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Indian Real Estate, Modulex Modular Buildings, Red Ribbon Asset Management Plc

Affordable Housing for India: A Perfect Storm of Opportunity

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Affordable Housing for India: A Perfect Storm of Opportunity

Mumbai’s skyline has, of course, been transformed beyond recognition over recent years, but its glass pinnacles are well beyond the reach of all but its wealthiest residents. So you need to look closer to the earth to find the true driver behind the subcontinent’s resurgent real estate sector.

India’s increasingly youthful population is moving out of the countryside at an increasing rate in search of better work, pay and living conditions and this is precisely the demographic the Affordable Housing Policy is designed to appeal to, because the dream of having a home (or a flat) of one’s own resonates like nothing else with this new wave of discriminating voters on the subcontinent…and nobody knows that better than Narendra Modi. His Government has aggressively pursued legacy policies on housing with the introduction of a raft of new tax incentives over the course of the last two Union Budgets, including giving infrastructure status to qualifying affordable housing, offering developers increased tax concessions and providing buyers with a range of fiscal incentives including subsidised interest payments.

And it’s not just voters who are being energised: investors are responding positively too in increasingly ingenious ways. For example, because banks in India aren’t allowed to finance land acquisitions the Private Equity Fund KKR has moved into the sector to offer development funding directly to contractors, taking an equity stake in the completed project. In what might be taken by some as a statement of the obvious, Sanjay Nayar of KKR India pointed out that “with the right project and partners, there’s good money to be made”.

There is indeed Mr Nayar.

Chris Wood of Citic Securities perhaps put it a little more eloquently: “Affordable housing in India remains one of the most straightforward bull stories in Asian equities. There will be an acceleration in economic activity in India in the coming 18 months driven by housing.”

But there is, of course, at least one (more or less hidden) difficulty with all of that. Given such a voracious and burgeoning consumer appetite coupled with capital market ambition and expansionist government policies, where are all these new homes going to come from? As we have noted previously on this site, stoking up such high levels of demand means India is now committed to building 856 new homes every hour between until 2050. Traditional construction technologies simply aren’t up to that kind of challenge, which is why commentators (including KPMG India’s Director of Real Estate Neeraj Bansal) have pinpointed Modular Construction as the single most important innovator in the sector.

By prefabricating units at scale and off site, Modular Construction is capable of delivering affordable housing on the required scale and at a reasonable cost: three times quicker and half as expensive as traditional construction methods. It is perfectly positioned to meet the demands and opportunities being created by this perfect storm in India’s real estate markets.

As Mr Nayer would probably say over at KKR: “there’s good money to be made”.

Modulex Construction is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focused manner. It was established by Red Ribbon to harness the potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors. Because, when it comes to investing on the subcontinent, nobody knows India and its markets better than Red Ribbon.

Modulex Modular Buildings Plc is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors because, when it comes to investing on the subcontinent, nobody knows its markets better than Red Ribbon.

Red Ribbon CEO, Suchit Punnose said:

For me, the key determinant of exponential growth in India’s real estate sector over recent years is the combination of an unprecedented growth in the subcontinent’s population and a rapid trend for its urbanisation: largely, as the article rightly points out, a product of this rapidly expanding population becoming progressively more youthful and more affluent. In time honoured fashion, India’s younger demographic is streaming from village to city with money in its pocket (in the hope of making more).

This is the demographic that Prime Minister Modi has so successfully appealed to through his Government’s re-energised Affordable Housing Programme: the other key factor driving growth in the sector. As with some of his other radical initiatives, the scale and scope of the programme has at times been breathtaking, but in truth it has to be to meet the sheer scale of the challenge.

And when it comes to delivering a workable solution to that challenge it seems to me, as most expert commentators now recognise, that the attraction of Modular Construction is simply inescapable. No other technology offers the pace and scale of delivery needed to meet India’s housing needs. That’s why Red Ribbon was committed to Modulex Construction from the very beginning of the project and we remain committed to it today. I’m convinced it is a vital element in meeting the challenges as well as making the most of the opportunities currently being presented by the subcontinent’s markets.

