ANAROCK Report Underscores Gujarat’s Thriving Economy, Housing Opportunities

  • Compact homes (area less than 646 sq. ft)see maximum traction in Vadodara
  • Surat’s residential market set to boom on the back of DREAM City

Ahmedabad, 26 October 2018: Gujarat’s real estate market presents a mixed bag of highs and lows, according to ANAROCK Property Consultants’ report ‘Gujarat – Land of Innumerable Possibilities.

As knowledge partner for the event, ANAROCK launched the report at the CII Realty & Infrastructure Conclave 2018 in Ahmedabad today.

Shobhit Agarwal, MD & CEO – ANAROCK Capital said, “Gujarat has attracted over ₹65,432 crores of FDI over the last 5 years, accounting for 5% of the total investments in the country. The state’s major real estate markets are largely stable, barring a minor price correction in early 2017 due to demonetisation. Smaller-sized housing units appear to attract the maximum demand overall, though Surat is a notable exception. While there has been fairly constant housing price growth in all segments since 2016, the maximum price rise in major cities of the state has been in the mid-segment.”


Housing Price Trends

Dinesh J. Yadav, Chairman – CII Gujarat State Council said, “We at CII are organizing the 1st Edition of Realty & Infrastructure Conclave 2018 for developers and builders based out in Gujarat. Understanding the current scenario, there are sufficient reasons to remain bullish on Gujarat’s real estate market, not least of all the state’s brilliant macroeconomic indicators. Gujarat contributes a massive 18.4% share to India’s industrial output, and the per capita income has increased from Rs. 87,481 in 2011-12 to Rs 1,56,691 in 2017-18. This accounts for an impressive annualized growth of over 12% during the period. Gujarat currently ranks 3rd in India in terms of per capita income. This bodes very well for its real estate growth story.”

Report Highlights:

  • Gujarat has 419 industrial clusters, which employ more than 17 lakh people. South Gujarat alone has 132 clusters employing more than 10 lakh people.
  • Ahmedabad is witnessing significant infrastructure growth. The main factors fuelling growth of the city are its proximity to DMIC & GIFT City and the proposed Ahmedabad-Dholera Special Investment Region.
  • In Vadodara, smaller homes (with area less than 646 sq. ft) are witnessing maximum price appreciation. Vadodara will also gain from DMIC passing through its borders.
  • Surat has seen a rapid increase in population, resulting in severe pressure on existing infrastructure and services. Nevertheless, the Diamond Research and Mercantile City (DREAM City) in Surat will fuel further residential development in and around Surat

Click here to download the report ‘Gujarat – Land of Innumerable Possibilities’

Image By Srikeit at en.wikipedia, CC BY-SA 3.0

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NBFC Crisis – Real Estate on Tenterhooks!

Shobhit Agarwal, MD & CEO – ANAROCK Capital

It may be true that ‘when the going gets tough, the tough gets going,’ but this doesn’t hold true for the Indian real estate sector currently. The ongoing NBFC crisis post IL&FS default has made things even more difficult for developers.

Post the banking system’s freeze on real estate funding due to rising non-performing assets, NBFCs and HFCs were the sole sources of funds for the cash-strapped developers. Now, however, NBFCs themselves are struggling and their loan disbursals to developers have slowed down significantly.

A source of broad-spectrum dismay and despair, the NBFC crisis needs to be resolved as soon as possible or the real estate sector’s much-anticipated recovery will be postponed by a couple of quarters more.

As a Credit Suisse report reiterates, NBFCs and housing finance companies (HFCs) have played a major role in credit supply in recent years, accounting for nearly 25-35% of the incremental overall credit.

While bank credit growth in the last two years averaged at a mere 7%, strong 20%-plus growth in NBFC credit aided overall credit expansion beyond 10%.

Free Falling

What began as a singular event with one of the biggies – IL&FS – failing to repay its commercial dues has blown up into a liquidity crisis for the entire NBFC spectrum.

As an immediate aftermath, NBFCs’ stocks went into free fall. The top 15 NBFC companies cumulatively lost over ₹75,000 Crore in just two initial trading sessions.

To say that this rattled investors would be a gross understatement, and the Government and regulators’ immediate efforts to rein in the panic failed to curb the sell-off tidal wave. Since 20 September, NBFC stocks have tumbled by more than 50% for DHFL.

The current NBFC crisis can have a cascading effect on the real estate sector’s growth forecasts, which were already nebulous on the back of the liquidity crisis created by rising defaults and non-performing assets in banks.

Deep Impact

  • The liquidity crisis plaguing NBFCs is likely to hit stake sale and fund-raising plans for these lenders in the near term. With real estate having a strong correlation to credit availability, it could be worse for already cash-starved developers. As per ANAROCK data, more than 5.75 lakh residential units are running behind schedule across the top 7 cities since their launch in 2013 or before. The major factor contributing to this delay is the liquidity crunch developers are experiencing to the backdrop of tepid sales.
  • Despite residential sales gradually picking up q-o-q, they are nowhere near their peak levels. With a substantial number of residential projects running behind schedule, the crisis could further exacerbate liquidity woes and impact project delivery timelines even more.
  • Some NBFCs like Indiabulls also provide home loans to individual homebuyers. With banks tightening their norms for lending to individual homebuyers in recent times, NBFCs were seen as the best alternative. Therefore, the ongoing NBFC liquidity crunch will also impact home loan approvals and disbursements, inevitably reducing residential property demand in the short-to-mid-term.

