This Orphan Sector Got a Father. What This Means for You

Jan 20, 2018

Kunal Thanvi, Research analyst

Can you imagine...

A country without a government?

A school without a principal?

An organisation without a CEO?

Stock market without a regulator?

Yes, things would be very difficult and chaotic without them.

The idea of no one taking care of the basic disciplinary and hygiene factors seems unthinkable.

These authority figures take care of basic yet crucial things i.e. the right way of doing things, Dos & Don'ts, powers & responsibilities. Help things run smoothly - keeping anarchy, fraud and mismanagement at bay.

These people are regulators.

Just picture an organisation without a Chief Executive Officer? Not only will it be direction less, people will put their own benefits above those of the organisation.

Real Estate Sector - Poised for Consolidation?

Unfortunately, the real estate sector in India has been just such an orphan without a regulator.

Real estate has suffered chaos and anarchy for decades.

Traditionally, real estate has been the biggest market for the black money.

Both developers and investors have taken undue advantage of this parent-less sector.

With no regulator in place - high cash transactions, avoidance of taxes, money laundering became a norm.

The run up of real estate prices between 2007-09 and 2014, got many new players in the sector (mostly unorganised players).

With no barriers of entry, every street had its own developer and the market became increasingly fragmented.

The party got spoiled somewhere in 2014 when the market started slowing down.

And since then the sector has been through a lot.

First, notebandi proved to be a major roadblock in the otherwise struggling real-estate market.

With cash going out of the system the sales and bookings dropped and oversupply clogged the market.

While the industry was bleeding already, the government of India brought 'Real Estate Regulatory Authority' under the Real Estate (Regulation and Development) Act 2016, RERA.

RERA is like a father to the otherwise orphan sector.

RERA gave the sector regulations, like:

  • No more moving of money from one project to another (escrow accounts for each projects);
  • No project can start before all the requisite approvals from all the authorities are received;
  • Strict penalties were dealt for delaying projects (imprisonment in some cases);
  • Tight control over black money;
  • Every agent/partner/developer should be registered with the regulator.

Now, just think about it, first the demonetisation and then RERA with strict regulations - the Sector is going through a very tough time.

Is this bad for the sector?

The answer is both yes and no.

Yes - it is bad for the unorganised and unethical players who stand to lose big time.

No - it is not bad for the organised and ethical players who stand to gain big time.

The sector is poised for a multi-year consolidation i.e. small and unorganised players will not be able to survive the stricter norms; and strong ethical players will gain market share.

The Smart Money Secrets team, is closely tracking developments in the sector and the companies that can be major beneficiaries of the consolidation.

In fact, last week we met a company known for its ethical conduct. It has a strong brand when it comes to transparency and timely delivery of projects. In fact, it has never moved money from one project to another.

While the company has passed the stringent Smart Money Score, the team plans to meet several more companies in the sector to better understand the ground reality. Stay Tuned...

Editor's Note: If real estate investing is of interest to you, do not miss this free webinar by a real estate expert who has been in the industry for three decades - and will show you exactly how to profit right now - just as the market is poised for a major revival.

The webinar will air on Tuesday, 30th of January at 1PM. Clicking here will save your spot.

Does This Indicator Spell Trouble Ahead?

The Market cap to GDP ratio for Indian companies is close to dangerously high levels. While this is still some way off the peak of FY-08, when it had once reached close to 150, it's relatively high.

The Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued

FY17 saw this ratio reach close to 80. It is also expected to increase further given the moderate growth expectations in India's GDP for FY18. Warren Buffett once considered this as one of the best valuation metrics to gauge the markets.

Past history shows some correlation between the ratio and the share market. 2008 saw Sensex decline by 38%, when this ratio crossed the 100 mark. Also, the market has bounced back sharply when this ratio was low.

The basic assumption in this ratio is that whenever the GDP of the country grows, the market performance will reflect it. Also, when stocks do well, it can be extrapolated to assume the Indian economy is doing well.

The only caveat in this ratio is the number of households involved in the stock market. While in countries like US, 50% of the households are invested in the stock market, India stands at just 2-3%. As a result, when the economy grows, all of the money might not enter the stock market.

But unless there is growth in earnings, it makes sense to tread with caution at current levels.

Revised GST Rate to Boost Growth Ahead of Budget

The Goods and Services Tax (GST) council announced rate cuts on 29 good and 53 services in their meet on Thursday.

The automobile sector was one of the major beneficiaries of this revision. Rates for used SUVs, medium and large cars were slashed from 28% to 18%. Also, used cars and motor vehicles will be charged 12% tax instead of the existing 28%.

Private LPG players are also expected to benefit from this revision. Rates from household LPG suppliers were cut from 18% to 5%. Increasing Diesel and Petrol prices might help the transition from cylinder users to LPG users post the tax rate cut.

The implementation of the GST had halted the economy, albeit temporarily. Although the GST is likely to usher in greater transparency and efficiency in the supply-chain network, the initial teething problems are likely to delay the recovery process.

Once the structural issues surrounding GST are ironed out, we can see a sustained growth ahead for the Indian economy.

What the Markets Looked Like This Week

Global stock markets ended the week on a positive note. Benchmark indices in US grew by 1% during the week.

The Dow Jones Industrial Average topped the 26,000 mark for the first time during the week. This is a new landmark in the Wall Street stock market boom that has gathered pace since the new year. The rally is fuelled by an upswing in the global economy coupled with the corporate tax rate cuts brought in by Mr. Donald Trump.

Stock markets in Asia too ended on a good note as the benchmark indices in Hong Kong and China posted gains of 2.7% and 1.7% during the week.

Hong Kong stock markets hit a record high on upbeat China data. China's economy expanded at a faster pace than expected. China's economy grew at a pace of 6.8% in the fourth quarter of 2017 from a year earlier, beating estimates compiled by Reuters and Bloomberg.

Back home, benchmark indices in India too logged gains of 2.7% as BSE Sensex closed at 35,512. Good corporate earnings coupled with heavy inflows from foreign institutional investors (FIIs) led to the spurt in the indices.

Investing Myntra of the Day

"People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game." - Warren Buffett

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