But none of that should beguile us from forgetting the sheer scale of the housing challenge India currently faces, in common with other leading global economies. Traditional construction technology simply can’t deliver to the scale and pace required by projected demand on existing governmental programmes. No wonder then than Modular Construction is a policy priority for Prime Minister Modi’s Government. It’s only a question of time before others follow suit…

Indian Real Estate and Modular Construction - Red Ribbon Asset Management Plc

A Sense of Understatement: Modular Construction and Indian Real Estate

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A Sense of Understatement: Modular Construction and Indian Real Estate

Mitsubishi Corporation announced this month its first ever investment in Indian Housing: it will invest $25 Million in Chennai through its subsidiary DRI India and plans to build 1,450 new homes on a 186,000 square meter site. And as if you needed any reminding of the buoyancy of Indian real estate, three quarters of those units have already been sold. Mitsubishi expects to earn more than 10 Billion rupees on the project within four years so it was probably with a sense of understatement that a Mitsubishi spokesman told the press last week that: “…middle-income earners (in India) are expected to expand, boosting housing demand.”

No prizes for original thinking there.

The United Nations has repeatedly forecast that the subcontinent’s current population of 1.3 Billion will overtake China by 2022, making it the most populous in the world so yes, middle-income earners on the subcontinent are indeed “expected to expand”…and how. Added to which India is already the fastest growing large economy on the planet, with an increasingly urbanised population so the demand for new homes will indeed be “boosted”. Look no further than the burgeoning conurbations of Mumbai and Bangalore. Mitsubishi might not be winning any prizes for economic analysis anytime soon but its decision to invest in the subcontinent’s real estate sector makes perfect business sense.

Of course, in the overall context of the economic phenomenon that is India, 1,450 homes is a drop in the Ocean. Just to keep pace with current housing demands, the subcontinent needs to build 856 new homes every hour (using up Mitsubishi’s contribution in less than two hours).

And that provides a graphic illustration of why Modular Construction is now at the top of the subcontinent’s political agenda.

Modular Construction is literally changing the shape of the world we live in: not just for homes but hospitals, bus stations and offices too…if it can be built at all, it can be built quicker and more efficiently in a modular format. So if, like India, you need to build nearly 900 new homes an hour, it should be obvious where to look for the solution. Indeed, having announced this week that the United Kingdom Government will commit an additional £2 Billion to affordable housing projects, Theresa May could usefully take a leaf out of Prime Minister Modi’s playbook.

And that’s not the half of it…with recent concerns over air quality in India’s conurbations also making the news recently, modular construction technologies also provide a ready answer to environmental concerns. Its technology eliminates high moisture levels occurring in traditional building materials, with units being constructed off site and indoors well away from adverse weather conditions. That not only protects the integrity of the structure but prevents excess moisture building up in the wooden framing too.

Modulex Modular Buildings Plc is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors because, when it comes to investing on the subcontinent, nobody knows its markets better than Red Ribbon.

Red Ribbon CEO, Suchit Punnose said:

Mitsubishi’s entry into the Indian Real Estate sector should come as no surprise to anyone: major Japanese consortia have been leading the wave of inward investment into the subcontinent in the wake of key initiatives such as Delhi’s high speed rail system. But the article is right to characterise Mitsubishi’s commentary on the strength of the sector as a wild understatement. India is currently the fastest growing large economy in the World, with a burgeoning and increasingly urbanised population that is projected to be the largest on the planet by 2022. That will inevitably make the subcontinent’s real estate market an attractive proposition for any investor.

But none of that should beguile us from forgetting the sheer scale of the housing challenge India currently faces, in common with other leading global economies. Traditional construction technology simply can’t deliver to the scale and pace required by projected demand on existing governmental programmes. No wonder then than Modular Construction is a policy priority for Prime Minister Modi’s Government. It’s only a question of time before others follow suit…

Modular Construction Solution - Modulex - Red Ribbon Asset Management

Modular Construction: A Global Construction Solution

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Lets get straight to the point: the UK construction industry has a problem, three problems to be precise. First, an aging demographic (mostly with their own homes) combined with a impoverished younger population (mostly without); secondly, a lack of new companies entering the sector (think Carillion) and, third, a marked decline in skilled labour that isn’t likely to improve anytime soon with Brexit on the horizon. All of which makes the UK Government’s target of building 300,000 new homes every year until 2020 look distinctly shaky if only because, according to Arcadis Target, this would require 400,000 new skilled workers to be added every year from 2017(one every 77 seconds). Not particularly likely given lack of skilled workers is a core component of the problem.

