A big Ambit report is doing the rounds – they predict that real estate will fall big time.

We are seeing a broad-based real estate pullback, with prices correcting in most tier-1 and tier-2 cities alongside sharp drops in transaction and new launch volumes. The drivers for this slowdown are a mix of supply-side factors (banks have pulled back lending to developers) and demand-side factors (the Black Money Bill has created fear amongst speculators). The result is not just a drop in demand for building materials and challenges for lenders with big mortgage, LAP and housing finance books, but also a generalised slowdown in GDP growth, as the sector which drives 50% of India’s capex and 30% of its jobs conks off.

The drivers, they say:

  • Heavy inventory (Mumbai and Delhi have over 10 quarters of unsold apartments)
  • Property prices are falling in Tier 2 cities as well
  • Foot falls at registration offices have fallen
  • Banks have cut lending to RE esp commercial RE
  • Subsidies have been cut, so pilfering and parking in RE has been curtailed
  • Squeeze on black money through the black money bill
  • Rise in the “guidance value” rates that increase the “white” component of a purchase

Some Good Charts

ICICI has the most exposure to RE:

image

Indiabulls housing has the highest relative LAP (Loan against Property) portfolio:

image India has one of the highest spreads between rental yields and interest rates:

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Our view:A Fall is on the Cards

We have been noticing a slow down in real estate for around a year now, and it’s looking rough. From our own research (anecdotal, though):

  • Prices in Delhi and Gurgaon are down or falling. Transactions have fallen a lot
  • Bangalore, too, is seeing cooling off. Our recce trips to a few sites show us deserted marketing offices and desperate salesmen.
  • Real estate credit is still a huge part of all new credit lent out by banks, and that percentage has been increasing. A fall will hurt banks a lot:

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  • Real estate companies are already in the dumps.
  • Cement sales have fallen big time. ACC results showed a drop of over 40% in results and we expect Ultratech results to be bad too.
  • This will hurt companies like the ceramics giants, home loan financiers etc as well.
  • But if there’s a bust it will be a slow train wreck, rather than one mega fall. This is macro, so it’s slow by definition.

More data as we see it!

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