Will the RBI Rate Cut Bolster the Real Estate Sector?
(Oct 7, 2015)
|A A A
In this issue:
» Insurance companies are powering NBFCs
» India needs to invest more in cleaner technologies
» ...and more!
As inflation in India began to ease off, the pressure on RBI to cut interest rates cranked up a notch. The RBI governor finally obliged, albeit reluctantly, and cut rates by 0.5% in its latest Monetary Policy on September 29. Sure enough, the markets reacted positively that day, and one of the biggest sectoral gainers was real estate.
Why is that?
The assumption is that, with the cut in interest rates, banks will reduce rates on home loans. And so the demand for houses will increase. Markets perceive this development as excellent news for a sector that has been down in the dumps for the past many quarters.
Is this perception justified?
Let us go back a bit and understand why the real estate sector has not been doing that great in recent times. Builders and real estate companies have been harping that high interest rates are dissuading the average Indian from buying homes.
But there is a much deeper rooted problem here. House prices in India are way too high. So high that even though there is latent demand for homes and there are enough first time buyers, the exorbitant prices have kept them on the sidelines.
In other words, house prices are way beyond what the average Indian can afford. So inventories have piled up. Meanwhile, banks have been wary of lending to the sector as they have their own asset quality issues to deal with. So the funding from this area has begun to dry up.
The real estate sector continues to be bogged by lack of transparency issues. This means that economic laws of demand and supply don't really work for this sector. So even if the demand for homes has waned, prices have not fallen at the same pace. In fact, there is this view that home prices will never fall.
But Vivek Kaul, the India editor of The Daily Reckoning, busts this myth. In one of his pieces on real estate, he has very aptly stated that unless real estate prices fall, even with such a massive cut in rates (which is likely to lead to lower home loan rates), home sales won't pick up.
Now an article in the Economic Times has talked about how some of the leading banks have cut home loan rates. And this is just the booster dose that real estate companies needed. They seem to be brimming with confidence that demand for homes will take off and improve the fortunes of the sector.
We are taking this news with a pinch of salt. We agree with Vivek that demand for houses will not pick up unless there is a significant fall in prices. Thus, we believe investing in stocks of real estate companies solely based on the fact that the RBI has cut rates is fraught with risks.
What more, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...
Do you think that RBI's rate cut will lead to a rise in demand for houses? Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
Why Little-Known Companies Could Make You Big Returns...
Some little-known and barely heard of companies could be the star performers in your portfolio.
It's because these companies have a huge potential for profit. A potential unrecognized by most investors as of now.
And you need more than a magnifying glass to go through the details of such companies to pick the winners.
Believe it or not, Equitymaster has been researching and recommending such companies for more than 7 years now.
And our subscribers have made returns like 124% in 7 months, 217% in 3 years and 11 months, 250% in 2 years and more from such little-known small companies we've recommended.
So we now invite YOU also to be part of this amazing opportunity.
Just click here for full details...
The non-banking financial companies (NBFCs) have in the past derived a majority share of funds for operations from banks. But in FY15, there has been a 45% fall in investments by banks. This fall has come amidst banks themselves struggling with slowdown in credit demand as well as rising bad loans particularly in case of public sector banks.
But a sharp 82% jump in investment by insurance companies in FY15 has somewhat offset the overall reduction. Resultantly, insurance companies with a 40 % share in overall investments have now displaced banks as the major source of funding for NBFCs. Even asset management companies invested 33% more in NBFCs in FY15 as compared to the preceding year.
Insurance companies powering NBFCs
India has embarked on a journey to kick-start its economic growth engine. Therefore its power requirements are set to increase many folds. As 61% of the country's power plants still run on coal, the demand for the black gold is set to grow exponentially. The country has been opening up a mine a month in its pursuit to double coal output by 2020.
On the flip side, the huge clamour to burn more of the fossil fuel is expected to push India as the most polluting country among Asian nations. As per World Coal Association, China, India and Indonesia burn 71% of the world's newly mined coal. In comparison, coal consumption of developed economies such as Europe and North America is negligible as they have shifted to cleaner energy alternatives.
But India remains steadfast in its decision to increase coal production stating that its per capita emissions are far below the world average. However, as per Centre of International Climate and Environment Research, India may replace United States as the world's second largest emitter by 2025 as extra emissions from its coal drive will offset savings from solar and wind power. Therefore as India moves ahead to secure its energy requirements, it needs to also invest more in cleaner technologies to reduce its carbon footprint and achieve responsible growth. Currently green energy sources such as nuclear, hydro and renewable energy account for 31% of India's overall power generation.
Indian stock markets had a rather volatile trading session today as buying activity in the morning session was followed by bouts of profit booking in the subsequent hours. At the time of writing, the BSE-Sensex was trading up by around 57 points. Gains were largely seen in metals and auto stocks, while IT and pharma stocks were at the receiving end.
"We enjoy the process far more than the proceeds." - Warren Buffett
|| Today's investing mantra
Today's Premium Edition|
Five Years in the Life of Metal Stocks
Did you lose money in any of these metal stocks?
| Get Access
|This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
- Equitymaster has financial interest in SAIL.
- Equitymaster’s investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
- Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407