In your interest.
Online Personal Finance Magazine
No beating about the bush.
The real-estate market is not focusing on end-user sales, but higher valuations and raising funds through the capital market, says an independent real estate researcher
Real-estate sales fell by 50%-60% in the quarter ended June, as the market turned speculative and developers held prices in the hope that they would improve. Real-estate brokers also expect prices to rise over the next six months.
“The situation in the real-estate market is speculative. Despite falling sales and an inventory pile-up, prices are continuously rising,” said Pankaj Kapoor, founder and managing director, Liases Foras, a real-estate rating and research company.
“It looks like the focus is not on the consumer, but on valuations and IPOs (initial public offerings). People are looking for signs of stability in the stock market. It’s nothing but hoping and that is what is holding the prices in the property market.” Mr Kapoor suggested that the market would not undergo a correction until the hopes of the industry were fulfilled.
In a recent survey of real-estate brokers conducted by ICICI Securities, 93% of the respondents said that prices had moved up during the past three months, and 75% said they had found an increase in inquiries in the affordable segment. According to the survey, Mumbai and the National Capital Region (NCR) had seen the maximum rise in inquiries.
In the NCR, multinational real estate and property service firm Knight Frank said that an increase in consumer confidence, together with availability of various affordable housing units was the key factor driving demand for housing. During the second quarter, the NCR residential market saw the introduction of a new ‘flexi-payment’ plan for buyers and the revival of ‘EMI on possession’ scheme. The flexi-payment plan is designed along the lines of the construction-linked plan and aims to ease the liquidity pressure on buyers, an improvement over previous schemes. Knight Frank, a commercial and residential property estate agency, believes that the two schemes along with reasonably priced home loan rates, could spur the demand for housing in the NCR.
Mr Kapoor maintained that developers alone could not be held responsible for lower sales. “I feel that investors and merchant bankers are not giving them (developers) a green signal, in that investors are not too keen to buy real-estate stocks. In the last two or three IPOs, the participation of retail consumers was a low 7%-8%. The majority were institutional investors. This is an indication that there are not many buyers for realty stocks at current prices and valuations.”
During the June quarter, the Moneylife Real Estate index inched up 1% to 3,790.33 points, while the Bombay Stock Exchange (BSE) Realty index declined by 2% to 3,196.8 points. During this period, the BSE Sensex rose marginally from 17,527.8 points to 17,701 points.
What lies behind these impressive statistics? The urban markets are saturated — rural and semi-urban India, however, are in top gear
Statistics can be great fun. Shown variously using multiple software tools provides great relief, often in colour. But looking beyond them is even better. The year-on-year increase in automobile sales for August 2010 is one such case in point. With the possible exception of Fiat, it seems everybody else in the motor vehicle business in India has registered a 15%-35% growth in sales - and even more in the case of some manufacturers who had low baselines to start with in 2009.
But numbers, as always, don't always provide the full picture. Especially, when it is easier not to look beyond the numbers.
So where are these increased sales coming from, and what are the factors influencing them, what's the picture behind dry statistics?
Getting truthful answers out of the marketing, sales and production people in automobile companies is like trying to remove sugar from jam and marmalade. You know it's there. They know it's there. You get a lot of sweetness, and the label tells you that jam made out of strawberries needs to be bright red in colour, but the truth is truly all well mixed up inside - unless you look at the fine print on the labels.
And the fine print behind much of this growth is - semi-urban and rural India. None of the people from the automobile companies were willing to come on record, because some of this is now strategy, and some of it is success, and some of it is surprising to them too, but here goes anyways. Gandhiji was spot on correct, and nowhere does it show up better than with automobile sales lately.
A leading motorcycle manufacturer speaks about regularly getting requests for quotations for a truckload of motorcycles - model, colour, version all spelt out in advance. The buyers are often from habitats where dealers and their sub-dealers are simply unable to provide the kind of discounts and other benefits that buyers have started expecting as a standard. Increasingly, registration is not something that requires anything more than an RTO agent - which the dealers use anyways.
An old timer truck manufacturer speaks about how new entrants like AMW and Tatra-Vectra are reaching out to customers in parts of the country where dealers who were content working out of the larger cities never bothered to set up facilities. Entry for newcomers is cheaper in such places, too, and very often large fleet customers provide solutions for after-sales and support on their own, since they have the parking space already. It is interesting to add here that the ex-Armed Forces element comes to the fore again - dumpers and other rural truck applications need rapid maintenance best provided in-house, so why not be a dealer for the fleet you buy, and get the help of the manufacturer in maintaining these 24x7 vehicles?
A car manufacturer who has a leading position in the Indian car market, but has not expanded its repertoire beyond cars in the last few decades, explained it thus: 70% of sales last year were in urban cities above a certain population. This year with a 40% growth, the actual number sold in those large cities remained more or less the same, but the 30% component in numbers of rural and semi-urban areas more than doubled. In other words, their growth came almost totally from semi-urban and rural areas. The math was fascinating when model breakups were further discussed - people in rural areas increasingly want 3-box cars, not hatchbacks.
The same manufacturer explained how his dealers in large cities were discounting cars, while their dealers in smaller towns and rural areas were running short of cars. A complicated quota system based on past performance skews matters, with more despatches being sent to city dealers - who then released their "quotas" to smaller dealers or operated their own sub-dealers there. This is a company, by the way, which was born out of selling cars on quota and has still not got out of the habit. Public sector roots do not wither away that easily.