Apart from weak residential sales, increasing input costs and promotion expenses coupled with the high compliance costs will result in decreased earnings before interest, tax, depreciation and amortization margins.

Advantage Heavyweights

With most things being unequal in Indian real estate, the impact of this crisis will not be the same across the board.

Many listed realty developers such as Puravankara, DLF, Prestige Group, Oberoi Realty and Godrej Properties have well-diversified portfolios, including commercial and retail.

Many of these players have also reduced their debts and ventured into affordable or mid-income housing, where growth is currently the highest.

In the highly competitive real estate business environment, these players will, in fact, may emerge stronger as they are better equipped to ride the storm and continue to deliver while others can’t.

Large-scale consolidations are already ensuring that only the fittest will survive in the future, and this crisis will hasten the process.

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India REITs – Realty Gold Over Stock Market Blues?

The pros, cons and ho-hums about Indian REITs as they stand now

Shobhit Agarwal, MD & CEO – ANAROCK Capital

REITs are finally happening in India, and that’s good news. While real estate as an asset class has always attracted both small and big investors, other investment instruments – gold, stock markets, fixed deposits, mutual funds etc. – have also been a part of well-diversified investment portfolios.

However, most of these asset classes have come with not-inconsiderable risks in recent times. The value of gold has eroded visibly, mutual funds have responded sharply to the recent stock market downturns, and fixed deposit returns barely break even after taxation.

Investors are looking for investment avenues that provide them steady income with minimal risks and under professional management, ultimately ensuring a decent return on investment. It can safely be stated that REITs could not have made their appearance in India at a more opportune time.

Investment in commercial real estate is a highly capital-intensive affair. REITs are a very viable option addition to investment portfolios because they allow investors to participate in an asset class previously reserved only for the affluent few. Also, as is the case in developed nations, REITs provide very decent returns with minimal risks.

How REITs will Benefit Small Investors

Let’s look at what we have at the current time. The Blackstone-backed Embassy Group includes the income-generating SEZ and IT parks under its first REITs listing – potentially a highly lucrative proposition for small as well as big investors to get involved in.

Today, commercial real estate is doing exceptionally well in India, thanks to the aggressive expansion plans of both local and global businesses. Like mutual funds did for the stock market, REITs open a door to a potential treasure trove of returns to small investors – minus the downside of market downturns.

Stable rent-yielding Grade A commercial properties are high in demand with rentals seeing a steady increase. In sharp juxtaposition to the extremely volatile stock markets, Grade A office rentals will increase regardless of whether supply increases or decreases.

There just isn’t enough supply to meet all the demand for this type of real estate, because the locations that qualify Grade A office assets have limited growth capacities.

In short, demand will always outstrip supply – and as long as this remains so, returns from REITs can only be in the green. They are far less prone to risks and will deliver decent returns over the short-to-mid-term.

Some of REIT’s USPs

REITs offer various advantages to investors:

  • low entry point – as low as Rs. 2 lakh – effectively means that one can add real estate to one’s portfolio at a much lower investment.
  • The projected return on investments is anywhere between 8-14% in the short-to-medium term (post adjustment of the fund management fee), with minimum risks. REITs are far less volatile than the stock market, FDs, mutual funds and gold because regulations maintain that 80% of the REITs listings must be of rent-generating assets.
  • A lot of institutional capital is chasing the limited supply of investible Grade A office stock across top property markets. Therefore, the rents for these listed properties are very likely to rise steadily, and the contractual terms will be far more structured and transparent.
  • REITs guidelines maintain that at least 90% of the net distributable income after tax will be distributed to investors at least twice a year.

US, Canada, UK, Singapore and Australia are some of the countries with dynamic and flexible REITs markets that have proved to be highly lucrative for investors. For instance, in Canada, the average return was around 10% in 2017, while in the UK it hovered between 8-10%. The average return in these countries includes all REITable assets such as commercial and residential.

In India, REITs have currently been limited to commercial Grade A office spaces – however, the umbrella of ‘commercial spaces’ also covers retail. In other words, investors of varying investment appetites and capacities will actually be sharing in the profits of India’s best shopping malls.

Expected ROI – REITs vs other asset classes

Expected ROI - REITs vs other asset classes

Source: ANAROCK Research

On the Flipside

The success of REITs in India will largely depend on the benefits they offer to investors. Currently, there are a plethora of taxes that may make REITs unattractive for many. For instance, when a REIT sells shares of assets, the capital gains are taxable.

