More than 80 percent of India’s real estate resides in the top 8 cities of India: Mumbai MMR, Delhi NCR, Bengaluru, Chennai, Hyderabad, Pune, Kolkata and Ahmedabad.
Historically, these cities have driven commerce and growth in India through burgeoning sectors like IT/ITES, financial services and age-old presence of manufacturing, and other services. Ecosystems have been created in each of these cities due to which they have been favoured over other cities for specific industries.
For example, while Bengaluru and Hyderabad are largely driven by IT/ITES, Pune and Chennai are driven by a combination of IT and manufacturing, Mumbai is the financial capital while NCR is diversified and the nation’s political capital. Availability of the right infrastructure and talent has played a key role. We believe that these cities will continue to attract maximum growth and drive majority of the real estate demand in future too.
Our (MORE) strategy is to invest in 7 of these 8 cities: Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Pune and Ahmedabad. Even as real estate in these cities has outperformed that in the rest of the Indian cities, it has been grappling with several challenges over the last few years. Starting with demonetisation in 2016, real estate has undergone a slew of reforms such as GST, RERA which has regulated business significantly and create a survival issue with weaker and poorly managed developers.
The liquidity crisis which started with the IL&FS debacle in 2018 only made matters worse. Mumbai and NCR have been impacted more than other cities due to the inordinate levels of leverage that developers carried in these cities. Price did not rise and even stagnated in many cases. In cities like Mumbai and NCR, prices corrected too. The COVID pandemic has exacerbated these challenges for the sector.
As we enter the “unlock” phase of COVID, different sectors will recover at varied paces. While the general real estate demand of each city in the post COVID phase will be driven by the recovery and performance of the underlying sectors that drive that city’s economy, there are a few critical real estate factors that one must consider at the time of investing. Leverage and unsold inventory will play a key role in selecting the right city.
Mumbai and NCR now have the highest levels of unsold inventory both in terms square feet and months of inventory sales. Pre and post COVID, only well managed developers with strong balance sheets will survive. Hence, while our focus would be invest in these top cities, we would proceed with caution in Mumbai and NCR and within the other cities too, our focus would be on selecting the right partner.
Our strategy is to invest in mid-income housing projects with the right partners in the above mentioned top 7 cities. This segment has been the fastest growing one with the least inventory overhang over the last few years and we believe that this trend will continue in the future too. Partner selection is key. We ascertain our partner’s prior track record with similar projects, ability to execute and most importantly, sell. With the liquidity crisis, developer’s ability to achieve financial closure has gained a renewed prominence in our evaluation process.
Lastly, location of the project still plays a crucial role in driving sales. In the post COVID scenario, we believe that these investment criteria will still hold. However, it may take some time before we witness recovery in the sector as a whole. The last three months of lockdown may also cause user preferences to change and the sector to evolve in a manner not anticipated before. Due to the challenges faced due to labour and financial closure, we foresee several developers facing challenges with ongoing projects. As a result, it would be safer for investors to buy completed inventory in the short term future – as developers focus on generating cashflow and investors on reducing risk, buying completed inventory could form a win-win arrangement between both stakeholders.
(Source: CNBC TV18)