Another car manufacturer, trying hard to also enter the small commercial vehicle space, spelt it out thus - the urban market is saturated. For them, growth of cars has and will come in areas where smaller commercial vehicle sales are growing - the south, the newly resurgent states like Bihar and some parts of the North East. Kerala, for example, is a small state - but they have dealers in every town and sometimes multiple ones, too.
The increase in road and other taxes for cars and other motor vehicles in larger cities has brought about a situation where people living in larger cities are using the addresses in their 'native place' or small towns nearby to save large sums of money. Witness the growth of HR and UP plates in and around Delhi, and Talegaon/Raigad registrations in Mumbai. In some places, even a registered letter sent to yourself c/o a friend's address is sufficient enough as address proof.
The emergence of the motor vehicle as a tool for work, written about earlier, is another factor. This was shown brilliantly in Gujarat and Rajasthan, when good quality roads were made accessible all over, and is being experienced in Bihar, where a road quality revolution is taking place quietly. Note - the improvement has to be viewed through a prism of relativity - where there were rocks in paddy fields you now have decent tracks, and where you had broken roads, you now have highways. A 6-8 hour drive, not attempted at night, is now a 2-3 hour drive - and safe at night too.
Also hidden in the statistics are the numbers pertaining to a rapid shift of used cars upcountry - where they are maintained cheaper, without too many of the regulatory aspects bogging down this trade. This in turn creates a void in the new car market, which is filled - but surprisingly, here again it seems to be upcountry that is leading the numbers. Pajero and Fortuner are the new standards in rural India, and the German SUVs are getting there, too.
It may sound very simplistic to place all growth into non-urban areas, and certainly numbers are not available, so we have to go by off-the-record conversations - but here's one anecdotal one that will probably provide an idea - a leading agricultural products support company negotiated hard with a leasing company and a car manufacturer for about 350 cars to be provided to its staff. These cars had to be sedans, diesel, tough, presentable, supplied all-India, and were on a 3-year lease, to be registered in the name of the employees. Not one of these cars was registered in urban cities.
This, in turn, persuaded another company in the engineering products business, with a nationwide support network, to do the same. Again, it is better and cheaper to register cars in smaller towns. Again, all registered 'up-country', the benefits of lower prices being passed on to the user employee.
Expect the manufacturers and sellers of luxury cars and bikes to follow suit. Already, some of them have dispensed with wearing suits and sponsoring golf tournaments, to kitting out in jeans and sending roadshows to agricultural fairs. But then, who goes to rural India to check realities out?
There's an answer there too - some of these vehicles are being fitted out with GSM/CDMA based information systems, in addition to GPS systems, to function as offices on wheels wherever they are (and also to track them in case of theft). Expect hard analysis on data emanating from these to hit the marketing tables soon. Say, 6-12 months. And that's when the real reportage will start.
High property value and interest rates, coupled with a lower loan- to-value ratio are becoming serious obstacles for average home buyers, says researcher
An average working class person intending to buy a house will find it almost impossible today, as high interest rates and property values, coupled with low conduciveness of the loan-to-value (LTV) ratio, will make him "ineligible" for the purchase. The LTV ratio indicates how much of a property can be financed through a loan.
Pankaj Kapoor, founder and managing director, Liases Foras, a real estate research firm, says: "He (the average buyer) cannot purchase a property today as the LTV ratio is not very conducive. A consumer is most eligible for a purchase when the banks give 80% to 85% of the property value as loan, as he can manage the rest 15% to 20% from his own sources. However, if he has to pay 30% or 40% of the property value from his own pocket it turns out to be a huge burden. Besides, the property prices have also gone up, making it completely unaffordable for the average buyer."
Mr Kapoor also explained how the high property values deterred consumers from making a purchase of a property in Mumbai. He said the average cost of flats in the Greater Mumbai area of Colaba to Mulund and Borivli, is about Rs1.97 crore and if you ask an average customer to pay about 40%, or Rs80 lakh, then he has no option other than to cancel his purchase as it is unaffordable for him. "The average consumer does not have that kind of money. He may aspire to buy a property, but he will not be able to exercise this purchase today," Mr Kapoor said.
Interest rate is another roadblock that makes a home purchase difficult for a common person. Although some financial institutions offer interest rates of 8% and 8.5%, some customers find themselves ineligible for these schematic loans and move to other institutions where they are charged higher interest. "To expect 8% and 8.5% interest rate on home loans is too much. No one is offering that because the inflation rate is moving at that level," Mr Kapoor said.
A survey conducted by ICICI Securities recently has also found that property prices have become unaffordable. According to the survey in which 3,839 ICICI Direct customers participated, 72% of the respondents believed that property prices were unaffordable and 79% perceived property prices to be high. However, a significant section of the respondents indicated that while affordability was a concern, it was manageable. The survey showed that 48% of the buyers were interested in buying at the current prices or were keen to see a marginal correction. The survey was conducted during June-July this year.
The survey found a larger percentage of respondents in Mumbai and Pune who felt that home prices were too high, as compared to Hyderabad and Kolkata where a lower proportion of the respondents had a similar perception.