SECTOR UPDATE

11 MAR 2016

Real Estate: Primary data insights

Opaqueness to transparency
Parliament passed the Real Estate Development
and Regulation Bill, 2016, on 10 March 2016. The
much-awaited reform will bring cheer to highquality real estate developers/consumers and
other stakeholders like financial institutions,
private equity players, construction companies and
shareholders.

Real estate Bill 2016 will go a long way in making

sectoral deliveries predictable and reducing
overall financing costs for developers. The black
economy will shrink further, as 70% of the
collections will be by cheque and investor share
in sales will reduce. The Bill augurs well for endusers, with reduction in overall cost of
ownership on account of timely project
completion.

Lastly, the Bill will boost shareholders

Parikshit Kandpal
parikshit.kandpal@hdfcsec.com
+91-22-6171-7317

regulatory cost for developers in the near term,

the move will improve sectoral transparency
over mid to long term. With better
transparency, the overall cost of capital for the
sector should reduce. With limited capital and
reduction in speculative purchases, land prices
should reduce, and, in turn, result in lower real
estate prices. Interest subvention schemes like
10:80:10 may increase.

Implication for the approving authority: With

the passage of the Bill in Parliament, state
government can adopt their respective Bills. We
believe the states may also bring the approving
authority under the ambit of the Bill, with
provisions for a single-window clearance'. This
will help reduce overall approval time from
about 1 year to 3-4 months

confidence as cash flow predictability will

improve, reduction of black economy which will
result in higher profits and stringent completion
requirements will put onus of speedier
clearance on municipal authorities. These
factors together will result in a structural shift
from 'opaqueness to transparency'.

Implication for shareholders: With the move

Implication for developers: While fulfilling these

Our top picks: Oberoi Realty, DLF, Sobha and

requirements may result in higher initial

from opaqueness to transparency and better

corporate governance, the cost of equity will
reduce for the sector. Strict project completion
timelines, better cash flow predictability and
shrinking of the black economy will result in
better shareholder value.
Prestige Estates

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REAL ESTATE: SECTOR UPDATE

Salient features of the Real Estate Bill, 2016

Sno.
1)

Provisions
Percentage of collections to be
deposited in separate account
towards cost of construction
including land

2)

Plot size for registrations of projects

3)

Covers commercial real estate

4)

Carpet area defined properly

5)

Interest on delays will results in

similar interest penalty for
developers and buyers

6)

Structural defect liability cover

7)

Change in plan layout

2013 Bill
50%

2016 - Bill
70%

Plot area of
1,000 sqm
or 12
apartments

Plot area of
500 sqm or 8
apartments

Comment
State in consultation with
local developer body may
alter this. We dont expect it
to go down below 50%. In
Mumbai, cost of construction
and land is ~50% and the
number is similar in other
markets
Most of the real estate
projects will be covered

Will results in efficient

allocation of capital and
reduce speculative buildings
Buyer will know exactly what
he is getting

2 years

5 years

2/3rd buyer
consent
required

Will create level-playing field

and reduce delay in payment
by end-user after sales closure
in an event of slowdown in
the sector
Will results in higher
construction cost as better
quality inputs will be used for
construction

As the project gets global FSI

on land, this provision will
result in end product being
closer to what was promised.
Beneficial for buyers

Impact
Negative if 70% is
maintained, as
money fungibility will
reduce resulting in
increased borrowing,
which will be passed
on to customers. This
will result in higher
prices.
Positive for the sector

Positive for the sector

Will reduce over

construction or FSI
violations
Positive for the sector

Neutral for the sector

as construction cost
increase will be
passed on to buyers.
May result in higher
maintenance charges
Neutral for the sector
as layout may not
result in substantial
FSI leakage

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REAL ESTATE: SECTOR UPDATE

Sno.
8)

Provisions
Insurance of land titles

9)

Speedier dispute resolution by

appellate tribunal and regulatory
authorities

10)

Imprisonment for violation of

tribunals and regulatory authorities

2013 Bill

2016 - Bill

3-year
imprisonment
for real estate
developers,
one year for
buyers and
real estate
agents

Comment
Not available at present. Will
help protect housing units if
land title is found to be
fraudulent later
Will protect buyers interest

Will result in better

compliance of prevailing laws

Impact
Positive for the sector

Positive for high

quality developers
and negative for
fraudsters
Positive for the sector

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REAL ESTATE: SECTOR UPDATE

Implication for developers: While fulfilling these

requirements may result in higher initial

regulatory cost for developers in the near term,
the move will improve sectoral transparency
over mid to long term. With better transparency,
the overall cost of capital for the sector should
reduce. Balance sheet improvement will be a
function of risk diversification as escrowed cash
flows wont be utilised to buy speculative land.
With limited capital and reduction in speculative
purchases, land prices should reduce, and, in
turn, result in lower real estate prices. Interest
subvention schemes like 10:80:10 may increase.

Implication for the approving authority: With

the passage of the Bill in Parliament, state

government can adopt their respective Bills. We
believe the states may also bring the approving
authority under the ambit of the Bill, with
provisions for a single-window clearance', which
was not covered under the Union Bill as real
estate is a state subject. This will help reduce
overall approval time from about 1 year to 3-4
months and ease the loss of opportunity cost,
leading to lower property prices. With corruption
rampant in municipal bodies, bribe rates are as
high as Rs 1,000/sqft in Mumbai. This premium
may shrink and can be passed on to buyers.

Implication for shareholders: With the move

from opaqueness to transparency and better

corporate governance, the cost of equity will
reduce for the sector. Strict project completion

timelines, better cash flow predictability and

shrinking of the black economy will result in
better shareholder value. The corporate
governance discount will contract, resulting in
valuation re-rating for the sector. With 70% of
the advance being escrowed to the project,
working capital will turn negative, thereby
resulting in deleveraging. The focus will be on
monetisation of the existing land bank and
prohibit speculative real estate build up.

Opportunities and challenges: Many small

developers will be hit as they mostly use their

political clout to get approvals. A major part of
their land buys is financed by investors money,
with a large black component. With stringent
regulatory watch, such malpractices will reduce
considerably. This segment may become more
corporatised for the sake of existence. These
developers will be the ones offering market price
discount as projects once approved will have to
be completed on time. Bigger developers will
stand to gain as fraudulent supply will reduce
creating overall shortage in the market.

Implications to our coverage universe: High

quality developers stand to benefit from the

Bill. Oberoi Realty (CMP Rs 248, Mkt Cap Rs
83bn, BUY, TP Rs 411), Sobha (CMP Rs 259, Mkt
Cap Rs 25.4bn, BUY, TP Rs 400), Prestige Estate
(CMP Rs 148, Mkt Cap Rs 56bn, Not Rated) and
DLF (CMP Rs 108, Mkt Cap Rs 194bn, Not Rated)
remain our top sectoral picks.

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REAL ESTATE: SECTOR UPDATE

Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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REAL ESTATE: SECTOR UPDATE

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