NEW DELHI | MUMBAI: The rapid rise in the stock market since the new government was formed has taken the sheen off real estate, where investments have not only dropped but investors are trying to monetise their existing assets, creating a scare of price correction. While the stock market has risen by over 12% since May 26 when the government was sworn in, property values have either remained stagnant or dropped in several micro-markets across the country.
"Many HNIs are today stuck with their existing real estate portfolios, so the surplus money they are now generating in the businesses is finding its way to the stock market," said Rajeev Bairathi, executive director, north and capital transactions group at Knight Frank India. Investors have also been worried about the huge delays in execution of real estate projects and the overall wait and watch attitude of end-users, which has impacted property sales.
Prices of new residential projects in the National Capital Region, for instance, was down 10% in June this year compared to a year ago. In Pune, it was down 25%, while in Bangalore it remained stagnant. Only Mumbai and Chennai saw a rise in prices in new launches, 24% and 17%, respectively, according to property research firm Liases Foras.
The price of unsold inventory has risen in most markets, though marginally — 4% in Bangalore and Chennai, 10% in Hyderabad and the NCR, 11% in Mumbai and 1% in Pune. The difference between the price of existing inventory lying with builders and new launches is a big concern. According to Liases Foras, the gap is the widest in the NCR with new launches being offered at almost 31% lower than existing inventory in June 2014. This was followed by Hyderabad at a gap of 17%. Pune stood at 14%, Bangalore at 9% and Mumbai at 4%.
Unsold inventory levels at the end of June 2014 stood at 765 million sq ft or about 7.6 lakh apartments, which would take about 35 months to be sold at the current pace of sales.
Where does one invest if you want to be part of the up cycle? "The easiest is equities as it is relatively liquid. Whenever there's a change, money first goes into the most liquid of assets," said Gulbir Madan, chairman of Brahma Management, an India-focused investment firm.
In the current year, Sensex has gained 28%, the BSE Midcap Index is up 46%, while the small cap Index has gained 67%. "Clearly, investors are shifting from real estate to equity with inflation coming down and improving macro situation. In addition to this, with the new government at the Centre, investors are now more confident of investing in equity," said Rajesh Cheruvu, chief investment officer - India, for Royal Bank of Scotland.
Cheruvu said there's a question mark in the minds of investors about affordability of property as prices had risen risen sharply and continue to remain high. The positive outcome of the elections as well as a stronger global recovery have revived the Indian economy in the last few months. The new government has also made the right kind of moves which has buoyed the stock market. "The risk appetite for equity is back among our clients. Property prices have remained weak for the last two years. By contrast, equity market appears attractive," said Rajesh Saluja, chief executive officer and manging director at Ask Wealth Advisors.
The Sensex, for instance, is trading at a price-earnings ratio of 16 against 32 times in its peak, which gives an idea of the returns that equity can generate. Pankaj Kapoor, managing director of Liases Foras, said the downward pressure on property prices today is pushing investors away from real estate. "They see very little hope of a turnaround any time soon."