With the surge in stock prices of Mumbai-based real estate companies, a common question posed is: are things as good at the ground level in the real estate market as the stock prices indicate?
I stopped tracking the stock market actively several years ago but based on my conversations with analysts there are multiple triggers that have led this rally in real estate stocks. At a broad level there are four triggers. 1) Pick-up in volumes 2) Anticipation of price hikes by developers 3) Consolidation within the industry that will result in greater market share for large listed developers 4) Increased profitability levels. 5) Management commentary.
I don’t want to spend too much time on the seriousness of “management commentary” since in the many years I have heard them, there have been no occasions wherein their commentary was not strong.
Even at the peak of the COVID-19 crisis last year, there were still managements who were bold enough to throw a picture that was deceptive at best and lies at worst.
However, it has become critical to evaluate the other four triggers:
1) Volumes: There are two determinants on volumes. One is the “bookings” numbers that are shared by companies. It has a lot of value in understanding demand. However, since there is not any regulatory requirement to determine what constitutes a booking – we often see a phenomenon wherein large bookings are reported but thereafter there are questions on the cancellation rates.
The more credible number is property registration data. At the optical level the registration data appears to be strong. Data beyond the optics suggests that sales numbers are steady. Volumes are sustaining for projects that have the CASA mix. The CASA mix is: Credible Developers, Aggressive pricing, Small homes and Amenities in the project. Volumes are holding as long as values are kept low.
2) Anticipation of price hikes by developers: I’m afraid this is a misplaced hope. Volumes and sales are happening because of affordability. It will be a reckless move if developers undertake price hikes and kill this fledgling recovery.
Thankfully there is a growing maturity within the developer circuit on this aspect. There has been no player that I have interacted with —yet—who believes that prices will rise over the next two years. The focus is on sales. The few projects that have attempted serious price hikes have quickly rolled back.
3) Consolidation within the industry: The premise in this argument is that the real estate market will be dominated by a select and short list of strong developers. The majority will leave the business on account of a weak profitable environment.
This view is being tested as several players who had left the business/or were planning to - are returning back with a vengeance. It is not uncommon to see players who had been absent from the market over the last 2-3 years setting themselves up to launch 2-3 projects in the coming year.
A booming real estate market will result in lack of consolidation within the sector. A bearish real estate market will accelerate the pace of consolidation.
4) Increased profitability levels:
It’s no secret that the real estate business in Mumbai is no longer the lucrative business that many homebuyers believe it to be. The days of super-normal profits ended several years back.
It often becomes even less attractive for players that do projects via joint ventures. This fate is not restricted to only smaller players. Mohit Agrawal of IIFL Securities points out in a recent report that all the joint venture projects across India of Godrej Properties last year yielded a loss of Rs 116 crore.
The environment this year appears to be better given the reduction in government charges (in Mumbai) and a more feasible cost structure. The reduction in government charges however has created a burst in terms of project acquisition across the city. I suspect that a rush of future launches by players across the board will keep prices and profitability in check for a majority of projects. In some markets like Bandra where prices have remained relatively elevated on account of lack of new supply in recent years, a surge in supply (at an economical cost structure) may in all likelihood result in lower prices in the coming two years.
So yes, Mumbai real estate is recovering. But it hinges on one vital factor that has been elusive over the last decade—affordability. Mess around with that aspect and we will return to the sluggish phase that preceded this recovery.