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India Per Sq Ft Portable
Interest Rates – A Key Driver for Indian Property?
Interest rate impact: what do regional markets suggest? — We analyze the
impact of interest rate hardening on volumes, asset pricing and stock performance
in China & Singapore. While the markets are different and so too are the absolute
levels of interest rates in each market, they are similar in terms of demand outlook.
Also, data are available for long periods through cycles – not the case in India.
Impact on volumes: Only short term & comes with a lag — Past trends of
regional economies (China, Singapore & India) suggest that transaction volumes
are sensitive to changes in interest rates, though with a lag. The impact is felt only
short term (1-2 quarters), after which the normal trajectory resumes.
Impact on Pricing: Low correlation — Data suggest no apparent correlation
between interest rates and property prices in either of the two countries. In China,
prices have kept moving up through rate cycles. Pricing is a factor of
demand/supply; interest rates do seem to be a factor only in the short term.
Impact on sector performance: Likely but short lived — Sector performance
has been vulnerable to rate changes. Negative correlation is visible in the data we
have analyzed, though the impact is short lived. We believe other extraneous
factors (macro/regulatory/political/corporate) tend to overshadow the rate impact.
CIRA View – Interest rates less of a driver — In the last quarter, we have seen
two rate hikes (50bps). Citi’s economics team expects further rate hikes of 75bps
by early CY12. Data suggest that the sector is less rate-sensitive than it is made
out to be. The bigger drivers for the sector will be pragmatic pricing resulting in
volume recovery and an improvement in funding, rather than changes in interest
rates, in our view. The demand is intact and supported by strong wage growth.
News — HDFC realty fund to exit Manyata SEZ, Bangalore; Unitech sold 300
units in Gurgaon for Rs 2.0b; DLF launches ‘Bay View’ at Marine Drive, Kochi.
Interest Rates – A Key Driver?
In the last 12 months, Indian economy has seen multiple rate hikes - 225bps
increase in reverse repo and a 175bps increase in repo rate. Our economics
team expects another 75bps in hikes by early 2012. While interest rate hikes
are always taken as a negative for real estate sector, in this we note we try to
analyze how big an overhang this is. We analyze the impact of interest rate
hardening on (1) transaction volumes, (2) asset pricing and (3) stock price
performance in China & Singapore historically. We compare this to India to
understand the potential impact of these rate hikes on the sector, if any. The
other reason for analyzing China & Singapore is limited history/data in India
and the fact that both China & Singapore are high-growth markets. We do
appreciate that the markets are different and so are the absolute levels of
interest rates in each country; however, the markets are similar in terms of
growth profile and demand.
Impact of Interest Rates on Volumes
Past data trends of regional economies (China, Singapore & India) suggest that
transaction volumes are sensitive to changes in interest rates, though with a lag
and the impact is felt only short term (1-2 quarters), after which it resumes its
normal trajectory (refer to Figures 8-10). For India, we have considered
incremental mortgages/housing loans as a proxy for sales volumes, due to lack
of data.
Given the shortage of housing stock in India and increasing demand, we
believe pricing and supply are more critical factors which govern home buying
decisions. In China and Singapore, interest rate cuts have had a more visible
impact (during 2009 and 1H-2010). Hence, increasing interest rates, though a
short term challenge, doesn't really seem to impact home purchase decisions in
medium to long term.
Is Potential EMI increase a big overhang?
Interest rate hardening would raise mortgage rates and imply higher EMIs for
home buyers. Data from other growth markets suggest that it does not have a
very meaningful impact on home buyers' decisions in medium term. Volumes in
other markets have bounced back, despite rate hikes. This, in our view, is due
to the fact that wages are growing at a good pace and demand story is intact.
