Bangalore is the hottest investment destination for business

Source: The Economic Times,23 October 2013,Bangalore

Bangalore has emerged as the hottest business destination in the country leaving behind bigger cities like Mumbai, Delhi and Chennai, says a recent survey by Global Initiative for Restructuring Environment and Management (GIREM) and DTZ, the global leader in property services.

The report, which surveyed 21 business destinations across country, says good connectivity, high quality of talent pool, good availability of office space suiting different income groups, a high-quality education system and a welcoming, multifarious city culture has helped Bangalore notch the top slot. Bangalore ranks 1st with a total score of 129.56 out of 160 followed by Chennai at 127.84 and Mumbai at 123.64 

"Bangalore has one of the highest footfalls of business travelers in the country, driven by the booming IT/ITes sector. It also has one of the most resilient real estate markets which offer commercial space at much more competitive rates compared to cities like Delhi, Mumbai or Gurgaon," says Shyam Sundar S Pani, President - GIREM. 

According to the report, while popular destinations such as Bangalore, Mumbai, Chennai, and Pune continued to occupy top positions, the ranking revealed some unexpected contenders in the Top 10 league including Indore, Bhubaneshwar, Kochi, Coimbatore and Nagpur. 

"Rapid and unplanned urbanization in the country over the past few decades has led to unprecedented job demand. Job creation is a crucial answer to this challenge which calls for the pressing need to develop new industrial townships and business districts to ease the pressure from the already saturated business destinations," says Anshul Jain, Chief Executive, DTZ. 

Bangalore commercial space absorption that witnessed 105 million sft absorbed till date as compared to other top Indian cities led mainly by growth in leasing from IT/ITes firm, also helped fuelling growth in the residential real estate market. 

The residential market has seen absorption levels increasing by 22% in the first half of 2013 mainly driven by homes in the mid income group. In contrast other bigger markets like Mumbai and NCR, saw launches drop nearly 10%, in 2012 YoY while absorption levels have fallen close to 13% for the same period, as per Knight Frank latest report. 

"Around 28,000 units were launched during H1 2013, with 53% of the units launched were priced under Rs 50 lakh. Majority of the demand came from IT/ITes segment," says Samantak Das, chief economist and director - research Knight Frank.

"We expect sales to remain on the same level as last year. The middle segments seem to be moving well in spite of current volatility in the economy," said Viswa Prathap Desu, vice president - sales & marketing Brigade Enterprises. 

Another Bangalore-based builder, Sobha Developers sold property worth Rs 602.8 crore in the first quarter of FY 2014. ""We will not revisit sales target for the year and expect to sell 4.2 million sq ft of residential space for about Rs 2,600 crore in FY 2014," says vice-chairman and managing director, JC Sharma. The developer aims to add 8.9 million sq ft of new residential space this fiscal.

"We expect sales to remain on the same level as last year. The middle segments seem to be moving well in spite of current volatility in the economy," said Viswa Prathap Desu, vice president - sales & marketing Brigade Enterprises.

Another Bangalore-based builder, Sobha Developers sold property worth Rs 602.8 crore in the first quarter of FY 2014. ""We will not revisit sales target for the year and expect to sell 4.2 million sq ft of residential space for about Rs 2,600 crore in FY 2014," says vice-chairman and managing director, JC Sharma. The developer aims to add 8.9 million sq ft of new residential space this fiscal.

You can also read: Which city to invest in Real Estate Market : BullzBearz

Latent demand in Indian Real Estate: Buying a house at 25

It is always suggested to start investing early. Several reasons would support this suggestion, especially the compounding effect of money, inflation, low expenditures in the early part of life and many more. But when it comes to real estate, early investing more often than not leads to capital value appreciation. Moreover, when you have just passed out of your college and looking for a place to rent, did you ever stop to think what if you could just buy your flat rather than shelling out hefty amounts in the form of rent. Why aren’t these real estate companies targeting these early SEC A earners is beyond my understanding.

Let’s look at the economics of demand from these new graduates and analyze whether Real estate is affordable for them at such an early age.

First, let’s do some back of envelope calculation for guesstimating the number of graduates every year who would earn at least INR 50,000 or higher. Let’s make certain assumptions on the prospective number of graduates and post-graduates who would end up with a take-home salary of 8 lakhs or more.

• Graduates from top 10 engineering institutes with an average of 10000 students (all programs) i.e. 10,000
• Graduates from top 20 MBA institutes with an average of 600 students i.e. 18000
• Graduates from top 20 Medical institutes with an average of 300 students i.e. 6000
• Other graduates from professional institutes i.e. around 20000

This makes a total of 52,000 students graduating every year and making INR 60,000+ as their starting salary. Assuming that three-fourth of them end up in Mumbai, NCR and Bangalore which should be a fair assumption. Moreover, these three towns also account for 70% of total residential absorption in India. So that makes around 40,000 of students moving to these three towns.

The average price of apartments in Gurgaon is Rs. 6000/sqft. Similarly, APR in Noida (3500), Navi Mumbai (8000), Bangalore (4500). So a 1000 sqft 2 BHK apartment would cost somewhere around 60 Lakhs in GGN, 35 Lakhs in Noida, 80 Lakhs in Navi Mumbai, 45 Lakhs in Bangalore.

