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On this episode, I sit down with Sanjay Kumar Elangovan. Sanjay is part of the PMS team at ithought and tracks sectors such as banking, Real estate, Infrastructure, and commodities. Previously he has worked with Deloitte as a valuation consultant for the global real estate market.

Sanjay it is great to have you on the show

Real estate is the most loved sector of the market. Sanjay, why don’t you take us through how the cycle played out in the sector since 2000.


Real estate cycles are uniquely long and have typically followed an 8 to 10-year pattern or even more. Sometimes a particular phase in a cycle is elongated.

The first known cycle of Real Estate was in the 1990s. Not much information is available but there is a famous anecdote of Irfan Razack (Prestige group) on the 1994 RE boom in Bangalore:

“If a deal was made by us with a person, by the time he walked out of the door, he would hear another higher price & when he went down the lift and started to speak to somebody, its price would have gone up further.” Such is the craziness at the peak of a Real Estate cycle.

The bottom of that cycle happened when the Internet bubble burst in the early 2000s.

The next cycle started sometime in 2004 – 2005 which was also the beginning of a fresh bull run in the markets. We can split a cycle into 4 phases:

          1. Recovery
          2. Expansion
          3. Contraction
          4. Recession
  • Recovery is when there is strong pricing power with Developers because of a demand frenzy. During this phase, ideally, the launches are slightly lower than absorption/demand or the same level. The price improves due to lower supply and reduced inventory. The profitability would go up for every tom dick and harry in the sector. That’s what happened between 2005 – 2008. After a pause due to GFC, the recovery continued in 2009 – 2010.
  • Seeing the high returns earned by early developers, everyone wants a piece of the pie. The demand is high but so is the supply. The launches are higher than the absorption. Inventory starts to build in the system and as a result, the incremental price growth or appreciation is low. The expansion phase was during the early part of the last decade between 2010 – 2013. Anyone with a land parcel became a developer.
  • The contraction phase indicates the contraction in demand coupled with price erosion. Launches are way higher than absorption. Investors start getting out since they are not seeing a return on their assets. Only the end-user buyers are left in the market. As a result, many developers are left with huge inventory and more leveraged than before possible because of greed. 2014 – 2017.
  • A recession is when both inventory and leverage kill the developers and the industry goes through a consolidation phase. The weaker developers do not have the ability to do launches. The stronger players gain market share. Once again, demand is higher than launches. Inventory starts to fall 2018 – 2020. This recession was also a bit exaggerated by the pandemic which was the final nail in the coffin for a lot of sectors after the double whammy of GST & Demonetization.

We are currently in the Recovery phase. While the current frenzy could be because of pent up demand from lockdowns and the need for bigger homes due to Covid, the sector has bottomed out in my opinion, there are 2 main reasons:

          • Inventory is reducing across Cities.
          • There are signs of price hikes.


“Anyone with a land parcel became a developer which in turn left the sector with more inventory and more leverage”. So how did the developers actually manage out of the excess capacity phase?


Consolidation happens when the launches are not enough to meet the demand on offer. Launches in the last three or four years declined to average 2 Lakh – 3 Lakh units per year versus 4 Lakh units in the prior years. The number of developers in the top 7 cities launching projects has declined to 1,200 in FY20 vs 2,400 in FY12. Coincidentally, even at the beginning of the last cycle, ie, 2004 – 2005, there were only 1200 developers. Share of launches by top 30 players increased to 60% in FY20 from 45% in FY15 in Tier 1 cities. Market shares of listed players have improved significantly from 3% to 8% in the last quarter (Q1 FY22).

Developers go bust when they try chewing more than what they can bite. So, managing the peak phase or the excess capacity phase boils down to 2 things:

          1. Understanding the micro-market structure of where the developer is operating.
          2. Capital Allocation.
    • Micro Markets – Both MMR and NCR saw huge levels of inventory buildup in the last cycle. It didn’t make sense to do more launches in those 2 sectors. As a result, the decline in number of developers in those 2 markets between 2012 – 2019 was as high as 54 – 58%. Some markets like Pune saw only a 28% decline. Sensible developers didn’t go all out in MMR and NCR at the peak of the cycle.
    • Capital Allocation – If not bought at the right time, the land cost can eat into your margins and developers will be forced to take debt. I’ll quote Vikas Oberoi here – “This (2020-21) is the best time to buy, most of the developers’ coffers are empty. They also have their brand erosion happening. And we are doing well. This is the best time to go out and look for land.” Godrej bought land in Delhi for 1300 Crs in 2020 and was not at the peak of the last cycle. Godrej also guided that there will be some deals in the next few years which is the recovery phase. Brigade raised 500 crores from the market to buy land. So, the sensible ones know when to buy and how to fund it. Equity capital has been cheap since March 2020 and not all developers have that luxury. Some developers like Sunteck take the JV route. They partner with landowners and develop projects.