An annual salary survey by Aon Hewitt (global HR consultancy group)
reveals that in the coming year, Indian companies plan to give their staff
an average salary increase of just under 13%. This is higher than the hike
of 11.7% in 2010 and 6.6% in 2009. Mercer, another HR consulting firm,
expects average salaries to increase by 12% in 2011. India is the only
country in Asia-Pacific where double digit hikes are expected. (Source:
Economic Times Mar09 2011)
To substantiate this further, we have put together the EMI impact for every
25bps increase in rates. In India, a 25bps increase in mortgage rates would
increase EMIs by ~1.0-1.4% depending on the term of the loan. This increase
is important but manageable when seen alongside the income growth the
country is seeing.
This re emphasizes our thesis that while, interest rates are an important
variable, they are not the only governing force behind transaction volumes in
the country. While lower interest rates may act as an incentive to give a
marginal boost to home sales, higher interest rates only deter home buyers
short term. Eventually, price/supply/demand/income growth is what largely
determines the volume trajectory.
Impact of Interest Rates on Asset Pricing
Based on Figures 12-13, no apparent correlation can be derived between
interest rates and property prices in either of the two countries –China and
Singapore. In China, prices have kept moving up despite changes in interest
rates. Pricing is a factor of demand (which in turn depends on market
conditions) and supply – though interest rates do play a role in the short term.
In a good environment, where the economy is growing and jobs stability exists,
demand will drive pricing, as seen in India through CY10.
An increase in interest rates may push up mortgage rates, but may not hold
back buyers if market conditions are good. As we analyzed before, the increase
in EMIs is marginal with rate hikes and can well be absorbed by buyers with
salaries growing at a good pace.
Impact of Interest rates on Share Price
Performance
Historically, sector performance has been vulnerable to interest rate changes.
Negative correlation is visible in Figures 14-16. On most occasions, prime facie
rate hikes have not been absorbed well by stock markets (especially China and
India), though the impact is short lived. Having said that, we believe other
extraneous factors (macro/regulatory/ political/corporate) tend to overshadow
the impact resulting from movements in interest rates.
News
HDFC realty fund to exit Manyata SEZ, Bangalore
(Source: Live Mint. Mar24 2011)
HDFC Property Ventures Ltd is selling its investment in a technology export
zone, Manyata Business Park in north Bangalore, back to the developer
Embassy, making its fifth exit in recent months. The sale will earn the fund
returns of Rs. 4.9bn on the Rs. 2.1bn investment made less than five years
ago. HDFC Property’s exit from the venture will be complete by mid-April.
The fund’s previous exit was from Embassy Golf Links, an office property in
Bangalore sold to a group of wealthy individuals, which earned returns of Rs.
2.2bn on an investment of Rs. 0.51bn. HDFC Property’s recent exits were
triggered by the quality and rental yield of its assets across property markets.
Unitech sold 300 housing units in Gurgaon for Rs 2.0bn
(Source: Business Standard, Mar23 2011)
Unitech said that it has sold over 300 mid-income housing units worth Rs 2.0bn
in its recently-launched South Park Project at Gurgaon.
In February last week, Unitech launched a township project in Rewari. "These
are in line with our business plan to launch almost 10 msf in the next few
months," said Unitech MD Sanjay Chandra.
DLF launches ‘Bay View’ at Marine Drive, Kochi
(Source: Express Buzz, Mar21 2011)
DLF launched its luxury homes project 'Bay View' at Marine Drive earlier this
week. The project comprises exclusive air-conditioned apartments with prices
ranging from ~Rs. 10m – Rs. 28m developed in 3.78 acres of land. It is an ecofriendly
project, the complex has about an acre of landscaped garden and 95%
apartments within the complex are waterfront. The property overlooks the
backwaters, harbour and the Bolgatty Island. The project is in close proximity to
the Vallarpadam International Container Terminal and the new Express
Highway.