But the proof of the pudding is in the eating. In 2017 the Government fell 80,000 short of its target (nearly 30% short), which is why Modular Construction has now leapt up the list of UK Policy priorities: if you can’t change the system, change the method and no existing building technology is better equipped to deliver quality housing at pace than Modular Construction. In fact, off site prefabrication delivers units at three times the rate of conventional technologies so its just what the Government needs to meet its target…

Except no matter how hard Government seems to try, modular construction in the United Kingdom is still at cottage industry levels, largely because of the first of those three factors we just mentioned: an aging demographic and an impoverished younger population acting together effectively to staunch demand for innovation.

How different then things are on the subcontinent.

Rather than an aging demographic, India has an increasingly youthful population, increasingly urbanised and increasingly wealthy as well as being drawn inexorably to live and work in the subcontinent’s major conurbations (Mumbai and Bangaluru in particular). And it is this demographic trend that is creating a surge in demand for affordable urban housing added to which, unlike the UK, India has no shortage of new construction entrants or skilled labour.

Again, the proof of the pudding is in the eating… Knight Frank’s latest India Real Estate Report found a surge in the number of new project launches for the first half of this year, up by 46% and with a marked increase in affordable housing starts too (making up 51% of supply). Most Indian Cities are also showing exceptionally strong rental growth, with Bengaluru in the lead at 17% year on year. All in all it’s a very different picture from the UK but what the two countries do have in common is housing targets: specifically those established in India by the Affordable Housing Programme which are if anything tougher than those confronting the UK Government.

That’s where Modular Construction comes in, because in contrast to the position in the former mother country, off site prefabrication on the subcontinent is very far from being a cottage industry. Favourable economic conditions and underlying demographic trends have instead made it an essential component of India’s drive to meet its public housing targets by 2022. The sheer pace and quality of delivery offered by modular technologies (not only for homes but hospitals, schools and office buildings too) simply can’t be matched by conventional building techniques: something the UK Government seems to be waking up to, if perhaps a little too late.

Red Ribbon set up Modulex Modular Buildings with the intention of building on these demographic and economic trends, recognising the outstanding capacity of Modulex to deliver above market rate returns for investors by tapping into high demand levels in India’s real estate markets. Modulex provides an exciting opportunity for investors to participate in this key sector of the fastest growing large economy in the world.

Red Ribbon CEO, Suchit Punnose said:

I found it interesting to compare the current strengths and weaknesses of the Indian and UK construction sectors where the same three factors for change seem to be working in wholly opposite directions (to India’s advantage). But more than that, I was also struck that both sectors have now come to the conclusion that view modular construction has to be a key component in delivering the significant number of new units required in each country. I know, for example, that the House of Lords Technology Committee has recently started an investigation into the advantages off site prefabrication offer in helping meet policy targets which seem at the moment to be running away from the Government. Perhaps though, as the article points out, that may all be too little too late.

For our part, and with Red Ribbon’s roots set deep in the Indian markets for over a decade now, it is a trend we have obviously been following with great interest for some years. That’s why we decided to take a pivotal role in establishing Modulex Modular Construction on the subcontinent and its why we remain excited at its prospects of delivering above market rates for our investors in such a resurgent real estate market. We firmly believe Modular Construction will play an essential part in India’s future.

Modular Construction India - Red Ribbon Asset Management

Taking It In Stages: Modular Construction and India’s Urban Challenge

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India’s already congested conurbations will have to find homes for 900 Million more people by 2050, and assuming a modest four person occupancy rate that means 856 new homes will have to be built every hour, every day for the next thirty years (fourteen a minute in case you’re wondering), with the subcontinent’s builders working an implausible twenty four hours a day with no time off. The sheer scale of the challenge is unprecedented, and given the pressures it will place on India’s already overstretched urban infrastructure, it will call for a solution of equally unprecedented ingenuity. But more of that in a moment… first let’s look at those trends in a little more detail.