For me, real estate valuation is very tricky. What role do inflation and interest rates play in the economics of a project?


The narrative going around in the market for a boom in the real estate cycle is based on 2 reasons:

          1. Four-decade low-interest rates improving affordability – possibly the most important reason.
          2. Real Estate prices have been stagnant for seven-eight years.

But people are looking at these 2 reasons in isolation. We need to look at it on how these reasons play together as an interplay between interest rates and prices. This results in multi-decade low in difference between tax adjusted mortgage EMIs and lease rentals.

The basic premise is a Rental Yield + Price Appreciation should be greater than your Cost of Capital for a home buyer to make money. Rental Yields have been at 3.5  % for a long time. If cost of capital is 10%, you would need prices to grow at a CAGR of 7% to breakeven. Now that the interest rates are down and the cost of capital is 7%, you only need a CAGR of 4% in real estate prices to breakeven which means if the real estate assets are appreciating at a rate higher than 4% then you can start making money in real estate.


What do you think about the current situation of the industry, what does the future looks like going forward?


It indeed is a good time so we just spoke about how an investor looks at a real estate as an asset but current situation is more of an end user market driven by the pandemic. People want to move to bigger homes since we will be leading a hybrid life in terms of work. So employees want a space at home to do their work. Launches are lagging demand. And people who used to live in rented houses have realized the importance of owning a house. HDFC’s Keki Mistry says that most of the recent demand has come from first time homeowners. We are also seeing an exponential growth in the salaries of IT employees due to the boom. Some of it will flow to the real estate sector to buy homes. Sobha says that 50% of their customers are IT professionals. Salary hikes are always good for developers because it allows them to do price hikes. Similar to decline in growth of real estate prices, the salary hike rates were also in decline in the last decade.

Structurally also, given the demographics of our country, we are in for an elongated real estate cycle in India. HDFC customer’s average age is 39 years. India’s 66% population is below the age of 35 which means we could see a lot of first-time home buyers in the next few years. Mortgages as a percentage of GDP is at 11% now which is very low compared to some of the other economies. China & Thailand are at 20%. Developed countries are upwards of 50%. So we have a long run way when it comes to real estate sector in India.


Before I let you go, passive investing has taken over the world and even here it is picking up. Now let’s say we do get an option in the future to invest in a passive product for a sector like real estate. How important of a metric should the quality of the index be and how should an investor prepare to invest in such a sector.


We do have an index which is NIFTY Realty Index, it is designed to reflect the behaviour and performance of both commercial and real estate companies. So it not a pure play on the residential sector alone. Although its a small part one has to have a view on the office space and malls aswell. There is no fund or ETF which lets you buy this index we will have to wait for a fund house to launch a better quality product, because the constituents in a sectorial index should not have any corporate governance issues in the past and in terms of preparation one needs to understand the risks involved in buying say NIFTY 50 Index Vs Realty Index. We can measure risks in terms of Standard Deviation, Nifty 50 standard deviation is 18 % roughly long term average meaning it can go up or fall 18 % average in a year, whereas its 30 % in the reality index. Investors should decide if they are willing to take on this higher risk in realty index in relation to the higher returns. SIP approach will help in navigating this risk. I think investors should explore such a product given that we are at the cusp of a new real estate cycle and I know its a cliché but Q2 updates of real estate companies are very strong. We need to see if the current demand sustains going forward.


Thank you so much for coming on the show and sharing your insights, I had a wonderful time having this conversation and I hope to connect with you soon.

This brings us to the end of season one we’d like to thank our guests for taking time out of their schedule and sharing their valuable insights with us.

For all our listeners out there do get in touch with us at info@ithought.co.in to leave us a review and topics that you’d like for us to cover in Season 2. With that we will see you again soon.

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