Indiabulls, Lodha in fray to buy construction rights from NTC
(Source: Live Mint, Mar18 2011)
Indiabulls Properties Pvt. Ltd, Microtek Constructions Pvt. Ltd (part of Lodha
Developers Ltd) and New Jet Printing Press are in the fray to buy additional
construction rights in central Mumbai in an auction by National Textile Corp. Ltd
(NTC). NTC is selling floor space index (FSI) for the first time. The textile firm
will auction ~0.2msf of FSI at a reserve price of Rs11,000/sf, implying a
cumulative base price of ~Rs2.2bn.
NTC's sale comes at a time when the Maharashtra government is going tough
on FSI-based incentives in its capital city. A recent news article stated that the
government had suspended fresh sanctions of additional development rights
and was reviewing projects that were given the incentive
DB Realty promoters pledge another 8%
(Source: Economic Times, Mar23 2011)
Promoters of DB Realty have been forced to pledge an additional 8% stake in
the company to cover margin calls from the pledgee, ICICI Bank, as a result of
the sharp fall in the share price. This pushed the total pledged position to ~40%
of the company's shares. On March 16, Vinod Goenka, promoter and managing
director of DB Realty, pledged a 5.6% stake while his wife Aseela pledged
2.3%. Currently, promoters and the promoter group hold a 64.07% stake in the
realty developer.
According to a company official, these shares have been pledged as an
additional collateral apart from existing securities provided for a loan taken by
promoter group company DB Hospitality. Neelkamal Tower Construction, the
largest shareholder within the promoter group, has already pledged 8,07,562
shares, or a 32.11% stake, in the company.
Parsvnath to sell stake in Sonepat SPV to PE fund for >Rs 1.0-1.5bn
(Source: Economic Times, Mar16 2011)
Parsvnath Developers is close to selling ~25% stake in its Parsvnath City
project in Sonepat for Rs 1.0-1.5bn and is in talks with two private equity firms
(JP Morgan and Redfort Capital) for the stake sale in the SPV.
Parsvnath City is a project developed in Sonepat which is 17 kms away from
NH1. Parsvnath Developers has net debt of over Rs 1,200 cr on its books and
still has to repay debt of ~Rs 1.0bn till the end of the financial year.
c
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Per Sq Ft Portable
Interest Rates – A Key Driver for Indian Property?
Interest rate impact: what do regional markets suggest? — We analyze the
impact of interest rate hardening on volumes, asset pricing and stock performance
in China & Singapore. While the markets are different and so too are the absolute
levels of interest rates in each market, they are similar in terms of demand outlook.
Also, data are available for long periods through cycles – not the case in India.
Impact on volumes: Only short term & comes with a lag — Past trends of
regional economies (China, Singapore & India) suggest that transaction volumes
are sensitive to changes in interest rates, though with a lag. The impact is felt only
short term (1-2 quarters), after which the normal trajectory resumes.
Impact on Pricing: Low correlation — Data suggest no apparent correlation
between interest rates and property prices in either of the two countries. In China,
prices have kept moving up through rate cycles. Pricing is a factor of
demand/supply; interest rates do seem to be a factor only in the short term.
Impact on sector performance: Likely but short lived — Sector performance
has been vulnerable to rate changes. Negative correlation is visible in the data we
have analyzed, though the impact is short lived. We believe other extraneous
factors (macro/regulatory/political/corporate) tend to overshadow the rate impact.
CIRA View – Interest rates less of a driver — In the last quarter, we have seen
two rate hikes (50bps). Citi’s economics team expects further rate hikes of 75bps
by early CY12. Data suggest that the sector is less rate-sensitive than it is made
out to be. The bigger drivers for the sector will be pragmatic pricing resulting in
volume recovery and an improvement in funding, rather than changes in interest
rates, in our view. The demand is intact and supported by strong wage growth.
News — HDFC realty fund to exit Manyata SEZ, Bangalore; Unitech sold 300
units in Gurgaon for Rs 2.0b; DLF launches ‘Bay View’ at Marine Drive, Kochi.
Interest Rates – A Key Driver?
