel that a realty crisis is deepening. We must be prepared for anything."
In April, the Asian Development Bank said that the realty sector in India would see a U-shaped trajectory, with a lull in 2011, followed by a surge soon after. India's investment-grade real estate was valued at more than $100 billion at the end of 2010-a level that has been achieved only by China.
According to Jones Lang LaSalle, information technology, which has been one of the faster growing sectors, is also expected to continue to generate demand for office space.
"By 2020, the current size of the IT/ITeS market in India will have grown from the current $67 billion to $225 billion. Simultaneously, the markets for hardware and electronics will increase from the existing $45 billion to $400 billion," Mr Puri says. It is estimated that the demand for commercial properties in the country has already doubled from a low of 20 million square feet to 40 million in 2011, and this is likely to go up to 45 million square feet by 2012.
The other big demand generator would be the retail sector, which is brimming with hope after the government started to allow more FDI in major cities. The retail sector, worth $500 billion today, is forecast to grow to $900 billion by 2020. Organised retail, which constitutes a measly 5% of this pie, is also showing healthy growth.
"Demand for retail real estate rose from 4 million square feet in 2010 to 11 million square feet in 2011. If we factor in the spiralling aspirations of Indian shoppers, the constant development of new residential catchments, townships and satellite cities, the real estate demand from Indian retail by 2020 can well be imagined," Mr Puri says.
He is also optimistic about residential space and hospitality industry, which always feature in the radar of realty sector analysts in a big way. The ministry of housing has estimated a shortfall of 26 million residential units by 2012. The travel and tourism market in India is expected to grow from the $144 billion in 2010 to $431 billion by 2020. In the next four years alone, the branded hotel industry will likely see an addition of 60,426 rooms.
The company’s scrip has languished over the past year due to its inability to execute the massive diversification exercise that it has already launched, in retailing. And now Reliance is looking at further forays into uncharted areas—power generation, fertilizers, cement and the overcrowded telecom sector. Its projected growth rate is also not very promising
The term 'Diworsification' may sound a little absurd and unusual; but it has been coined by legendary fund manager Peter Lynch of Fidelity Magellan Fund. He argues that at some stage of its operations, a company starts diversifying its line of business and enters new territories.
As per his analysis, such diversification happens in unchartered areas and leads to the worsening of a company's profitability and growth and hence more often it is 'Diworsification'—i.e., diversifying for the worse.
The same seems to be the current phase which Reliance Industries is going through—the Indian stalwart with a staggering market cap of over
Rs3 lakh crore. Since its AGM (Annual General Meeting) in June 2010, the stock has fallen by something over 10%, while the Sensex has gone up by around 12% for the same period. Indeed, the stock is below what it was exactly two years ago—when the Sensex was at 12,600!
The main reason behind this underperformance over the past one year is the company's inability to execute the massive diversification exercise that it has already launched—in retailing. And now Reliance is looking at further diversification.
Last year, at the AGM, the company's head Mukesh Ambani unveiled a large number of new business plans, and most of them were into areas which were beyond the core strengths of the company, which is mainly into textiles, petroleum, chemicals and allied products. The company plans to enter segments like power generation, fertilizers, cement and the worst of all, the already overcrowded telecom sector.
Moreover, Mr Ambani also said that over the next decade, Reliance plans to double its total enterprise value and also received great applause for this statement from his shareholders. However, a simple back-of-the-envelope calculation will reveal that doubling enterprise value over 10 years is not that big a deal. If Reliance doubles its enterprise value in 7-8 years (this is an optimistic estimate) this means a Compounded Annual Growth Rate (CAGR) of around 9%-10%. So for an investor, Reliance is an investment which promises to offer around 9%-10% compounded growth over the next 8-10 years, only slightly better than the current bank fixed deposit rate of over 9% (which is almost risk-free).
Hence, the risk premium which an equity investment should offer is missing in Reliance and thus this is another strong reason for its underperformance.
RIL has underperformed and may continue to underperform. Why would a fund manager allot premium valuations for a company, which on the one hand is entering into new segments beyond its core competency, and on top of that, is saying that it would only grow at around 9%-10% compounded growth over the next 10 years or so?
An investor—or a fund manager-would rather buy faster-growing companies and examine the prospects of RIL which Mr Ambani is highlighting. RIL is one of the largest institutionally—held Indian stocks, both in India and globally, but no global fund manager will be foolish enough to pay 17 times P/E multiple for a company with this kind of expected growth rate and a 'Diworsification' business model.
Hence, the current correction is no signal to buy RIL; it's just the P/E re-rating which is happening... and which will continue to happen.