In contrast, in the UK where REITs have been operating for over a decade now, there is no taxation on income and gains from their property rental business. Instead, shareholders are taxed on REIT-related property income when it is distributed, and some investors may even be exempt from tax altogether.

Further, in other countries, there have been exemptions from the stamp duty, as well. If and when India provides these tax benefits to investors, REITs will become all the more functional and lucrative in the long run.

Also, if REITs are made more attractive for investors with such tax sops, the flood-gates of foreign funding into Indian real estate will open up in real earnest.

The Immediate Future

It will indeed be interesting to see the response to the first REIT listings in India. We do need to remember that, as is the case with any kind of real estate investment, the degree of their success depends heavily on a favourable macroeconomic environment backed by sound policy reforms.

To make the most of REITs in India and earn maximum returns, analyze the portfolio of projects included under the REIT. The analysis must include the stature and historic track record of the concerned entity, the developers’ portfolio, and the location advantages of the properties – including micro-market, IT Parks, and so on.

Effectively, a REIT will drive price appreciation at the lowest risk if it includes Grade A commercial spaces with minimal vacancy, located in the best business-centric micro markets, with established rentals and occupiers.


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RBI’s Move To Increase Credit Flow To NFBCs And HFCs

With the RBI’s move to increase credit flow to NFBCs and HFCs, the RBI has now made a proactive attempt to boost credit flows to NBFCs and it is a positive move per se.

Banks are already grappling with the problem of NPA, and have consciously reduced their exposure towards real estate. The current IL&FS crisis has further complicated the liquidity crisis in the system and every lender is taking extra precautions while disbursing capital to NBFCs and HFCs, including banks.

In the current background where real estate sales have been extremely slow and a substantial amount of projects are running behind schedule, banks might not be willing to lend to NBFc and HFCs. However, the NBFCs with strong track records might certainly get some respite from the banks.

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Indian Real Estate After RERA – Collaborate, Consolidate Or Exit

Shobhit Agarwal, MD & CEO – ANAROCK Capital

DeMo, RERA and GST struck at the very heart of the previously unregulated practices prevalent in the Indian real estate.

RERA, in particular, has been responsible for smaller and often unscrupulous developers taking a major hit not only in terms of existing business but future business viability.

This is largely because of the radical change RERA has enforced in terms of the ways in which real estate business must now be conducted.

From the need for verified documentation to the increased complexity of business operations and the compulsion to upgrade their billing systems, most smaller players were initially clueless about how to proceed.

Not surprisingly, Indian real estate post-RERA has witnessed major consolidation. Lower sales coupled with financial incapability also prompted several small-size developers to either exit or consider consolidation via mergers, acquisitions, and joint developments with organised bigger players.

Factors Prompting Collaboration or exit post-RERA

The elimination of pre-launches and the associated ‘rolling’ of funds collected from customers from one project to the other have come to an almost complete halt under RERA. This has exacerbated the liquidity crunch of smaller developers.

In fact, rising non-performing assets (NPAs), lower profits in the real estate sector and RBI labelling the sector as a high-risk business have made banks cautious about lending to developers.

Bank lending went down from 68% in 2013 to a mere 17% in 2016, and other sources of funding such as private equity, financial institutions, and pension funds gained prominence.

However, private equity players are now conducting thorough due diligence and investing only in ‘clean’ and viable projects by established developers with strong track records for compliance and completion. Under-equipped players, on the other hand, are finding it increasingly difficult to raise funds.

The strict penalty-clause for project delays under RERA is also daunting for many tier II and tier III developers. In fact, the stalled projects of some of these players will inevitably have to be sold on an ‘as-is’ basis to large developers.

To cut to the chase, large-scale consolidation of real estate assets and players is afoot, and very much on the cards in the foreseeable future as well.

This trend will eventually benefit consumers, as unscrupulous and financially undisciplined developers will be wiped out and buyers will get better products without the hitherto notorious delays, and with vastly reduced risks on their investments.

Consolidation in Commercial Real Estate

Major consolidation is not limited to the residential sector, though it has seen the lion’s share of consolidation moves.

Commercial real estate is also likely to follow suit. Increasing demand for Grade A office space, which is already seeing lowest vacancy levels across the top cities, is the prime reason for consolidation within this space.

Another emerging trend is the increasing demand of institutional investors, including private equity, sovereign wealth and pension funds for matured yield-producing assets in India, particularly in the commercial space.

Most of these matured and ready projects have established rentals and occupiers, for which the global entities are willing to write hefty cheques.

Besides bringing in much-needed governance into the commercial space, this new trend will make it more structured and transparent. Invariably, only the big developers will be able to survive this change.

The rising prominence of institutional investors in the Indian commercial space will also bring a change in the ownership pattern. Unlike earlier, this segment will no longer be driven by the whims and fancies of single owners.

With increasing demand for Grade A office space, rents will most likely see a steady rise and the contractual terms will become more structured. Besides, for developers who currently incur huge expenditure in commercial real estate – be it on land, construction or interior fit-outs – REITs can be a safe bet to exit the property and focus on their core area of developing.

