Analytical view of real estate market
Empirical study of Nelamangala region and Kolar
Definitions of key terms
Real estate market
1. According to Cambridge English dictionary
“The buying and selling of land and buildings” is known as real estate market.
2. According to legal dictionary
“Land, buildings, and things permanently attached to land and buildings. It is also called realty and real property.
Real estate is the modern term for land and anything that is permanently affixed to it. Fixtures include buildings, fences, and things attached to buildings, such as plumbing, heating, and light fixtures. Property that is not affixed is regarded as Personal Property. For example, furniture and draperies are items of personal property”
Real estate is “property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more generally) buildings or housing in general. It is also the business of real estate; the profession of buying, selling, or renting land, buildings, or housing.”
It is a legal term used in jurisdictions whose legal system is derived from English common law, such as India, the United Kingdom, United States, Canada, Pakistan, Australia, and New Zealand.
Real Estate Markets
“”Markets are the means by which buyers and sellers trade goods and services. The real estate market can be broken down into space markets and asset markets.
Space Markets – the mechanism for trading the rights to use land and buildings
1. Demand for space is created by those who are willing to pay for the use of space
2. Supply for space is provided by those willing to sell the rights that they own to the users
Space markets can be categorized by type of use:
1. Office Space
• Class A – Superior quality and location that command the highest rents
• Class B – Highly desirable, but lacking attributes that would otherwise command top dollar
• Class C – Buildings with few amenities but are in good condition and are modestly priced
• Class D – Buildings with few amenities in poor locations and generally poor condition
2. Retail Space
• Freestanding retail – single tenant buildings
• Neighborhood center – serve a relatively small population within a 1½ mile radius often anchored by a supermarket with other stores providing convenience goods and personal services
• Community center – serves a larger trade area within a 3-5 mile radius with a wider variety of stores often anchored by a department store
• Regional center – serves an area within a 7-12 mile radius often in the form of enclosed malls and anchored by two or more department stores
• Superregional center – serves areas of up to 50 miles in radius with a tremendous range of products and services
3. Industrial Space
• Warehouse and distribution
• Manufacturing and production
• Materials processing
4. Agricultural Space
• Annual and perennial cropland
• Livestock facilities and grazing
5. Lodging Space
• Highway motels
• Convention/business hotels (have convention space)
• Luxury hotels
• Extended stay hotels/motels (apartments)
• Resort or destination hotels
6. Residential Space
• Single family detached homes
• Single family attached homes (condos, co-ops and townhouses)
• Manufactured homes
• Multi-family apartments
Asset Markets – the market for cash flow rights to real estate ownership (value)
Capital Markets – the market for long-term (more than one year) assets. This includes stocks and bonds as well as real estate.
• Public markets
o Publicly traded stocks (equity), bonds and money market (less than one year) instruments
o REITs (real estate investment trusts) – invest in real property
o Mutual Funds – invest in stocks and bonds (and other financial assets)
• Private markets
o Real property
o Privately-held companies
o Partnerships (oil and gas, leasing)
o Bank loans
o Individual mortgages (as opposed to mortgage backed securities, which are publicly traded securities backed, or “securitized”, by mortgages)
o Private (venture) debt
Like all assets, both real and financial, market prices are determined by
1. Cost of capital (an opportunity cost) – this refers to the fact that investors have alternative investment opportunities in which to earn a rate of return on their invested capital. Thus, investors look at the rates of return that can be earned elsewhere before making an investment in a specific asset.
2. Expectations of future cash flows (which reflect growth opportunities) – how much an investor is willing to pay for an asset is a function of the future cash flows that they can anticipate realizing from the investment. This includes both increases (growth) as well as decreases (decline) in cash flows.
3. Risk – the risk related to the investment is an important consideration in order to compare apples to apples. Clearly, an investment in a government bond has no risk associated with the payments by the government, whereas investment in mortgages has default risk and investment in stocks or real property has uncertainty of cash flows in general due to the residual nature of the ownership claim. As will be seen later, the higher the risk of an investment, everything else the same, the lower price that investors are willing to pay since investors are risk-averse.
The definition of “fair market value” can be described as
the price at which an asset trades between a willing buyer and a willing seller, neither of whom is under compulsion to buy or sell, and both of whom are knowledgeable of the risks and future prospects of the asset
The relationship between the Space Market and the Asset Market in real estate is tied together through the cash flows. The price at which the use of real estate space is sold is a function of supply and demand which determines rent.
