In your interest.
Online Personal Finance Magazine
No beating about the bush.
By commonsensical valuation methods followed globally, Indian real estate sports nosebleed valuations. It is important to be aware of this if you want to ‘invest’ in real estate
Property prices across India have run up a lot between 2003 to 2008, appreciating as much as even 400%+ during the said period.
Some places have now cooled down, like Hyderabad due to the Telangana agitation and Bengaluru. Meaningful correction is yet to be seen in metros like Mumbai and Chennai, etc.
Recently, a prospective buyer wanted to purchase a second-hand flat in Chennai for Rs1.2 crore. This flat was purchased for Rs30 lakh by the original buyer in 2005.
The buyer's line of thinking is as the value has multiplied by 4 times in the past 5 years, he would buy now and sell it in 2016 for Rs4.8 crore! He is assuming an absolute return of 400% in the next five years, a CAGR (compounded annual growth rate) of around 32%.
The annual rental yield for his Rs1.2 crore investment is only Rs.2.4 lakh or a mere 2% per annum.
Recently, a client of mine wanted to purchase a property she is residing at for Rs65 lakh. The rent she is paying is only Rs9,000 a month. Even by investing in fixed deposits, she may get around 9.5% p.a. whereas by investing in this
20-year-old flat, her yield (or saving) would only be 1.67% p.a.
The 'House price to (annual) Rent' ratio in her case works out to 60 times. Going by international standards, if this ratio is above 20, then the cost of owning is considered higher than cost of renting.
The generally accepted range is around 15. This was the ratio prevalent in the US, before the great housing bubble began. Considering the crash in the US housing market during the last three years, this ratio may even be lower now.
This means, the rental yield in case of the above client should be at least 5% p.a and preferably 6.7% p.a. Again, this implies that the Rs65 lakh flat's fair price is actually between Rs16.2 lakh and Rs21.6 lakh.
You can use this back-of-the-envelope calculation for arriving at the fair value of the property you are looking at.
Though no ratio can be blindly applied, this is a good point to start with.
Another pointer worth looking at is that the value of the property you are planning to buy on a loan should not be more than 3 years of your annual income.
I feel that your home loan EMI as a part of your income (debt to income ratio) should not exceed 35% to 40% (maximum). Anything beyond this may put a huge strain on you especially in a rising interest rate scenario or any other contingency in life.
Teaser loan rates at lower EMIs in initial years would do more harm than good. The debt to income ratio would get skewed after the euphoria of owning the house has evaporated.
Applying the above three-rental yield, loan to annual income and debt to income ratio, the current real estate market looks very unreal to me.
Home ownership is becoming beyond a dream of the common man. I'm not even referring to the poor or lower middle class. Even for the middle class or higher middle class, it is not about a dream home but dreaming about a home.
The strange thing about the real estate market is that many a times the prices do not come down but markets simply become illiquid. No transaction happens but still the price on paper remains high.
I can only hope that the real estate prices correct significantly. I believe that there is a powerful vested interest lobby which keeps the price artificially high.
Robert Shiller, by tracking the US home prices data from 1890, has mentioned that in the longer run, property prices grew at an annualised return of around 3%, just keeping pace with inflation.
This means the real rate of return in real estate, after adjusting for inflation, is nothing.
Out of curiosity, I browsed to find out how much the S&P 500 index (equity) has given since 1890. It works out to 9.24%.
This again means the real rate of return in stocks, after adjusting for inflation, is 6%+.
This further strengthens my conviction; in the long run (even after I'm dead and gone) equities are capable of providing superior return than any other asset class and investing in equity is the best way to beat inflation.
In India there are no broadly accepted transparent indices across various locations for real estate. The real estate market is not well regulated, like, say, the securities market.
Black money, goondas and political clout play a significant role in this market.
Maybe that's why the regulator has not so far allowed REITS (Real Estate Investment Trusts) in India, which would make it easier for even a common man to participate in the real estate market.
You may not be able to buy a house but at least be able to own a portion of it, doors or roof or wall through REITS!
In the current scenario, the only way to bring down the abnormal real estate prices is to opt for renting rather than owning a house.
Though this idea may not sound pleasant to your ears, try giving it a serious thought.
Maybe you can consider starting a movement against ownership. I would be glad to join the same, if you don't disqualify me for already owning a house!
In a poorer country like Bangladesh, 90% of the houses are owner occupied. Whereas in a richer country like Switzerland, only 33% of the houses are owner occupied. This is not the latest data but at least should serve as a good pointer.