Consolidation in IT Companies

Meanwhile, IT companies are shutting down small centres and consolidating their workforce in bigger cities. Several corporates including IT companies are reviewing their real estate strategies and monetising assets wherever possible.

Additionally, companies across sectors are firming up their relocation and consolidation plans and tenants are locking in large office spaces at favourable lease terms.

Notably, it is not just the IT sector that is seeing consolidation – it is equally evident in the BFSI and telecom sectors, as well.

To conclude

Despite the churn it causes, consolidation in real estate is inherently positive as it results in a more streamlined and customer-friendly landscape and also helps players to become more efficient and effective in conducting their business.

While the consolidation trend has been an ongoing phenomenon for quite a while, the recent policy upheavals have put this trend front and centre.

It is certainly an interesting trend which benefits the real estate industry as a whole by opening up multiple opportunities for companies, developers and real estate consultancies.

However, the fact that consolidation also involved the rather brutal elimination of few smaller players can, of course, not be ignored either. Like most change, this one involves a considerable amount of pain for the stakeholders involved.

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REITs – Serving Small Bites of the Large Real Estate Pie

Shobhit Agarwal, MD & CEO – ANAROCK Capital

India is waiting with bated breath for the first listings on its home-grown Real Estate Investment Trusts (REITs).

In fact, the first listing will happen within a couple months. REITs are good news for investors who have a small appetite – as small as Rs 2 lakh – and yet want to invest in the otherwise highly cost-intensive commercial real estate market.

With REITs, they can literally take a small bite of the large Indian commercial real estate pie.

One of the major real estate players in the country (Blackstone-backed Embassy Group) is in the process of launching its first REIT to raise approx. $1 billion as part of its strategy to monetize its rent-yielding commercial properties.

Currently, this realty major is in the reshuffling of its property portfolio to include assets across Bengaluru, NCR and Mumbai.

The company has more than 30 million sq. ft of leased office space and about 22 million sq. ft. more in the pipeline across cities. Another player in the fray for listing REITs is IIFL Holdings.

REITs Decoded

Just like mutual funds, REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. As of now, REIT-listed properties are largely commercial assets – primarily office spaces – that can generate steady and lucrative rental income.

REIT-listed office assets are very likely to be followed by other REITable asset classes in India, including retail malls, hotels, etc.

Post its registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities. Like listed shares, small investors can buy units of REITs from both primary and secondary markets.

Thus, besides low entry levels, REITs will provide investors with a safe and diversified portfolio at minimal risk and under professional management, ensuring decent returns on investment. REITs will not only be characterized by investment in real estate assets – they will also offer limited liability for all unitholders.

To ensure regular income to investors, it has been mandated to distribute at least 90% of the net distributable cash flows to the investors at least twice a year.

That’s not all. As per the guidelines, 80% of the assets must be invested in completed projects, and only 20% will be in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities.

Expected ROI

Small investors will raise a pertinent question – will REITs be able to offer the same returns on investment that they can expect from ‘real’ real estate investments? The answer is, probably not. Definitely, investors who are hoping for unrealistic returns (>20-30%) will need to look elsewhere.

Being realistic in one’s returns expectations from REITs is important. A realistic ROI expectation would be in the range of 7-8% annually, post adjustment of the fund management fee.

With REITs, the ROI will be highly structured, realistic and risk-averse. REITs are ideal for investors who want a steady income with minimum risks. Investors can earn two types of income from REITs – one through capital gains post the sale of REIT units, and the other via dividend income.

Moreover, REITs will be a good investment option for investors who are looking to diversify their portfolio beyond gold and equity markets.

The Downside

On the flipside, a plethora of taxes has currently made REITs more than a little unattractive in India. For instance, when a REIT sells shares of assets, the capital gains are taxable.

Further, in other countries where REITs have been functional for a long time have been exempted from stamp duty. Such tax benefits, if and when are provided in Indian REITs, will act as a catalyst in making REITs more functional and attractive in the long run.

More importantly, if REITs become attractive to investors via tax sops, channels for foreign funding in Indian real estate market will open up. The potential is considerable, but a proactive decision on the taxation aspect needs to be made.

Global Players Galore

Sensing immense opportunity, large global institutional investors are already eyeing India’s real estate market through REIT-tinted lenses.

These include Japan’s NikkoAm StraitsTrading Asia, US’ North Carolina Fund, Malaysia’s Hwang Asia Pacific REITs and Infrastructure Fund, Taiwan’s Eastspring Investments and Canada-based Sentry Global.

This ignited the interest of global entities is largely due to the uptick in office leasing activity in major Indian cities.

To be fair, the Government and SEBI have incorporated several changes time and again to make the issuance of REITs a success. However, only time and circumstances can reveal the ‘real’ success of REITs in India.

The first listing will be more of a test case for the Indian market. If it succeeds, there will certainly be no looking back.

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Indian Hospitality – Recovery Or Growth Track?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

The Indian hospitality sector stands as the chief beneficiary of India’s burgeoning travel and tourism industry.

