Outlook Business: Moving onto real estate, Atin, you had mentioned last year that clients were reducing real estate and investing in equities. Is that continuing?
Saha: Yes, clients are moving away from real estate and getting into financial assets. Equities have been a big option. The only difference this time around is they are finding it tough to monetise real estate. Our advisory has been restricted to select real estate funds. But even there, the client experience has been very bad (low single digit return) and thus, clients are not positively inclined towards these funds.
Outlook Business: Rajesh, you had mentioned last year that a lot of developers were in the general ward. Have any of them landed in the ICU?
Saluja: Real estate is not dead. Even today there is very good opportunity in the space. With the real estate bill being passed, developers are a little scared about not completing projects on time, as that could result in customer litigation. Also, with black money having gone out of the window, the sector is going through a churn.
Outlook Business: Where do you still see opportunity?
Saluja: In mid-income housing, there is a supply-demand mismatch. Homes in Vikhroli, Chembur and adjoining areas in Mumbai are going at Rs.20,000 to Rs.25,000 per sq ft. Today, Rs.20,000 in Mumbai has become mid-income housing. Within residential there is mid-income, there is group housing and luxury. Then you have land where cash flow has slowed down. At the higher-end, residential investments have slowed down because until a whole new wealth cycle gets created in the private sector, that segment is not coming back.
Commercial had slowed down in many areas but now you are seeing a pickup because of the yield, as the assumption is that fixed income over the next three-four years will fetch lower return. So, people are open to buying a property where you are getting 8% yield. In Hyderabad, there is a waitlist for commercial properties of 6,000 sq ft and above, because no supply had come to the market.
Another sweet spot is developers who have approvals but can’t continue construction, as they are not able to generate cash. Existing buyers are not willing to pay because it is construction-linked. Now the developer has to service monthly debt, so how does he pay? That’s where the funds are stepping in. So, both on the equity and debt side there are opportunities available. It is a matter of how much risk you are willing to take, your developer-selection criteria, the location and so on.
Outlook Business: Is the skew towards buyers or investors?
Saluja: They are actual buyers. Investors have gone out of the window. That’s why luxury is stagnant and also because of the fact that a lot of cash went out, it has stagnated investor demand. We feel over the next 12 to 18 months there will be good pickup; mid-income will see traction across the country. Mumbai, Pune and Bangalore are the three markets where there is going to be an impact. NCR, Chennai or even Kolkata, hardly any sales are happening there. But in Hyderabad, demand has picked up again as the political situation has sort of eased out.
Outlook Business: Given that funding is a non-issue, where do you see the price trend over the next 3 to 5 years?
Saluja: Funding is increasing, PE funds are coming in and domestic money is being raised. In fact, money is now chasing good developers. You will see REITs coming in. You will see a big market there where investors can buy and owners can monetise their assets. On the residential side, the whole game is going to change. We are already seeing Chinese investment in real estate in Delhi and Haryana.
Singh: Whichever markets were investor-led have turned sluggish because a large part of this money has been pulled out. Good developers continue to have access to funds because a lot of private equity funds, global and local have entered the fray. Good developers will get access to funds and they will be able to deliver.
Saluja: At some point, pent-up demand of the past 4-5 years could cover up locations where there hasn’t been much supply. I am not talking about Dwarka, Gurgaon and Noida where there is clearly a lot of supply and it will take some time for it to get sorted out.
Saha: Commercial is actually doing better. Even in the suburbs of Mumbai, Navi Mumbai and beyond like Airoli.
Outlook Business: Sharad, what are you advising your clients?
Mohan: Compared to what it was a couple of years back, the situation is less stressful. Inventory, which used to be 60-month plus, is now under 40 months. With launches on the mend, we are slowly seeing demand-supply equilibrium. Real estate funds have given 8-12%. In an absolute sense they may not be good, but given the state of the asset class, they are not bad either.
Singh: Investor preference has shifted from pure real estate private equity funds into real estate debt. So, you lend to these developers at 18-20% and have regular cash coming in as well. You don’t have to lock-in for 6-8 years. It is being looked at as a high-yield debt opportunity more than a real estate play.
Bhagat: Of late, structured debt in real estate is in vogue.
Outlook Business: What is the downside risk?
Singh: It all depends on the developer’s ability to pay. But the debt structure assures that you are at least getting some cash back. The risk is of default, there is no question about that. But rather than opting for a single NCD, which a lot of clients were previously opting for, a structured pool gives you diversification. Of course, any high-yield investment has its own risks, so you need to control your exposure and pick the right manager.
Das: We do not offer advice on real estate. But as a bank, we are seeing a clear movement away from physical to financial assets. I think the way forward is again to take exposure through a financial product which is time-tested.
Outlook Business: Rajesh, what markets and segments would you bet on?
Saluja: Hyderabad is a good opportunity, but our focus would be Mumbai, Pune and Bangalore. These are three markets where one can find self-liquidating residential mid-income properties. As far as segments are concerned, commercial is also good. But we would still advice our clients to wait for REITs, because that is going to be a game-changer. Investing at 8-9% yield with capital appreciation will be fantastic. I think by mid or end-17 we will have our first REIT.
Outlook Business: Coming back to equities, what’s everyone expecting in 2017?
Das: I see returns between 12% and 15%.
Bhagat: Similar, 12-15% post-tax.
Saluja: Last year, I said 15-20% and we delivered more than 20%. Because as a private wealth advisor I am not looking at the index, I still believe 15-18% is bare minimum. I am biased towards large-cap because of all the risks that continue to exist. Though unlikely, but even if the US were to hike rates or something in China goes wrong, the impact of the subsequent knee-jerk reaction will be severe on mid- and small-caps. So, my advice would be to remain largely focused on large-caps with good businesses.
Singh: The market is fairly priced. So my view is 15% return similar to what the earnings expectations are. Because, there is no other way of predicting where the market is headed.
Mohan: We expect earnings growth of 12-15%. One can look at market corrections as opportunities to rebalance the portfolio.
Saha: Our bias is towards large-cap and we are focusing on sectors such as consumer discretionary, staples and cement and we believe that over the next one year they will fetch the best return.
Outlook Business: Finally, Clinton or Trump and the impact on the market?
Das: I think it’s not just about Hillary versus Trump as there are different dynamics at play for each of the three legislative bodies, that is, the Presidency, the Senate and the House.
Bhagat: Doesn’t matter who wins.
Saluja: If Trump wins, it will be a short-term negative and, in my opinion, that would be a good buying opportunity because as Sandeep mentioned there are too many dynamics at play. So, even for Trump to carry out his agenda he needs the support of Congress and that is not going to be easy. Though he is perceived to be more business-oriented than Hillary, if he does get elected, it will be a different story.
Singh: Best case is Hillary. If she wins, it is more of a status quo. If Trump wins, the initial impact would be the emerging markets rally fizzling out.
Mohan: Trump winning is a low-probability event but you never know. But like I said in the beginning, the impact on equities will be transient.
Saluja: For all the hype around American imperialism, Trump cannot ignore the fact that corporate America today is far more closely integrated with the world than it was ever before.
Outlook Business: On that note, we conclude our 5th private wealth roundtable. Thank you very much, and wishing all of you a great year ahead.