Follow the Swiss!
As I'm in the profession of reviewing people's financial health, I find that once I remove the value of self-occupied property, which is usually a loan under 20 years, loan, and gold jewellery, the net worth is very meagre even for high income people.
People who talk about appreciation in property over a 20-year period do not take into account the interest they are paying on their long-term housing loan and other costs like taxes, periodical maintenance and repairs etc.
Also the focus is on absolute returns and there is no clue about annualised returns.
Once these are pointed out, I'm able to see a surprise on their face.
As leverage (borrowing) is freely available, the next move is to start planning to buy another house!
Housing bursts always lead to banking bursts, who are the providers of the much required leverage, both to home builders and buyers, which is also responsible for keeping the home prices high.
Bankers are one tribe who can actually help in bringing down home prices.
Is it in their interest to do it?
Since the Supreme Court has vacated the stay on 2% royalty payments to music companies, major FM broadcasters—and the music industry—are hoping for the best, before the rollout of Phase III of radio spectrum auctions
While FM broadcasters appear jubilant about the Supreme Court lifting the stay on the Copyright Board's music royalty order and ordered the Madras High Court to dispose of the matter in 60 days, the music industry hopes for a favourable decision.
On Tuesday, the Supreme Court vacated the stay on the Copyright Board's order that radio channels would have to pay 2% royalty, and directed the Madras High Court- where the suit had originally been registered-to conclude the suit within the next two months. The Board had fixed the new royalty structure to standardise rates across the board, which was challenged by some music industry labels.
The order has been deemed a relief by the radio channels, who think a speedy settlement of the matter will help them. In a press statement, the Association of Radio Operators of India (AROI) said, "The rates aimed to correct a long standing demand of radio operators in India who were paying royalty at rates that were almost 10 times the prevalent rates in other countries on the subject. The earlier rates were effectively making the private radio industry in India financially unviable and analysts had begun to script obituaries for the industry on the whole. We are satisfied with the court directive and hope that the industry will now move on to the next stage-Phase III- and the Government will expedite announcement of the auctions."
With Phase III of radio spectrum auction being on the cards, the radio industry no doubt wants the problem sorted out. Hence, they are very enthusiastic about the outcome. So are the music industry representatives, who feel that without adequate royalty support, the industry is going to suffer.
"We haven't lost the battle", said Indian Music Industry's secretary Savio
D'Souza, "there are 60 days to the judgement. Of course we hope that the court will understand our point of view." The industry, as Mr D'Souza said, is already losing a lot of money due to piracy and bad business. While they have to buy music from the filmmakers and artists at huge costs, the radio royalties-which form a significant part of their revenue-will decrease with the new regime. Earlier, a broadcaster had to pay a certain amount of money per hour to the industry labels.
However, otherwise, both sides are happy that the matter will be resolved soon. A representative of Reliance Broadcast Network Limited said, "We are not commenting on the ongoing case, but definitely we are happy that the stay has been lifted and the issue is going to be resolved." said Apurv Nagpal, MD, Saregama India Limited.
"We're delighted that the court has mandated that the matter be closed within two months. We have no issues with the stay being vacated for this period as two months do not matter in the long run."
Phase III, some experts argue, is crucial both for the industry and the broadcasters because with some 800 new radio stations in new locations, it will give a boost to both the music industry and the FM space, which has seen a boom in recent years. The Madras High Court's decision will be crucial in determining the future relationship between the music industry and the broadcasters.
Automobile growth should sustain, FMCG and pharma could see higher growth, while pipe manufacturers may be impacted by higher crude prices amid tensions in the Middle East, according to IDFC Securities
Agri-related companies should perform well in the fourth quarter, following a good rabi season, according to IDFC Securities research. It expects revenues for United Phosphorus, one of the prominent companies in the sector, to grow by 8% y-o-y to Rs16.3 billion and EBITDA margins should improve by 200 basis points (bps) on an annual basis in the quarter. However, higher interest expenses will put pressure on net profit. Advanta India's earnings are likely to grow 12% and profit after tax (PAT) by 5%, it says in an earnings preview report published this week.
Jain Irrigation Systems appears upbeat on the fourth quarter, after a subdued performance in the previous two quarters. Revenue growth is expected to be over 30%, spurred by a 35%-plus growth in its micro irrigation systems business and over 20% growth in the pipes division. EBITDA margins are expected at 22%, translating into an expansion of 163 bps y-o-y.
