Om Chaudhry, CEO or Fire Capital Fund has a word of caution for Indian realty market and he believes that while there’s a huge hunger line for the realty, FII’s inflow can be a matter of concern since China is going to control the GDP. He says, the speculative elements have added to the demand-supply mismatch in the Indian market and crisis of credibility is going to be the biggest challenge for the developers. The policy of Fire Capital Fund is to put money only in the debt free companies.
Q. How do you see the market shaping up in the year 2011?
As the economy is filled with positive sentiments and heightened activity, the future of the real estate market in India looks robust in the long run though the higher increase in prices as compared to rise in inflation rate has made some real estate investors take pause for the present. Outlook of FDI funds towards Indian real estate industry is once again looking favourable. Increasing migration to Tier-I and Tier-II cities and higher income levels makes real estate one of the most appealing investment areas for investors. The interest rates that are expected to rise may impact the buyers’ choice in the short run but will even out in the medium term. In its various development ventures across tier II cities in India , FIRE Capital has seen the highest sales and price increases in the last quarter of 2010 compared to other quarters. This trend bodes well for 2011 and we feel very confident about the real estate sector performing better than the previous year in 2011.
Q. Any particular trend that you see emerging in the year ahead?
With the evolving real estate market, “value housing” seems to be the key for future. As the buyers are getting more informed, they are ready to pay increased prices in proportion to the increased value in terms of amenities and specifications of the housing offered. Hence, irrationally high premiums will not be accepted based on only location or brand advantage. Year 2011 will also see increasing momentum in growth of suburban townships. Many Tier II and Tier III cities, along with outskirts of Tier-I cities, have witnessed exceptional growth in the last few years but the shift will now be to offer quality development in the form of suburban integrated townships which offer international lifestyle at value prices. FIRE Capital, a real estate centric PE firm, is developing 5 large integrated townships across India, covering the total land area of over 1300 acres with a potential development scale of 50 million sq ft.
Now, since the stronger driver of residential demand is an increasing number of end-users, the developers will have to offer something which makes sense to the end users. Offering affordable prices with poor quality or infrastructure will not do. Understanding the taste of the customers and their expectations will be a key to succeed. Moreover, since the interest rates will remain on the higher side relatively, the buyers will become more conscious while making any investment decisions.
Q. Do you think affordable launches are over and 2011 will see launch in various categories?
“Affordable” means different things to different income groups of the society though it has been perceived in the past as meant for low income group. However, we continue to believe that ticket price range between Rs. 12 lacs to Rs. 20 lacs is affordable for the middle income group in most Tier-II cities. Year 2011 will see an increased trend of “value housing”. Offering world class infrastructure and amenities at a mid segment level will hold the key for the developer. FIRE Capital Fund is focused on the value housing segment in Tier-II cities and planning to launch 4 to 5 projects in the near future. As stated earlier, the key is to provide living spaces as per the customers’ taste located near the newly developed work centres.
Q. Which are the segments that will see the maximum demand in 2011—both in residential and commercial?
We feel that the residential segment will drive the majority of realty market in 2011 as well since there remains a deficit between supply and demand of housing in India. Tier II and Tier III cities will be popular destinations for developers to foray into. The middle income segment will retain its popularity in the residential market.
Though the demand for high-end luxury housing will remain, the numbers might reduce as prices are reaching very high levels which will make both end users and investors think twice before making a purchase decision. There will be an increased demand for mid segment options due to the increased size of middle-income group. Indeed quality aspect cannot be overlooked and will largely influence the price and demand for each project.
In the commercial segment, the gap resulted by increased supply over some time will be covered by the increased demand generated by economic activity. Build-to-suit will hold the key for commercial development along with proximity to urban infrastructure and attractive pricing for tenants.
Q. Do you think the skyrocketing of input costs, inflationary pressures and interest rates will influence absorption dynamics?
Factors like input costs and inflationary pressures will have a pull down effect on absorption numbers if developers pass on all the increases to the end customer. Though the sector is reeling under over-supply pressures in some cities, the improved economic activity has now started narrowing the gap between supply and demand. That said, pricing will be the key watch word in 2011 if developers desire to keep inventories low. This combined effect will likely result in lower development margins in 2011.
Q. Any forecast on the price trends in various property categories?
The market is expected to remain stable for the coming months. However, selective escalation of prices may take place due to increased input costs and rate of interests. In Tier II and III cities, prices are likely to keep increasing steadily and in the Tier-I cities, where over-supply is observed, price may taper off. Prices of luxury products might see a correction this year. On the whole, the boom in the residential markets which is driving the realty market largely will continue in 2011.