The latest industry source to address the issue is KPMG in its NAREDCO Study, “Bridging the Urban Housing Shortage in India” (the clue’s in the title obviously) and the Report draws an arch reference to commentators having first predicted a critical shortage of urban housing as long ago as 2012, with a then projected deficit of 18 Million units. But things have got worse since then and KPMG now say there are some 1 Million urban households currently living in “non serviceable accommodation” and over half a million without any homes at all. So what’s to be done?

Well, the first point to make is that it would be unduly Eeyorish (with apologies to Philip Hammond) for us to ignore the work Prime Minister Modi’s Government has already done to re-vitalise the subcontinent’s Affordable Housing Programme: introducing a raft of new tax incentives over the course of the last two Union Budgets with more streamlined Planning Procedures thrown in for good measure and a general cutting of Red Tape across the board. Which is, of course, all well and good but cutting Red Tape and going Fiscal Max won’t get any homes built by themselves. Something more is obviously required.

KPMG’s Director of Real Estate on the Subcontinent, Neeraj Bansal, more or less put his finger on the solution when he highlighted that the single most important policy initiative which has so far gone largely unexplored is the use of innovative and low cost technologies which can speed up the construction process: and that means Modular Construction.

Prefabricated units are, indeed, likely to be key to delivering affordable housing on the required scale and within cost structures optimum to the framework of incentives put in place by Prime Minister Modi’s Government. Modular Construction has a real potential to overcome all of the structural barriers to volume delivery at pace which are inherent in India’s traditional building technologies: including a lack of skilled construction workers (or at least skilled in sufficient numbers in the urban areas where they are required); a pressing shortage of non land resources, from precious water supplies to fabrication materials and, most crucially of all, the severe time delays which come hand in hand with conventional construction methods.

Modular Construction ticks all of those boxes.

First of all, it has clear advantages on speed: manufacturing and site work can be carried out simultaneously, reducing overall completion times by as much as 50%. Think about that: for every two hundred traditional units completed, modular construction can build three hundred. And that means reduced labour costs too, with nearly all of the design and engineering overheads being rolled into the bottom line manufacturing process. Roofs, walls and floors can all be constructed as part of the same process when, in stark contrast, ceilings can’t be put in place on a conventional project until the walls are completed, and walls can’t be completed until the floors are laid down: resulting in a lot of workers standing idly by as each small delay in the process dominos into a bigger one. That isn’t the case with modular construction where these same workers can work together at the same time; and they can also be recruited centrally so that local skills shortages (of the kind that have blighted the Mumbai construction sector) also become a lot less significant.

Modulex Modular Buildings is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors through the platform of the Red Ribbon Real Estate Fund: because, when it comes to investing on the subcontinent, nobody knows its markets better than Red Ribbon.

Red Ribbon played a key role in setting up Modulex Modular Buildings, recognising the company’s outstanding potential to deliver above market rate returns for investors through its ability to tap into unusually high demand levels in Indian real estate markets. The company provides an exciting opportunity for investors to take advantage of this key trend in the fastest growing large economy on the planet.

Red Ribbon CEO, Suchit Punnose said:

When you come to look at the nuts and bolts of what it will take to deliver on India’s housing targets for its burgeoning urban population, the figures are truly eye watering. Building fourteen new homes every minute for the next thirty years would strain the limits of any conventional construction methods: not to mention the resolve of workers required to put in a twenty four hour a day shift, seven days a week.

But for me the answer is always been obvious and, as the article says, challenges on this scale require groundbreaking and innovative solutions. That solution, I am convinced, is Modular Construction.

No conventional industry methods can beat Modular Construction for its sheer pace of delivery and, of course, the key challenge faced in India and elsewhere is delivery timing: and its low overheads combined with unique operational efficiencies mean it will beat conventional construction methods hands down on overall profitability too.

That in a nutshell is why we have been committed to Modulex Modular Buildings (as a founding partner) since the project’s foundation several years ago. We remain convinced that it will play a vital part in meeting the challenges of India’s housing sector over the years ahead.

Affordable Housing Programme - Housing for all - Red Ribbon Asset Management

Affordable Housing Programme: the Private Equity Boost

By | INDIA, News | One Comment

We’ve heard a lot recently about policy announcements made in this year’s Union Budget, but what about the headline announcements from last year; how effective have they been in delivering the radical economic programme currently being pursued by Prime Minister Modi’s Government? Well, the answer seems to be very effective indeed, particularly in the case of one of those flagship policies, the Affordable Housing Programme.

