The Indian Real Estate Party Has Just Begun

Apr 1, 2021

As a kid, my father always use to stress upon the importance of accuracy and time in 'Diagnosis'.

He was referring to accurate and timely diagnosis in the field of medicine. Those were the 2 qualities that differentiated successful doctors from the average ones.

An accurate diagnosis, if not done in time is equal to a misdiagnosis.

After all for a critical patient, no matter how good the diagnosis process would be, the time factor defines life and death.

Let's relate this to the stock market.

While doctors diagnose a problem; we find an opportunity.

What's the point of identifying a stock accurately when its already run up. You're late.

Just like the medical field, a successful investment has to be accurate (identify the right stock/sector) and timely (not ahead/behind the curve).

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The big bucks are made by people who can envision the future based on past experiences and judgement in any field.

In my last editorial, I had stated, that for every Eicher Motors there is a Suzlon. Not every small cap stock that glitters will be gold in the long run. It's imperative for you to go trust a successful money manager.

The key lies in identifying sectors and stocks with accuracy and in time.

Let's focus on certain small cap stocks in the sectors I am bullish on.

I am talking about one of the most unloved sectors over the past decade: Real Estate.

Isn't it when all hope is lost, mankind springs back, and surprises the critics?

Real estate sector has been no different.

The initial days of Covid in March and April last year, rung the death bell for the real estate sector which was already reeling from perils of IL&FS crisis and defaults.

A 5 year down turn was expected to last even longer, with people writing off the sector. Unsold inventory levels were at the peak.

Suddenly the narrative changed and how!

Headwinds have become tail winds for the sector.

Housing interest rates are at a decade low.

Stamp duty reduction and GST waiver on buildings with OC (in some states).

Affordable housing projects and demand from Tier 2 and Tier 3 cities is zooming. The need and urge to get a house is more than ever now, with work from home becoming an accepted long term norm.

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Let's do a back of the envelope cost saving calculation to see how the narrative has changed in a couple of years.

Scenario 1 (2017): On a Rs 15 million house at an interest rate of 10% for 15 years would mean an EMI at Rs 162,000.

Scenario 2 (2020): On a Rs 15 million house at an interest rate of 7.5% for 15 years would mean an EMI of Rs 139,000.

That's a Rs 23,000 saving/month only due to 2.5% reduction in interest rates.

And yes, add to it a 5% savings due to reduction in stamp duty and occupation certificate. That would be Rs 0.75 million on a Rs 15 million house.

Basically, most of the furniture would be free!

I haven't even added the 5% discount you get while negotiating with the builder.

Now you know why such a mad rush to buy a house.

Let me tell you even after a reasonable run up in stock prices of real estate companies, I still see the cycle at its infancy.

To gauge which stage we are in any asset cycle, the most important factor is change in prices of the underlying asset and its velocity of change. Normally the price of an asset in every cycle surpasses the peak formed in the previous cycle.

Real estate prices have barely moved over the past 5 years. In fact, small developers are offering discounts just to liquidate their inventory.

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Affordability is at its highest since 2008.

In my last article, I said, 'What doesn't kill you makes you stronger'. This is exactly what I was referring to.

The weaker standalone developers have been selling their assets to reputed names at a 30-40% discount. This has led to massive consolidation in the sector.

Can you believe the share of large developers has risen from 17% in CY2017 to 44% in CY 2020. After all, quality matters!

In a nutshell, I believe we are at the start of a real estate cycle with the next trigger being the rise in prices as inventory dries up.

In my next editorial, I will decode the building material space which is a proxy to real estate and why I believe is likely to be a great investment opportunity.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

PS: Join me on 15 April, at India's Revival Summit. I will reveal a once-in-generation opportunity to potentially make 1000% long-term gains. Get the full details here.

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