In the last 12 months, Indian economy has seen multiple rate hikes - 225bps
increase in reverse repo and a 175bps increase in repo rate. Our economics
team expects another 75bps in hikes by early 2012. While interest rate hikes
are always taken as a negative for real estate sector, in this we note we try to
analyze how big an overhang this is. We analyze the impact of interest rate
hardening on (1) transaction volumes, (2) asset pricing and (3) stock price
performance in China & Singapore historically. We compare this to India to
understand the potential impact of these rate hikes on the sector, if any. The
other reason for analyzing China & Singapore is limited history/data in India
and the fact that both China & Singapore are high-growth markets. We do
appreciate that the markets are different and so are the absolute levels of
interest rates in each country; however, the markets are similar in terms of
growth profile and demand.
Impact of Interest Rates on Volumes
Past data trends of regional economies (China, Singapore & India) suggest that
transaction volumes are sensitive to changes in interest rates, though with a lag
and the impact is felt only short term (1-2 quarters), after which it resumes its
normal trajectory (refer to Figures 8-10). For India, we have considered
incremental mortgages/housing loans as a proxy for sales volumes, due to lack
of data.
Given the shortage of housing stock in India and increasing demand, we
believe pricing and supply are more critical factors which govern home buying
decisions. In China and Singapore, interest rate cuts have had a more visible
impact (during 2009 and 1H-2010). Hence, increasing interest rates, though a
short term challenge, doesn't really seem to impact home purchase decisions in
medium to long term.
Is Potential EMI increase a big overhang?
Interest rate hardening would raise mortgage rates and imply higher EMIs for
home buyers. Data from other growth markets suggest that it does not have a
very meaningful impact on home buyers' decisions in medium term. Volumes in
other markets have bounced back, despite rate hikes. This, in our view, is due
to the fact that wages are growing at a good pace and demand story is intact.
An annual salary survey by Aon Hewitt (global HR consultancy group)
reveals that in the coming year, Indian companies plan to give their staff
an average salary increase of just under 13%. This is higher than the hike
of 11.7% in 2010 and 6.6% in 2009. Mercer, another HR consulting firm,
expects average salaries to increase by 12% in 2011. India is the only
country in Asia-Pacific where double digit hikes are expected. (Source:
Economic Times Mar09 2011)
To substantiate this further, we have put together the EMI impact for every
25bps increase in rates. In India, a 25bps increase in mortgage rates would
increase EMIs by ~1.0-1.4% depending on the term of the loan. This increase
is important but manageable when seen alongside the income growth the
country is seeing.
This re emphasizes our thesis that while, interest rates are an important
variable, they are not the only governing force behind transaction volumes in
the country. While lower interest rates may act as an incentive to give a
marginal boost to home sales, higher interest rates only deter home buyers
short term. Eventually, price/supply/demand/income growth is what largely
determines the volume trajectory.
Impact of Interest Rates on Asset Pricing
Based on Figures 12-13, no apparent correlation can be derived between
interest rates and property prices in either of the two countries –China and
Singapore. In China, prices have kept moving up despite changes in interest
rates. Pricing is a factor of demand (which in turn depends on market
conditions) and supply – though interest rates do play a role in the short term.
In a good environment, where the economy is growing and jobs stability exists,
demand will drive pricing, as seen in India through CY10.
An increase in interest rates may push up mortgage rates, but may not hold
back buyers if market conditions are good. As we analyzed before, the increase
in EMIs is marginal with rate hikes and can well be absorbed by buyers with
salaries growing at a good pace.
Impact of Interest rates on Share Price
Performance
Historically, sector performance has been vulnerable to interest rate changes.
Negative correlation is visible in Figures 14-16. On most occasions, prime facie
rate hikes have not been absorbed well by stock markets (especially China and
India), though the impact is short lived. Having said that, we believe other
extraneous factors (macro/regulatory/ political/corporate) tend to overshadow
the impact resulting from movements in interest rates.