Designed to address the subcontinent’s severe shortage of domestic housing resulting from a burgeoning and increasingly urbanised population, the programme has its roots in pre-Modi Administrations which had made housing for all by 2022 a key policy objective and with it (this is what proved to be the problem) construction of no less than 50 Million new housing units. It was never an especially realistic target given the escalating cost of urban land, which was making development more difficult; a creaking infrastructure system and lengthy delays in the planning process.

Prime Minister Modi’s Government has worked to cut the burden of red tape and, of course, its infrastructure-spending programme has already gone far beyond the wildest imagination of even the most cynical observers. And then, finally, to ease the fiscal difficulties of price gearing on new urban developments, last year’s Union Budget introduced a 6.5% subsidy for the poorest buyers combined with a licence to take the entire subsidy on a twenty year loan up front (so making the property more affordable) and then allowing withdrawals from EFPO of up to 90% of the purchase price (with the same effect). And then, most importantly of all, affordable housing was given infrastructure status meaning that the cost of borrowing for developers was radically reduced.

So, has it all worked? Have these initiatives actually attracted the type of long term real estate investor, prepared to commit to a lengthy development cycle of the kind inevitably required to provide much needed new homes?

Of course this type of investment, long term and short term shock resistant, has a name: we’re talking about Private Equity investment, and given the past year has seen a remarkable resurgence of Private Equity investment into affordable housing projects, the answer to our question has to be…yes: last year’s Union Budget has made a considerable difference.

The level of overall Private Equity interest, already strong in Indian Real Estate generally, has risen exponentially in the affordable housing segment: consider analysis this from Arun Natarajan, founder of research firm Venture Intelligence:

Affordable housing has emerged as a significant theme among PE-RE (private equity real estate) investors, especially in the second half of 2017, with both domestic investors as well as international firms placing special focus on the segment.”

The majority of residential project launches in 2017 were, moreover, in the affordable and mid-range price segments, with the affordable segment alone accounting for 45% of the overall supply. And last year in India private equity firms made 67 investments with an aggregate value of $6.1Billion. Around 57% of this went into residential projects with affordable housing grabbing the lion’s share.

Modulex Modular Buildings has a unique part to play in this cycle of explosive growth within the Indian Real Estate sector: founded and based in the United Kingdom, the company is setting up a global franchise designed to develop the use of proven British steel modular technology so as to construct buildings quickly, where they are needed most, in emerging and growth markets and in India in particular. Red Ribbon Asset Management is proud to have founded and to be part of the Modulex Project.

 

Window view with colourful concrete constructions of city in India

Indian Real Estate Markets: a Perfect Storm

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A perfect storm of demographic and economic factors is converging in India, and it is underpinning an unprecedented cycle of growth in the subcontinent’s real estate market.

With the fastest growing population in the world, India now has an increasingly urbanised and wealthy consumer base too and it is acting as a key driver for this, the fastest growing large economy on the planet which is now experiencing an unprecedented demand for domestic housing and new commercial (especially in social housing in its densely populated conurbations). So it should come as no surprise to learn that real estate investment on the subcontinent is now a core part of Red Ribbon’s investment strategy, helping to generate above market rate returns for its investors in one of the most exciting Growth Markets anywhere in the World.

And that’s not all, because these trends on the subcontinent are showing little sign of slowing down. On the contrary, they are likely to escalate still further according to October’s highly influential Cushman & Wakefield Report (“Winning in Growth Cities”) which has collected together data compiled from an exhaustive survey of no less than 400 global investment locations.

The Report found that real estate investment in India’s six major cities alone has doubled in the first half of this year to a staggering $2.87 Billion, with Mumbai taking the lion’s share as might be expected, pushing it to a worldwide investment ranking of 81st (up from 149th  last year). And that figure of $2.87 Billion, in case you were wondering, represents an increase of more than 100% on the equivalent figure from 2016. Mumbai also ranked number one in absolute growth terms amongst the so-called “gateway cities” worldwide, with a 194% increase in investment from last year (only Pune outshone its more illustrious neighbour, with an astonishing 285% growth in investment).

