The Real Estate (RE) Cycle: Where are we & the way forward

It has always been a difficult task to predict the Real Estate cycle, while in retrospect it is easy to gauge where the cycle started and where it ended. However, today I will try to build case for the Real Estate sector in India. Continuing the theme from my earlier blog post, I’ll reiterate that India is at the lowest point of its Real Estate cycle, and it is a great time to be investing in Real Estate of all kinds, from commercial and residential to hospitality and warehouses.

If we look at the pattern of investments by the Real Estate PE funds over the last 10 years, the following trend is noticed:

As is seen, there has been a huge uptick (~86%) in FY18. PEs normally are governed by smart people, and it is unlikely that they will invest at a time when the properties are overvalued.

Where are these PEs investing?

Now to answer this we will have to go through some of the chief deals in this sector:

DateTargetInvestorsDeal Value (USD mn)
March 8, 2017DLF Cybercity DevelopersGIC1800
May 15, 2017Indospace CoreCPPIB500
February 8, 2017K Raheja, Commercial AssetsBlackstone300
April 5, 2017Island Star Mall DevelopersCPPIB246
February 9, 2017L & T SeawoodsBlackstone212

Where is most of the money going to?

Most of the money today is going into pre-leased Commercial Spaces. This space used to hold 29% of the market in 2011 but now amounts to 66% of the total RE market according to a report by Knight Frank. Another sector that is looking promising is the logistics sector, warehousing to be specific.

Government initiatives such as Make in India, GST and the push towards the dedicated freight corridor continue to create tailwinds for the logistics sector and a boom in that space is just a matter of time. It is not a surprise to see that major PE players are shopping left, right and centre in these assets. CPPIB has already made a $ 500.0 mn investment in Indospace Core, which is a company engaged in activities such as real estate development of industrial and logistics parks.

Finally there is the residential market, which is currently quite saturated and inundated with inventory. Some estimates say that in India where absorption is arund 3500,000 units a year, the inventory left to sell is around 1,100,000. So it will take a while for that sector to pick up speed. Having said that, one needs to keep a close eye on the affordable housing space. With the announcement that affordable housing will be included in the infrastructure category, a lot of new funds (Infrastructure debt funds) which were otherwise barred from investing in RE may start investing. However, my personal stand on affordable housing is quite conservative, since I feel that upsides are almost always a function of speculation, and affordable housing space is meant less for speculation and more for end user consumption. Any speculation in this sector which may lead to inflating the prices may ring alarm bells at the regulator, in response to which the regulator may take steps to make life difficult for speculators. So investors will be wary of speculating here, and without speculation, we wont see manifold returns.

How does these insights help us?

For an average equity investor, PE activities may not be exciting, but she must track PE activities as these institutions take bets that are self fulfilling. Considering the huge uptick in RE investments and RE focused funds this is the best time to enter the sector. If one follows the pattern, a multibagger upside is a given with an investment horizon of 2-3 years.

How to play this sector?

Now that we’ve established that the industry as a whole is at its bottom, the tricky part is separating the wheat from the chaff. If we go through the major listed players and seek out those involved in logistics & commercial properties, we will definitely find bargains at the current price levels. In my subsequent articles, I will cover each of these stocks, that I’ve found. Happy investing.