The March quarter is pegged to be the strongest for the alcohol manufacturing industry. United Spirits is expected to post a 16% growth in revenues on the back of a 13%-14% volume growth, price increases and improved product mix. While extra neutral alcohol prices have remained stable in the fourth quarter, gross margins will be pressurised by higher glass prices. EBITDA margins of 15.6% are indicated for the period under review.
United Breweries is another outperformer with a 35% revenue growth and underlying volume growth of above 20%. Radico Khaitan is expected to see a volume growth of 13% leading to a revenue growth of 18%. EBITDA margins are expected to remain flat while lower interest cost is likely to support an 84% plus net profit growth in the three-month period ending March 2011.
The buoyancy in demand in the automobile sector is expected to remain bullish in Q4FY11. Passenger car and two-wheeler manufacturers are expected to sustain the 20% growth momentum, but the commercial vehicles segment may see a marginal slowdown on account of the high base effect.
Higher commodity costs are likely to cut margins of companies like Bajaj Auto, Tata Motors and Mahindra & Mahindra. Truck maker Ashok Leyland could gain the most on the back of its operating leverage, with a 61% q-o-q growth in volumes.
The domestic business of Tata Motors will face some pressure on margins while that of its niche segment-JLR-is expected to remain strong at over 16%. M&M is expected to witness a sequential decline in margins on account of higher contribution from the auto business and inclusion of Logan in standalone from January 2011.
Margins for auto ancillary units will remain steady as higher commodity prices offset operating leverage benefits. Bharat Forge and Bosch are expected to see strong revenue growth led by higher growth in the commercial vehicles segment and a bounce back in export volumes. Among tyre companies, Apollo Tyres will witness a 5% q-o-q growth in revenues on a higher domestic market share and price increases. Balkrishna Tyres will see a margin improvement on 4% sequential increase in volumes and price increases of 6% q-o-q.
The fast moving consumer goods (FMCG) industry is expected to witness a 19.5% growth in the fourth quarter of the just-concluded fiscal. While companies across the industry have resorted to price hikes to manage raw material costs, the price increases would not necessarily improve gross margins, according to IDFC Securities.
It rates Hindustan Unilever as an outperformer, with the company expected to post double-digit growth in volumes for a fifth consecutive quarter. But EBITDA margins could be at the lowest at 10.3%.
Cigarettes are expected to boost the growth of ITC since there has been no increase in excise duty in the recent Union Budget. Revenues are seen growing at 15% in the quarter. The ongoing conflict in the Middle East and North Africa is expected to have a marginal impact on revenue growth of Dabur and Marico. They are expected to report a revenue growth of 30% and 22%, respectively.
Most pharmaceutical companies are expected to see a growth of 12%-20% in the quarter under review. Recovery in domestic sales and formulations exports will benefit Cipla with a 14% y-o-y growth in revenues. Dr Reddy's revenues are expected to grow by 15% y-o-y on the back of Allegra d-24, Omeprazole and Tacrolimus sales and incremental contribution from Lansoprazole. Lupin's revenues are expected to grow 15% y-o-y on growth across all geographies and profit growth is estimated at 8%. Sun Pharma is expected to report 45% revenue growth on the back of sales contribution from Taro.
Glenmark will be boosted by contribution from new launches and growth in the US. Biocon's revenues are expected to grow 6% y-o-y on expansion of the biopharma segment and higher licencing income. Ranbaxy is expected to see a 15% decline in revenues on the back of a high base (exclusivity sales of Valacyclovir, even as Aricept sales for the quarter have been factored in). EBITDA margins of Ranbaxy are pegged at 14.1% for the quarter.
Rising crude prices and increasing rig count indicate that higher exploration and development capital expenditure could impact future revenue prospects of pipe manufacturers. EBITDA margins are expected to remain flat, but volume growth could rise marginally on a sequential basis. Also, the order book position of companies in this segment continues to rise sequentially, which is expected to see earnings grow in the next few quarters.
IDFC rates power equipment major Crompton Greaves as an outperformer, BHEL at neutral and ABB as an underperformer. Power equipment companies (except BHEL) are likely to report a 9% growth in revenues while operating margins are likely to fall by 100 bps. Earnings growth is expected to fall by 13%, y-o-y. BHEL's provisional performance is pegged at 32% to Rs25.2 billion-below expectations. EMCO is likely to witness a subdued performance on sluggish off-take by clients, while ABB's earnings will be pressurised by lower margins.
Power transmission companies are expected to post a 15% y-o-y growth in revenues on execution of order backlogs. However, higher interest costs will dent earnings growth to 10%.