According to WTTC Economic Impact report of 2018, the travel and tourism sector’s total contribution to India’s GDP in 2017 was US$ 234 billion and is expected to touch US$ 492 billion by 2028 – an impressive compounded annual growth rate of 7%. This growth naturally fuels the Indian hospitality sector.

The Indian Government has taken due note of the massive importance of the travel and tourism industry and has formulated a structured plan to promote it in its sixth five-year plan.

The holistic development of India’s travel and tourism industry obviously calls for considerable support from the hospitality sector, which is extremely sensitive to economic cycles.

Indian hospitality cruises through peaks and troughs based on different factors – apart from overall economic performance, its health hinges on Foreign Tourist Arrivals (FTAs), domestic business conditions and various travel enablers.

The Indian hospitality sector was ramping up nicely before 2008, but decelerated in the period between 2008-15 due to a weak global economy, poor infrastructure and policy paralysis at the Central Government level – all of which resulted in a fall in FTAs.

Indian Hospitality Sector

Today, the Indian hospitality sector has not just recovered from the slump but is once again beginning to register robust growth which seems very sustainable over the coming years. The hospitality sector is primarily driven by business and leisure travellers from within and outside India.

According to recent reports, India witnessed FTAs of 10.2 million in 2017 – representing an almost two-fold rise in the last seven years – and is expected to reach 20 million by 2020 (another two-fold rise from current arrivals). Rising FTAs is a reliable bellwether of future growth for the Indian hospitality sector.

Business Travel Growth

In recent times, there has been a significant rise in international business travellers due to the Central Government’s pro-business initiatives, improvement in India’s ease of doing business rankings, implementation of GST to unravel and ease the previously complex tax regime, and proliferating urban development.

As a result, international companies are looking to expand their Indian operations, resulting in a huge influx of foreign business travellers.

Simultaneously, rising business opportunities across the country, coupled with the Government’s push for entrepreneurial ventures and start-ups, is positively influencing domestic business travel. The combined effect of increased international and domestic business travel is ramping up the requirement of business-centric hotels.

According to reports by WTTC and TravelPort, India ranked 11th globally in business travel spending and registered a growth rate of 16.2% during 2011-16.

The same report also confirms that business tourism spending in India reached US$ 8.2 billion in 2008 – the highest since 1995. However, this figure fell to US$ 5.2 billion in 2011 due to an overall slowdown in the country, and the hospitality sector took a big hit due to this decline.

Nonetheless, business spending once again grew to US$ 11.6 billion in 2017, depicting a two-fold jump from 2011 and indicating a fairly rapid recovery from the downtrend. We are now looking at a potential growth figure of US$24.4 billion by 2028.

Domestic Travel Growth

According to the Ministry of Tourism, domestic tourism has outpaced FTAs and rose from ~14,300 lakh in 2015 to ~16,100 lakh in 2016, registering a 12.6% growth as compared to 9.7% growth in FTA during the same period.

This growth can be attributed to rising disposable income, increased availability of serviced apartments and hotels, and the aggressive price wars among low-cost airline carriers.

This increase has also triggered budget and business class hotels in the metros and tier I cities. Domestic tourism spending has witnessed a linear rise.

In 2005, it accounted for US$ 82.6 billion, reached US$ 186 billion in 2017 and is expected to rise to touch US$ 405 billion by 2028.

Proactive Policy Support

To support tourism and its allied industries, the Government of India has launched several initiatives to promote them.

Some of the most significant initiatives are a 5-year tax holiday for star hotels around UNESCO world heritage sites, an extension of e-visa for 161 nations, and setting up of a dedicated hospitality development and promotion board for faster clearance/approvals of projects.

Moreover, 100% FDI is now allowed in tourism and hospitality under the automatic route. The hotels and tourism industry received cumulative FDI inflows of US$ 10.9 billion from April 2000 to December 2017.

Due to the huge potential of the Indian hospitality sector, international hospitality brands are targeting India to set up their hotels – for example, Carlson Group is aiming to increase the number of its hotels in the country to 170 by 2020.

Some notable private equity deals in the Indian hospitality sector in recent times:

  • In Q1 2018, Lemon Tree Hotels raised around US$ 48 million from anchor investors including SBI Magnum Balanced Fund, DB International Asia, HDFC Small Cap Fund, Aberdeen Asian Smaller Companies Investment Trust Plc, BNP Paribas Arbitrage and Alpine Global Premier Properties Fund.
  • In 2016, Goldman Sachs invested US$ 66 million in PE-controlled hospitality firm SAMHI Hotels Pvt. Ltd. SAMHI group which owns 16 operational hotels has also previously raised US$ 75 million through Equity International.
  • In Q4 2014, Goldman Sachs invested US$ 40 million through an equity deal in Vatika Hotels, the hospitality arm of Gurgaon-based developer Vatika Group. Vatika Group majorly focuses on facilities management, hotels & resorts, wellness & diagnostic centre and restaurants.


