Hyman Minsky, the noted American economist, linked an economy’s life cycle with speculative investment bubbles which are endogenous to it. He stated that during prosperous times when the economy booms, corporate cash flows rise higher than corporate debts, and this leads to speculative euphoria. This euphoria continues to develop, allowing borrowers to borrow more until their income streams become inadequate to service their debts, creating a financial crisis. This speculative borrowing bubble then causes banks and financial institutions to reduce lending, which in turn causes a further contraction in the overall economy. Our economy is currently facing such a contraction. Overall economic activity has slowed, with GDP growth estimated at 4.9 percent in 2013-2014. True, this is an improvement of 40 bps over the previous year and we have seen growth in the traditional agricultural and allied sectors; however, industrial output and manufacturing in India are currently in a stagnant mode in terms of growth.
What this means for realty
While infrastructure has been hit by rising input costs and delayed approvals, asset prices for residential real estate have recovered and grown over the past two years. The increasing residential asset prices have given rise to a potential bubble, causing stagnation over the past two quarters. From a pan-India perspective, new launches in the residential sector have dwindled over 2013, as developers have been looking at disposing of existing stocks to generate cash flow.
Commercial real estate
In Delhi NCR’s commercial office sector, we have seen moderate to healthy levels of net absorption over the past three years. Absorption in 2013 was the lowest in nine years, despite promising leasing activity. This was primarily because occupiers were focused on cost saving and portfolio rationalisation.
The IT/ITeS sector has been the dominant performer, contributing a major share of leasing volumes while the manufacturing and industrial sector has also shown good traction of late. While Gurgaon remains the most favoured destination of office occupiers, Noida has also performed well. However, while Gurgaon has seen a good mix of IT and corporate occupiers, Noida still remains primarily driven by IT.
Over a 1-3 year horizon, we are likely to see an improvement in demand and absorption as economic conditions in the US and Western Europe are showing signs of stabilising. This is likely to increase outsourcing business into India, which will result in improved performance of the office sector. Indian domestic corporates are also likely to continue contributing towards non-IT demand.
From an investment perspective, it makes more sense to opt only for leased assets in the current scenario. Larger investors should consider the domestic private equity funds being raised, which are looking at investing in commercial assets.
Residential real estate
The residential sector in Delhi NCR has been affected more by the domestic economy shocks such as high inflation, rising input costs and consistently increasing prices which have acted as a dampener to home sales. The festive season of 2013 was one of the most muted in the last 5-6 years, as sales remained sluggish despite the advertised discounts, festive offers and new projects.
While inventory levels are high in terms of number of months, the overall supply numbers are high only in the broader Noida market. The controlled environment in other sub-markets has acted to keep the numbers at a more manageable level.
Some residential corridors still remain attractive at current valuations. Secondary market valuations are currently trending at a 25-30% discount to the primary market – therefore, the secondary market is a good avenue to get bargain sales Some of the emerging corridors around NCR which are currently suitable for residential investment are:
Sohna: Lower residential rates, the next development corridor, and it benefits from the KMP Expressway and proximity to Gurgaon.
Neemrana: Venue of upcoming industrial and infrastructural developments to drive residential demand.
Yamuna expressway: Excellent infrastructure, benefits from expressway as the node to fuel future city expansion, upcoming freight and warehousing developments, and the cheapest residential apartments in NCR.
NH-24: Affordable housing – low entry points, considerable pent-up demand and future appreciation potential.
Faridabad: A relative gold mine, keeping in mind the current land and residential prices and the infrastructural developments which are likely to put this area on the fast track of growth