News
HDFC realty fund to exit Manyata SEZ, Bangalore
(Source: Live Mint. Mar24 2011)
HDFC Property Ventures Ltd is selling its investment in a technology export
zone, Manyata Business Park in north Bangalore, back to the developer
Embassy, making its fifth exit in recent months. The sale will earn the fund
returns of Rs. 4.9bn on the Rs. 2.1bn investment made less than five years
ago. HDFC Property’s exit from the venture will be complete by mid-April.
The fund’s previous exit was from Embassy Golf Links, an office property in
Bangalore sold to a group of wealthy individuals, which earned returns of Rs.
2.2bn on an investment of Rs. 0.51bn. HDFC Property’s recent exits were
triggered by the quality and rental yield of its assets across property markets.
Unitech sold 300 housing units in Gurgaon for Rs 2.0bn
(Source: Business Standard, Mar23 2011)
Unitech said that it has sold over 300 mid-income housing units worth Rs 2.0bn
in its recently-launched South Park Project at Gurgaon.
In February last week, Unitech launched a township project in Rewari. "These
are in line with our business plan to launch almost 10 msf in the next few
months," said Unitech MD Sanjay Chandra.
DLF launches ‘Bay View’ at Marine Drive, Kochi
(Source: Express Buzz, Mar21 2011)
DLF launched its luxury homes project 'Bay View' at Marine Drive earlier this
week. The project comprises exclusive air-conditioned apartments with prices
ranging from ~Rs. 10m – Rs. 28m developed in 3.78 acres of land. It is an ecofriendly
project, the complex has about an acre of landscaped garden and 95%
apartments within the complex are waterfront. The property overlooks the
backwaters, harbour and the Bolgatty Island. The project is in close proximity to
the Vallarpadam International Container Terminal and the new Express
Highway.
Indiabulls, Lodha in fray to buy construction rights from NTC
(Source: Live Mint, Mar18 2011)
Indiabulls Properties Pvt. Ltd, Microtek Constructions Pvt. Ltd (part of Lodha
Developers Ltd) and New Jet Printing Press are in the fray to buy additional
construction rights in central Mumbai in an auction by National Textile Corp. Ltd
(NTC). NTC is selling floor space index (FSI) for the first time. The textile firm
will auction ~0.2msf of FSI at a reserve price of Rs11,000/sf, implying a
cumulative base price of ~Rs2.2bn.
NTC's sale comes at a time when the Maharashtra government is going tough
on FSI-based incentives in its capital city. A recent news article stated that the
government had suspended fresh sanctions of additional development rights
and was reviewing projects that were given the incentive
DB Realty promoters pledge another 8%
(Source: Economic Times, Mar23 2011)
Promoters of DB Realty have been forced to pledge an additional 8% stake in
the company to cover margin calls from the pledgee, ICICI Bank, as a result of
the sharp fall in the share price. This pushed the total pledged position to ~40%
of the company's shares. On March 16, Vinod Goenka, promoter and managing
director of DB Realty, pledged a 5.6% stake while his wife Aseela pledged
2.3%. Currently, promoters and the promoter group hold a 64.07% stake in the
realty developer.
According to a company official, these shares have been pledged as an
additional collateral apart from existing securities provided for a loan taken by
promoter group company DB Hospitality. Neelkamal Tower Construction, the
largest shareholder within the promoter group, has already pledged 8,07,562
shares, or a 32.11% stake, in the company.
Parsvnath to sell stake in Sonepat SPV to PE fund for >Rs 1.0-1.5bn
(Source: Economic Times, Mar16 2011)
Parsvnath Developers is close to selling ~25% stake in its Parsvnath City
project in Sonepat for Rs 1.0-1.5bn and is in talks with two private equity firms
(JP Morgan and Redfort Capital) for the stake sale in the SPV.
Parsvnath City is a project developed in Sonepat which is 17 kms away from
NH1. Parsvnath Developers has net debt of over Rs 1,200 cr on its books and
still has to repay debt of ~Rs 1.0bn till the end of the financial year.
c
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