There can be little doubt as to the strength of India’s real estate sector.

And in terms of segmented participation in the global investment pot, Cushman’s Report found that more than 55% was sourced from the United States; European investment accounted for roughly 14% and the bulk of the rest came from local investment (a further pointer to the core strengths of the economy).

Anshul Jain, Country Head and Managing Director of Cushman & Wakefield in India, put his finger on the significance of this for the wider Indian economy:  “Current economic drivers are biased towards developed markets, but Indian cities are performing ahead of expectations and are clearly offering superior medium to long-term growth potential in real estate.”

Jain went on to say that further afield from the subcontinent’s more established markets, the new manufacturing hub centres of Chennai, Hyderabad and Pune are also proving to be attractive for real estate investment, driven in particular by their burgeoning production and assembly facilities in the automobile, engineering and pharmaceutical sectors.

Red Ribbon CEO, Suchit Punnose said:

With no sign of the exponential growth in India’s Real Estate market slowing down anytime soon, last month’s influential Cushman & Wakefield Report (“Winning in Growth Cities”) has highlighted staggering progress in the sector over the past year. Investment in India & it’s six major cities alone has doubled in the first half of the year to $2.87 Billion, with Mumbai taking the lion’s share pushing it to a worldwide ranking of 81 st (up from 149th last year). And Mumbai is also ranked number one in absolute growth terms amongst the so-called “gateway cities” worldwide, with a 194% increase in investment from last year (only Pune outshone its more illustrious neighbour, with an astonishing 285% growth in investment). It all goes to underpin just why India is currently the most exciting Growth Market on the Planet.

Read the Cushman & Wakefield Report here

Read about the Indian Manufacturing Hub here

Read more about the Demographics underpinning Indian Real Estate Growth here

Indian Real Estate ten years on: The success story continues…

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Nostalgia isn’t what it used to be.

Red Ribbon Asset Management adopted cutting edge Impact Investment Strategies more a decade ago at a time when the Indian Real Estate Sector was widely perceived to be basking in its “Golden Age”; and its primary stimulus then was a staggering Rs 150 Billion investment from Dubai. If only things could be so good again…

Well, in fact they are; and they aren’t just as good, they’re better.

In the first six months of 2017 a record Rs 160 Billion poured into the subcontinent’s real estate markets from Dubai: easily eclipsing the 2007 pre-crash figure, even after it is adjusted for inflation and currency fluctuations in the intervening ten years. Because the fact is that things have never been so good in real property investment: right here, right now. Nostalgia isn’t all that it used to be.

Because India’s Real Estate Sector is on a resurgent high at the moment, helped in substantial part by the market friendly policies of Prime Minister Modi’s Government which have made real estate an especially attractive investment. In particular through the introduction earlier this year of The Real Estate (Regulation and Amendment) Act, widely known RERA, as well as last month’s innovative Goods and Service Tax which is widely expected to give a decisive further kick to real estate’s accelerating trajectory.

Anuj Puri, Chairman of the newly launched Anarock Property Consultants had this to say on the subject: “It is worth remembering that with the opening up of FDI (Foreign Direct Investment) in 2006 and institutional investments pouring into the sector over the last 10 years, we have already seen an increased level of transparency. That said, it was evident that more regulation was required and RERA will bring unprecedented levels of discipline and transparency into the sector. The Indian government is committed to bringing in the necessary changes that will help home buyers, investors, the various other industry stakeholders and the sector at large.”

With effect from last week, RERA, developers will be required to provide a five year structural warranty for all new builds. It is the first time that such an ironclad condition has been required from developers where,  earlier, the rule of thumb was that a property buyer was lucky to get any sort of long-term guarantee over a building’s structural soundness. How times have changed.

The innovative Real Estate Investment Trust, Demonetisation with its attendant increased levels of transparency and India’s ongoing focus on Affordable Housing have all added to this trend, helping to create a more mature, consolidated and efficient property market on the subcontinent.

So we shouldn’t expect the flow of funds out of Dubai and elsewhere to be slowing down anytime soon.

Red Ribbon Asset Management has placed Indian Real Estate markets at the heart of its investment strategies since that Golden Age back in 2007. And it continues to do so: it continues to look for cutting edge opportunities in India’s burgeoning real estate market, delivering above market rate returns for its investors and at the same time adhering to Mainstream Impact Investment Strategies.