The Indian hospitality industry is a key constituent of the travel and tourism sector, which hinges on business and leisure travellers.

The travel and tourism sector’s contribution to India’s GDP, as well as the employment and foreign exchange it generates, are growing rapidly – as are other industries associated with it.

Internal travel and tourism consumption, which indicate the revenue generated within a nation by the sectors dealing directly with it, is forecast to touch US$ 456.7 billion by 2028 from US$ 213.3 billion in 2017).

This is lead to the growth of the directly-correlated hospitality sector as well. We are therefore already looking way past an initial recovery and are witnessing full-fledged growth in this industry.

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Distressed Real Estate – Invest or Avoid?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

The aftershocks of multiple disruptive policy reforms and structural changes continue to ripple through the Indian real estate sector. While its visible transformation from unorganized to organized and opacity to transparency are indubitably positive, we cannot help but count the fatalities of this process.

Many real estate developers are finding it extremely difficult, if not impossible, to realign their businesses to the new norms. It’s not just a question of compliance, but also the fact that the new real estate development norms call for massive capital infusions.

The practice of raising interest-free monies via pre-launches now more or less a thing of the past, interest rates are hardening and the banking sector is not especially well-disposed towards lending to developers.

Simultaneously, investors who had depended on heavy cash components for their resale properties have been left in dire straits by demonetization and the concerted drive towards financial transparency.

Many developers need to sell their hung-over inventory in a hurry – either to raise funds for new projects or so that they can cash out and leave the business. Likewise, many investors or other property owners are also desperate to exit their holdings.

And as is usually the case, one man’s loss is inevitably another’s potential gain. The current state of the market certainly presents a window of opportunity for smart property buyers who can make the most of it.

Today, there are plenty of distressed properties available on the Indian real estate market. The available opportunities include retail assets, hotels, individual residential units and even entire housing projects. With proper due diligence and the appropriate capitalization, one can actually strike a gold mine.

However, one still needs to know what one is doing, and also follow some very necessary precautions before entering into a distressed property deal.

Is this the right time to buy distressed properties? 

With rising population in urban areas (more than 10 million people migrate to Indian cities and towns every year, and India’s urban population likely to surpass 800 million by 2050), there is a significant inherent demand for homes, offices, malls and other real estate asset classes.

In the current market conditions, many distressed assets are available at attractive valuations and it may not be a bad idea to seal a deal. However, one should not do this without a clear plan of action on how to utilize or monetize the acquired asset.

Aspects to investigate before acquiring a distressed property:

  • Reasons for the distress sale 

It is extremely important to identify the reason for why a property has become distressed, to assess if they involve policy changes (which may affect the new owner as well), financial troubles or wrong intent. The latter is the most difficult to identify and tackle, and so must be investigated with utmost care.

  • Existing debt

A distressed property buyer must do a thorough check on the existing debt which the new buyer will assume. In addition to the overall quantum, one must segregate such debt into short-term and long-term, and also understand if the debt is backed by any security or otherwise.

  • Physical condition

However attractive the valuation may appear, the physical condition of the asset to be purchased plays a key role in its inherent value to the new owner. Regardless of whether the buyer plans to refurbish and release/sell and/or demolish and rebuild the property, this check is important to assess the cost implications.

  • Law adherence

A prospective buyer of a distressed property must ensure that the asset is developed as per the stipulated regulations, including FSI permissions, statutory approvals, fire safety norms, and many more. If there is even a faint hint of a violation, the buyer must understand the risks and have a plan towards mitigating them.

  • Litigation check

The buyer should check for litigations that embrace the distressed asset. It should be commercially viable to own the property despite the existing litigations, and the buyer should have the knowledge, means and a plan to overcome such issues.

  • Title clarity

A clean title is a must for the hassle-free future transactions or development of the purchased asset.

  • Lease contracts

If a buyer is acquiring a pre-leased asset, it is imperative to check the lease contracts and their expiry dates so that they can be factored into future financial projections.


The momentary pause and panic in the real estate sector of a country whose GDP likely to reach $5 trillion by 2025 can certainly be viewed as an opportunity by large global investors who are looking to enter into or expand in India.

However, such players are not gamblers and will always ensure that they have the benefit of an experienced India-based consultancy to identify opportunities as well as their accompanying risks and required mitigation plans.

Individual investors, on the other hand, bear the onus of due diligence while acquiring distressed assets.

It should be clear that a well-meditated play in distressed property can reap rich benefits, while an inadequately researched acquisition can result in a severe financial setback and even legal complications.

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Indian Real Estate’s IPO Revival

Shobhit Agarwal, MD & CEO – ANAROCK Capital

A decade ago (in 2007-08), prior to the global financial crisis hitting D-street, the Indian initial public offerings (IPO) market gave a stellar show with overall ₹41,300 crore funds raised, making India the 5th largest market in volume and 7th largest in value terms.

Then the capital markets crashed in after the global economic slowdown in 2008, and the numbers fell as low as Rs 2,030 crore.