In addition, economic circumstances beyond the supply and demand for space determine the costs of providing space. The difference between rents and costs represent the cash flows available to investors which are valued in the asset market. Economic circumstances in other markets also impact the opportunity cost of capital and, hence, the value of real estate assets and the allocation of capital to providing additional space (supply) in the space market.
Real Estate Market Analysis – study of the supply and demand sides of a real estate space market
o Rents – what can be charged to tenants (competitors’ rents)
o Vacancy rate
o Amount of competing space currently and anticipated
o Rate of absorption of space
o Number of units/floor space on the property
o Type of building
o Growth prospects
All of these factors are interrelated. The term “month’s supply” of property refers to how long it will take before demand fills a given supply of real estate space. It can be defined as
This is one measure of the desirability of adding new space since it is directly impacts the revenue stream that can be anticipated from development.
Important considerations by market segment for revenues:
1. Office Space – employment in occupations requiring office space
2. Lodging – air passenger volume, highway traffic counts, tourism receipts, number of visitors
3. Retail – per capita income, aggregate income
4. Industrial – manufacturing employment, shipping volume
5. Apartments – population, household formation, housing affordability, employment growth
6. Owner-occupied residential – population, household formation, interest rates, employment growth, income growth, apartment rents
Indian real estate’s market
The real estate sector is one of the most globally recognized sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The real estate sector comprises four sub sectors – housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.
It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bangalore is expected to be the most favored property investment destination for NRIs, followed by Ahmadabad, Pune, Chennai, Goa, Delhi and Dehradun.
India’s rank in the Global House Price Index has jumped 13* spots to reach the ninth position among 55 international markets, on the back of increasing prices in mainstream residential sector.
The Indian real estate market is expected to touch US$ 180 billion by 2020. Housing sector is expected to contribute around 11 per cent to India’s GDP by 2020. In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India’s growing needs.
Private equity and debt investments in India’s real estate sector grew 12 per cent year-on-year to US$ 4.18 billion across 79 transactions in 2017. In 2017, M&A deals worth US$ 3.26 billion were made in India’s real estate sector. Private equity investments in Indian retail assets increased 15 per cent in CY 2017 to reach US$ 800 million. India is expected to witness an upward rise in the number of real estate deals in 2018, on the back of policy changes that have made the market more transparent.
Sectors such as IT and ITES, retail, consulting and e-commerce have registered high demand for office space in recent times. The office space absorption in 2017 across the top eight cities amounted to 18 million square feet (msf) as of September 2017. Private equity inflows in office and IT/ITES real estate have grown 150 per cent between 2014 and 2017 backed by a strong attraction towards office sector. In 2017, new retail space of 6.4 million has finished and supply of around 20 mn sq ft is expected in 2019.
The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. Private equity investments in real estate are estimated to grow to US$ 100 billion by 2026 with tier 1 and 2 cities being the prime beneficiaries. India stood third in the US Green Building Council’s (USGBC) ranking of the top 10 countries for Leadership in Energy and Environmental Design (LEED) certified buildings, with over 752 LEED-certified projects across 20.28 million gross square meters of space. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.67 billion in the period April 2000-December 2017.
Some of the major investments in this sector are as follows:
In February 2018, DLF bought 11.76 acres of land for Rs 15 billion (US$ 231.7 million) for its expansion in Gurugram, Haryana.
In February 2018, Japanese conglomerate Sumitomo Corporation announced its US$ 2 billion partnership with Krishna Group to develop real estate projects in the country.
KKR India Asset Finance Pvt Ltd has invested over US$ 500 million in residential real estate projects in India in 2017, taking its total investments in real estate projects in India to US$ 1 billion.
The Government of India along with the governments of the respective states has taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives:
In February 2018, creation of National Urban Housing Fund was approved with an outlay of Rs 60,000 crore (US$ 9.27 billion).
Under the Pradhan Mantri Awas Yojana (PMAY) Urban 1,427,486 houses have been sanctioned in 2017-18. In March 2018, construction of additional 3, 21,567 affordable houses was sanctioned under the scheme.
The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform which will help in allowing all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth Rs 1.25 trillion (US$ 19.65 billion) in the Indian market over the years. Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalization, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralized processes to source material and organize manpower and hiring qualified professionals in areas like project management, architecture and engineering.
The growing flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards.
Exchange Rate Used: INR 1 = US$ 0.0155 as on March 04, 2018