Given India is the fastest growing Growth Market on the Planet at the moment that is a trend, which is increasingly difficult to ignore.

Read about the Real Estate (Regulation and Amendment) Act here

Read about Indian REIT Legislation and comment.

How is the Indian government going to promote an environment for the growth and functioning of affordable housing?

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It was Adam Smith who pointed out that “people of the same trade rarely meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”; and in his acidic way, Smith was drawing attention to a fundamental problem with the competitive market model: free markets can be the very opposite of competitive markets in practice, and some markets can only function effectively with state intervention.

The residential property market in India is a case in point.

India has one of the fastest growing populations in the World and the United Nations reported last year that the subcontinent would overtake China as the World’s most populous country by 2022 (less than five years off lest we forget); the population is predicted to reach 1.7 Billion by 2050. This explosive growth in population has been accompanied also by rapidly increased urbanization, with a profound demographic shift from country to town swelling already overcrowded conurbations such as Mumbai and creating an acute shortage of affordable, social housing. Something obviously had to be done.

Which was why the Housing for All Project was launched by Prime Minister Modi in June 2015 and it was on any basis a Project with vaulting ambitions, setting itself the target of constructing no less than 20 Million units of new housing stock by 2022 (the date when India is expected to become the world’s most populous country). The creation of the Project and the sheer scale of its ambition sent a clear signal that the Government was not prepared to leave the issue to the private sector to deal with on its own.

So far so good, except that the Project had more or less hit the buffers less than a year after its launch. By mid 2016 it had delivered only 1,623 new units of affordable housing. It would have been a wild understatement to say there was a long way to go and in less enlightened times the Project would have been virtually dead in the water; especially given the continuing year on year exponential growth in population which was exacerbating the shortage of housing stock and highlighting the Project’s continuing failure.

So it is good news that key provisions in this month’s Union Budget have demonstrated a reinvigorated commitment on the part of the Indian Government to meet its “Housing For All” targets through a newly energized partnership with the private sector.

In particular, the creation of affordable housing will now to be given Infrastructure Status meaning developers will in future find it a lot easier to secure access to institutional credit and the overall cost of borrowing on affordable housing projects will be reduced. The Budget Measures also take into account that social housing projects are currently taking longer to close; so the eligibility timeline has been increased from three to five years and the definition of “affordable housing”: has itself been revised available to a wider range of developers.

As part of the new Program, The National Housing Bank will also refinance 20,000 crore of existing housing loans, significantly reducing bottom line interest costs.

And the Budget didn’t overlook the ongoing issue which cash flow has been for developers either; with high levels of unsold housing stock falling to be taxed as part of their ongoing inventory, this was proving a real fetter on projects being completed. Under the new regime established by the Budget developers will get one year to pay tax on notional rental income accruing on completed but unsold residential inventory and there will also be a new reduced period of two years following which capital gains can be considered eligible for long term treatment.

With these new incentives in place, the Government expects 10 Million units of social housing to be built by 2019 which should put it firmly back on course to meet its “Housing For All” Target; and that has to be a good thing. The Private Sector hasn’t been slow to recognize this new found ambition either; this is what Anil Jindal, Chairman of the SRS Group had to say on the subject:

“This year’s Union Budget has ushered in positive advances for Real Estate. We are delighted to note the overall reforms initiated by the Government to promote an environment for the growth and functioning of affordable housing.”

All of which would suggest Private Sector Developers and Government Agencies alike have their eyes set firmly on the same target and are moving forward together. Adam Smith would have approved.

Red Ribbon CEO, Suchit Punnose said:

The rapid growth in India’s population and its projected status as the world’s most populous country by 2022, will undoubtedly bring benefits to the subcontinent’s economy; not least a sustainable and rising demand for infrastructure, goods and services, but there are social and environmental costs to the phenomenon as well. Not least the severe shortage in affordable housing stock, which the Government has been trying to grapple with for several years now with mostly disappointing results.