The consecutive years also saw a limited number of IPOs being filed by companies. However, 2017-18 saw the resurrection of the Indian IPO market. As many as 45 companies resorted to raising much-needed capital via the IPO route.

A record of about ₹82,100 crore has been collectively raised by these companies – a whopping three-fold jump from previous years’ ₹28,200 crore and almost double the 2007’s IPO figure.

Strong domestic liquidity, the resilient Indian economy, the surge in foreign institutional investors and improving investor sentiments have pushed the IPO charts northwards.

Indian Realty – pre and post global recession

Prior to the global financial apocalypse that shook the world including India, the real estate sector was at its peak. Till then, the wave of financial liberalization allowed banks to give credit to large-scale borrowers – resulting in a sharp rise in foreign capital inflows and domestic liquidity.

Post-2013, the story changed and the previous roar of Indian real estate first sank to a murmur – and then, more or less, fell silent. The liquidity crunch coupled with high inflation and execution delays compelled housing buyers to postpone their purchase decisions. This naturally impacted housing sales and property prices, leaving developers with huge piles of unsold inventory.

Battling massive negative cash flows, many developers also failed to deliver their promised projects. Things worsened when high-risk provisioning was assigned to the real estate sector when various realty firms either defaulted or faced bankruptcy. Banks became reluctant to lend to developers as they were already burdened with non-performing assets (NPAs).

IPOs as an alternate source for cheap capital also slowed down because of weakened consumer sentiments to the backdrop of deteriorating builder reputation who failed to live up to their promises, causing buyers to feel the brunt of delayed delivery of projects.

Many builders then resorted to overseas funding, private lending and qualified institutional placements (QIPs) which allowed only listed companies to raise funds, and non-banking finance companies (NBFCs) which charged steep interest rates.

Deciphering the BSE Realty Index

The BSE Realty index which reflects the performance of the top-listed real estate players was at its peak until 2008. After that, the index witnessed a slump due to weak macroeconomic conditions, rising unemployment and declining real estate demand.

However, the recent spate of reforms including DeMo, RERA and GST have helped the market conditions improve due to increased transparency and accountability. With this, the realty index also seems to be heading north now.

Till date, around 16 private realty players and two Government-owned real estate companies have opened their shares to the public. Of this, DLF (issued in 2010) owns the highest issue size of ₹9,000 crore till date. In the consecutive five year period, from 2011-16, there were no large-scale IPOs issued by big real estate players.

The recent IPO filing by the Government-owned Housing and Urban Development Corporation (HUDCO) in May 2017 and National Buildings Construction Corporation Limited (NBCC) in April 2018 received manifold subscription due to their diverse businesses.

While HUDCO emphasizes financing urban infrastructure and housing, NBCC has a hard focus on civil construction projects, civil infrastructure for the power sector, and real estate development.

Realty IPOs Gaining Momentum

To the considerable relief all stakeholders, the struggling real estate sector is now stabilizing to some extent.

As a result, real estate IPOs are also gaining momentum. Reports suggest that Mumbai-based Lodha Developers Limited, Thane-based Puranik group and Bengaluru-based VBHC Value Homes are planning to raise funds through public offerings.

One predominant factor contributing to this spurt is the improving economic parameters, including GDP growth rate. Also, RERA implementation in 2017 raised the confidence of investors and end-users of real estate.

After decades of disorganized eccentricity, the Indian real estate sector is transforming into an organized one, with improving transparency and accountability providing a new ray of hope.

Good times ahead? 

Looking at the record-breaking number of IPOs in 2017-18, the current fiscal is also likely to remain robust with numbers, suggesting that India Inc may collectively raise over Rs 2,00,000 crore in equity and equity-linked offerings – and IPOs take centre-stage.

Real estate IPOs, which had taken a backseat over the last few years, are once again getting ready to ride the revival wave.

ANAROCK’s research also clearly highlights the increasing real estate absorption momentum with a Q-o-Q rise in housing sales across the top 7 cities. The stage is set and the actors are primed for a massive IPO push over the next few years.

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A Closer Look at Distressed Property Auctions

Shobhit Agarwal, MD & CEO – ANAROCK Capital

We often hear of banks auctioning off seized distressed properties, and how such properties can be lucrative investments as they come at very attractive prices. Studying the market of distressed properties is not very easy, but there are some areas of predictability.

The ‘supply’ of distressed properties is usually closely linked to the prevailing economic situation. Severe market setbacks or stock market crashes can result in an unusually large infusion of distressed properties in the market.

In a normal or vibrant economic situation, the availability of such assets is much lower. Less than 8% of Indians who have borrowed from a bank to acquire a residential property will default on their home loans unless there are exceptional circumstances involved.

How do properties become distressed and go to the auction block?

A homeowner is considered to be in default when he or she is behind on the agreed-upon EMIs for three consecutive months or more.

When a home loan is in default, banks do not seize the assets of the borrowers immediately. They send a notice to the borrower highlighting the missed EMI repayments, and that they will take strict action if the situation is not remedied.