So the EMI on these ticket sizes approximates to 60000 for GGN, 35000 for Noida, 80000 for Navi Mumbai, 45000 for Bangalore. It’s true that with a salary of 60,000 it might be impossible to shell out such huge EMIs every month. Though it seems plausible to do so for cities like Noida & Bangalore. As far as Navi Mumbai & Gurgaon is concerned, what if 2 friends come together and buy a flat to stay together. Let’s look at the benefits:

• You save on the rents which you hate to shell out every month 
• You save yourself from the tension of dealing with a broker which is a hassle
• You save on paying unnecessary brokerages and token money which seldom runs in lakhs
• You save yourself from the fear of getting back your token money from the owner
• You save yourself from constantly being asked to renew your contract or change your house every 11 months

These were the cons from which you get to save yourself. Now let’s look at the pros:

• If you had passed from your college in 2009 and taken a house in Gurgaon, you would be shelling not more than 35,000 rupees as your EMI for a 2 BHK flat. Moreover, the same investment would have probably doubled by now. What else does one look for!

I know there are few challenges to the same such as:

• New Graduates are often looking for a change in their jobs leading to instability in their life which makes them unsure of buying a house. Buying a house would restrict them in a way to make choices in their lives
• There is a need for down payment which amounts to as high as 15 lakhs on a house worth INR 1 crore which these new graduates are unable to pay.

All I am saying is that this group of new graduates with a better scope of earning good salary is a latent demand which can be catered by the Real Estate developers. The need is to come up with innovative solutions to take care of few challenges that exist as mentioned above. I am sure there might be other challenges too which can be overcome if all stakeholders come together to find a solution for the same.

Why are property prices rising but Real estate prices falling?

BSE Sensex Vs. BSE Realty Index

As we can see, BSE Realty Index has fallen by almost 80% since Q4 FY08 whereas Sensex has risen by almost 20% in the same period. And we all envy the fact that prices in real estate are raising leaps and bound. There is no denying the fact that realty investments is one of the major investments to have in one’s portfolio. The question is “why are Realty stocks prices falling despite the magnificent rise in property prices”? Is there a flaw in the strategies used by these real estate companies which is not allowing these realty companies benefit from the rise in real estate prices. Or is it that these real estate stocks are simply undervalued. 

Useful Read: Comparing Real Estate Market and the Stock Market of India

Now let us look at the consolidated revenue, EBITDA and PBTs of the top real estate companies of India for FY13.  

Company	Consolidated Turnover (in cr)	EBITDA (in cr)	PBT (in cr)	Finance Charges (in cr)	Interest / ebitda ratio
DLF	9095	3150	839	2314	73%
Oberoi	1147	712	683	37	5%
Prestige	2011	642	425	148	23%
Mahindra Lifespaces	772	276	136	31	11%
Unitech	1526	576	231	304	53%
GPL	1047	296	288	3	1%
IndiaBulls	1486	471	222	228	48%
Sobha Dev	2093	553	323	170	31%

The ratio of interest paid to EBITDA is a clear indication that these companies shell out a major percentage of their profits as interest on the loans taken. DLF, Indiabulls & Unitech shell out more than 50% of their EBITDA as interests. Higher prices and profits in real estate are obviously not accruing to the investors. No doubt, these companies have to work at a very high IRR (Internal Rate of return) thereby pricing their products at a very high end. I always wonder what if government were to waiver their loans just as they did for farmers back in 2009 (to the tune of Rs. 70,000 crore), will it promote lower prices for the properties!! Though, I am personally against it.

But the whole point is that the stock prices of these companies are not rising because they have to shell out a hell lot of money as interest costs.

Secondly, almost all real estate companies depend on PE investors who expects a return of 20-30% in a short span of time. To accommodate for their margins, Real estate companies jack up their prices so their own margins do not get hit. This leads to a further rise in prices of real estate properties. Now at these jacked up prices, it is difficult for end users to buy a property when it is still under construction. On the other hand, investors with a large chunk of money buy these properties by paying a small token money. As a result, when you see in Gurgaon, especially the belt of Dwarka Expressway and New Gurgaon, almost all properties are selling at phenomenal prices which is not supported by the infrastructure development. Developers are increasing their prices without any logic, and investors are still ready to buy. There is zero consumption by the end user. Prices are rising based on speculation. The builders are forced to delay the construction of these properties until there is some incentive in the form of infrastructure that would enable resale to end users. This delay in construction further jacks up the prices.

Sometimes I wonder, what is the need of PE capitals in residential construction. Developers charge on the basis of construction linked plan where a buyer has to pay based on the construction done till then. This money is sufficient to sustain the construction activities, nullifying the need for any PE investment. With margins for PE investments gone, it should enable to bring down the prices considerably. This should in turn help increase the end-consumer demand as well which is the need of the hour.

We talk about corporate social responsibility, what better than being responsible for this cause for any real estate developer. Please give your thoughts!!