With that in mind, I was very pleased to learn of the incentives built into this month’s Union Budget for the affordable housing sector; in particular the new designation of affordable housing to “infrastructure status”; that, coupled with the various and very sensible tax breaks, which are also included in the Budget, should provide just the shot in the arm that the affordable housing sector needs. The wider property sector in India is already buoyant; it will be good to see the affordable segment catching up.  The opportunity is immense, but so too is the innovation challenge of achieving this sustainably.

 

How are Equity Investment in Property Projects now on the increase?

By | INDIA | No Comments

Look back as little as ten years and you’d find a very different Indian Property Market from the one we know today: Central Government Policy on Property, indeed the very question of whether the Government even had a Property Policy worthy of the name, was a vexatious and thinly understood issue. In particular, the Indian Government had markedly failed to come to terms with radical problems caused by a surge in unplanned urbanisation, unleashed by the rapid strengthening of the underlying economy; in addition to which income disparity and sector specific unemployment across the subcontinent had also contributed to a national housing shortage which was running at 51 million units by 2011.

But that’s all changed now.

Equity Investments in Property Projects are now on the increase. According to this month’s JLL India Report, out of a total of $5.2 Billion worth of private equity investments over the last two years, no less than 43% were effected in Property Projects using equity structures (that is, investment in the corporate vehicle carrying out the development rather than the resulting bricks and mortar put on sale to the public); and in the year to date, more than $2.8 Billion worth of these platforms have been created and are focused on producing affordable and middle-income housing.

All that may sound like dry statistics, but don’t be fooled. It points to a deeper fact of potentially profound importance to the future of the property sector on the subcontinent.

Investors will usually only make an equity investment of that kind if they are confident the project will actually be seen through to completion at a profit. Ask anyone involved in project finance and they will tell you that despite all the millions invested and no matter how good it looks, a power station is only worth having if it’s finished and has started generating power. Nobody wants a half built Facility just as nobody wants a half-built block of flats, and a half-built block of flats will do nothing to address an urban housing shortage. It will do nothing, in short, to deal with that 51 million shortfalls from 2011.

All of which brings us back to the role of Central Government in India because it has finally woken up to the need to step in and help chart for investors a clear course through a development’s life; giving in the process the sort of assurances on effective completion that equity investors have traditionally been lacking.

Its key instrument of policy has been the Real Estate (Property and Development) Act 2016 (“REDA”).

All commercial and residential real estate projects of 500 square meters and more (that’s all the projects that matter) must now be registered under the terms of REDA with the Real Estate Regulatory Authority (“RERA”), and RERA then acts as an agent to provide greater transparency on what the project in question involves and on when it is likely to be completed. Cast your mind back to the power station analogy; RERA gives the transparency an investor needs to understand enough about the project to make it worth investing in. It’s not a shot in the dark on whether it will be completed at all.

So it should be no surprise to hear on the back of REDA coming into force this year that the level of equity investment in property projects has increased so radically. The legislation is an astute and well directed effort by the Indian Government to respond proactively to an investment need; and the results are striking if we look at the JLL statistics.

They could even be about to get more striking still because the Government of Prime Minister Modi has now released a set of Executory Rules designed to give the legislation more teeth at State level; and all States save Karnataka had implemented those Rules by the beginning of November.

As for future prospects, this month’s JLL India Report wasn’t mincing its words either:

From the Investor’s point of view there couldn’t be a better time. Earlier, lack of uniformity and transparency were the key challenges the real estate sector was plagued with and this had kept equity investment at bay…..Today, however, the change towards better corporate governance and higher transparency is being seen across all industries, but especially real estate”.

We’ve come a long way in the last ten years.

Red Ribbon CEO, Suchit Punnose said:

It is true that the sheer scale of investment into Infrastructure right across India is simply staggering at the moment. But that is a necessary price to pay if economic growth across the subcontinent is to be maintained at anything like its recent historic rates. Moving goods around the country, moving people around and securing effective transit of raw materials: these are all essential for a modern, global economy. And I am heartened to seeing them being addressed as a priority because they are a priority.

I am looking forward to seeing just how and at what level the Government proposes next to secure a fully effective “joining up” of the infrastructure as it becomes available.

Red Ribbon

At Red Ribbon we understand that the transition towards a resilient global economy will be led by well-governed businesses in mainstream markets, striving to reduce the environmental impact of their production processes on society at large and on the environment as well.

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