Realty Stocks

Mark Twain once famously said ‘Buy land they’re not making it anymore’. While the stock market has emerged as the clear winner among major asset categories for investors in the post liberalization era appreciating more than be 1,300% on an average since mid 1991, property values in cities such as Bangalore that benefited from the reforms and the information technology boom have increased at an even faster pace.

Property and stocks grew at the fastest pace in the post reforms era, with the realty gaining between 450% and 1,400% while gold, when compared to property made modest gains of around 275%. Silver, however, jumped by an impressive 632.5% during the period. As the markets opened up throwing up a lot more opportunities more people lined up to have a share on the lucrative pie.

Emerging property markets (in the early ‘90s) such as Bangalore and Chennai have become fully developed.

Only Delhi and Mumbai made it to the global list of property destinations in the early 90s. But with the reforms cities like Bangalore too have found a place. Growth in these cities came mainly in the past 15 years. Reforms had a big impact on commercial property and rates zoomed on the back of the ever growing demand for space. Exact data on commercial property prices in 1991 was not available but according to a TOI study property consultancies rate have jumped by 400% to 1,400 % depending on the location.

Even as values continued to climb retail participation in stocks and real estate increased manifold in the reforms era thanks in good measure to newer easier options to invest and the availability of finance. In the good old days getting a loan was a tough proposition and one typically worked all life building a corpus and finally bought a house with savings and even retirement benefits. All this has changed in the past decade.

Now one can get personal loans just after landing a proper job. Salaries have increased tremendously and as a result a lot of people are looking at buying even a second house as an investment. The per capita income has more than trebled since 1991 to Rs 44,345 in 2009-10.

Investments in stocks are no different. The average daily turnover at the NSE which accounts for the majority of stock trades has grown more than ten fold in the past seven years alone. The advent of demat accounts and online trading has increased the overall reach of the market. The average daily turnover in the cash segment shot up from a mere Rs 469 crore in 1995-96 to Rs 11, 760 crore in 2006-07. RBI data shows this decade (mid 90s to mid 2000s) reaped the full benefits of liberalization .

Earlier stock trading was done only in certain pockets. But you have a trading terminal in most corners (of the country) now. The reforms played a big role. There were not many institutional (domestic as well as foreign) participation than as only UTI was the primary player. Since then volumes have picked up and have grown by more than 100 times.

Interestingly the reverse link between real estate and stocks vanished in the reform era. In the pre-reforms era whenever the stock markets went up, real estate declined. Ever since foreign institutional investors warmed up to the Indian markets this reverse correlation changed he added.

Real estate prices have increased by an average of 15-20% every year in most places says observers. The national capital region has had a tremendous increase in property development and as a result prices climbed by well in excess of 25%. However, Mumbai has rarely seen a steep decline in all these years, say observers.

Excerpts from ‘The Times of India’

  • Arunshah

    I have received various private queries on real estate (RE).Boarders will recall that I called the bottom on the sector about a month back. I shall summarise why RE stocks are the classic contrarian play for 2011. Please do not buy the smaller counters. Buy the blue chips. Top picks are IB Real, HDIL, Orbit and Unitech. They have the both the value argument, and the volume to attract massive FII buying, which is happening as we speak.

    The disconnect between the RE market and the scripts is growing by the day. RE has more than recovered from the 2009 slump.Looking at recruitment ads, we see a shortage of people from civil engineers to karigars and bricklayers.A housing and construction boom is on.Yet the scripts are trading at 52 week lows.(Btw, Unitech promoters have hiked their stake recently in their company. Promoters raising stakes is one of the most bullish signs in a sector.)

    The slump in the stocks is ironic,because RE is the biggest beneficiary of 9 % GDP growth.It is also the biggest beneficiary of the Indian demographic story.After all,you are born, then you finish school and college, then you find a job and get married.Then what do you do?You buy a house for your expanding family.

    Valuations are astonishing.Many of these stocks are trading at 50 to 60 % discounts to their net asset values (NAV).Now the NAV calculation is simple.If I take all the land and flats under construction and sell them, then pay of all the debts on the company’s books, I get the NAV.Consequently, most company shares should sell AT OR CLOSE TO, THEIR NAVs.But they are trading at massive discounts.The market is behaving as though some sort of nuclear bomb has gone off on these company’s properties.(If there was a market for corporate control in India, it makes sense acquiring these companies, breaking them up, selling their assets and paying off their debts, to realize value).

    Consider the following stock prices and their NAVs. IB Real at 130 vs NAV of 280. HDIL at 185 vs NAV of 370. Orbit at 80 vs NAV of 180.To trade at their NAVs implies 100 % upside in these stocks from here.Remember the NAV itself is subject to upside revision particularly for IB Real, HDIL and Orbit.

    A panic bottom was reached in late November due to the socalled “scam”.This was nothing but a bunch of mid level managers at banks getting paid by middlemen to facilitate loans.These middlemen are called loan syndication agents (LSAs) and the industry if full of them.The mistake this time was that the LSAs bribed mid level managers to facilitate paperwork, a common Indian practice.As a result, blue chip RE companies have lost 50 % of their value in weeks!This is a disproportionate result. Notice also that not a single RE company, let alone a blue chip one, has been named in the scam.

    RE companies with substantial presence around Mumbai will benefit particularly from the final clearance to the Panvel airport project, – and the transharbour link – done a few weeks back by the Environment Ministry.These include IB Real Estate, HDIL, and Orbit.See my earlier post on IB Real for the argument.

    The real estate sector interests me currently because it is a genuine contrarian investment. Genuine contrarian investing is tough, dangerous, and for most people, psychologically impossible.That is why it is so hugely profitable, and practiced by all the masters of investing.It involves buying from the crowd what the crowd hates, and selling to the crowd what the crowd loves.There are two basic requirements and I consider them with regard to RE. First,there has to be overwhelming consensus, either positive or negative. With regards to RE, there is overwhelming negative consensus.There is not a single brokerage or analyst who is positive on RE, and all are heavily underweight.The sector has become a dog.

    Second, that strong consensus has to be supported by “weak” reasons.This is an important, and profound, point that deserves detailed explanation.With contrarian investing, a weak reason is not a weak reason per se.It is a reason that so widely known, that it is already “baked into the price”.Thus , “interest rates are rising and this will affect demand for housing”.Also the “scam may make banks more cautions about lending” to the sector.These are all valid reasons.But because the whole world and their grandmothers are talking about it, it is already in the price, which is why the price is so low.Hence in contrarian investing, this is a weak reason.

    Two things can then happen.Firstly, the sector becomes vulnerable to positive news surprises that will suddenly cause the price to flare up.This could be an earnings surprise. Or FDI changes in real estate/retail.Secondly, valuation considerations start to predominate when prices fall so low.Fund managers looking for alpha and seeking to deploy excess cash, realize their stupidity and start buying in.This generates momentum, trend followers pile in, and we have a full blown rally.