Banks do understand the various reasons why a borrower may have defaulted on EMI payments, which include financial crisis, serious health setback, loss of job, a family crisis, etc.

These are facts of life, and banks do not make themselves unapproachable to defaulting borrowers who state such reasons. Once the buyer has explained the reasons or they are otherwise evident to the bank, an offer to restructure the EMI and extend the tenure of the loan is made.

A borrower may ask for a grace period on the basis of a good repayment record for loan repayments and that interest rates have increased beyond affordability. The borrower can ask the bank to refinance the loan, resulting in reduced EMIs over and increased tenure period.

The defaulting borrower may offer to liquidate other assets such as fixed deposits, insurance policies or mutual fund investments in order to repay the debt. He or she may even sell the property themselves to pay back the amount instead of letting the bank take over and auction it.

If these measures help the borrower to catch up on the outstanding EMIs, the property will not come up for auction. Auctions happen only in extreme cases – and even then, the borrower may not incur a total loss.

If the property is sold within three years of its purchase, the borrower is entitled to a profit on the sale after the bank has recovered its dues. If three years have elapsed since the property’s acquisition, the owner is still entitled to tax exemption benefits.

If the borrower is still unable to pay back the principal amount and interest on a home loan after 90 days, the bank will classify a home loan as a Non-Performing Asset (NPA) and will seek to recover the complete home loan amount.

To do so, they will seize the borrower’s assets and/or the mortgaged property. They are authorized to do this under the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests) Act to protect their interests.

Even at this stage, the banks may not go as far as auctioning off the property, preferring to resolve the borrower’s issues by further easing the repayment process and burden for the borrower. Only when all these measures fail will the bank proceed with selling the property.

The Process of Property Auctions

At this stage, the bank will take the defaulting borrower’s property into its possession and seek to dispose of it under the guiding factors of the SARFAESI Act.

The process begins when a borrower’s home loan account is classified as a ‘chronic’ NPA – one where no other form of resolution is possible. The bank will issue the borrower a 60-day notice, which is technically a reminder to the defaulter stating the issue and the factors that have led them to this point in full detail.

If the defaulter does not respond during this notice period, the bank proceeds with the auction of the property. Even in this period, the borrower has the option of resolving the issue or raising an objection to the notice.

For instance, the bank will specify the property’s fair value and the borrower can object if the property is perceived to be undervalued or if he or she has an alternative to pay off the pending dues to the bank.

The banks must then serve a fresh 30-day notice period to auction the property, and the subsequent notice will include all the relevant details of the sale. Finally, the property is auctioned and the outstanding amount is recovered.

The process of bank-auctioning itself is, however, quite cumbersome and lengthy. The bank will first advertise the upcoming property auction on a given date, assimilate the various offers and then determine the final buyer.

The process can get prolonged even further if the buyer intends to acquire the property via a loan, either from the same or a different bank or financial institution. Also, all intending buyers need to be fully vetted and the final transfer of ownership is subject to a NOC by the pertinent housing society.

Are distressed property auctions a good investment bet?

It is true that properties on sale via bank auctions can be bought at prices which are significantly lower than the prevailing market rates in that particular area and for that particular property size and type. However, it should also be borne in mind that the base price for a property on auction is a function of the outstanding loan amount in question.

In other words, the longer the current owner has been servicing the home loan, the lower will be the base price of the property. If the current owner is only a few EMI cycles short of complete repayment, he or she will seek to restructure the loan on the property instead of allowing it to be auctioned off.

Getting to know of such opportunities is not hard. The public will be informed quite efficiently when an auction for single or multiple seized properties is to take place, as the bank will advertise the fact along with all pertinent details online and in leading dailies.

Distressed properties and their scheduled auctioning will also be mentioned in a bank’s annual report under the category of bad debts. Interested buyers may also turn to trusted property consultants who will apprise them of distressed assets on the market, and what the expected price range will be.

The primary potential advantage to buying a distressed property being auctioned by a bank is obviously the possibility of getting an asset at a potentially lower price than the prevailing market rates for such a property in that particular location. Another plus could be the potential for securing a property in a prime location.

Also noteworthy is the reduced burden of due diligence since the auctioning bank will already have established that the property is legally sound in all aspects. Notably, the property would come up for auction only after the previous owner has exhausted all available avenues to stay the proceedings, and no longer has any legal recourse.


There are some potential challenges to investing in properties being auctioned by banks. In the first place, there is no single database of such properties to consult. Secondly, it is impossible to anticipate what the highest bid for any given property will be, so there is no assurance of acquiring a particular property one is interested in.

In any case, buyers need to be very familiar with the exact process involved before, during and after buying a distressed property. The process of buying distressed property on auction is only complete when it has met with the expectations of both the auctioning bank as well as the property’s previous owner.

If it hasn’t, there could be legal problems even after the property is legally purchased by its new owner. Also, the buyer must have a complete understanding of the ownership history of such a property and needs to ask for all the pertinent paperwork. This is important in case the new owner seeks to sell the property again at some stage.

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