Is Real Estate Turning Around? -

If past history was all that is needed to play the game of money, the richest people would be librarians. — Warren Buffet

What happens to a sector after a prolonged slowdown? – Mean Reversion?

What happens to a sector when Government channelizes its resources behind it? – Grows Fast?

What happens to a sector when there is a huge pent-up demand? – Tailwind?

And what happens when all three coincide?

Government seems to be seriously working towards achieving its stated goal of ‘Housing For All’ by 2022 which would require 20 mn new houses. Credit Linked Subsidy Scheme (CLSS) is a material development in that direction. Under this scheme, interest subsidy of 4 per cent on housing loans up to Rs 9 lakh for those who have the income of Rs 12 lakh per year and 3 per cent on housing loans up to Rs 12 lakh for those having incomes of Rs 18 lakh per year will be offered. This will mean assistance in the range of Rs 1.98 lakh to Rs 2.30 lakh per beneficiary. Besides, the two categories of subsidy can be availed for building a house measuring 968 sq ft and 1184 sq ft respectively. Today, banks are offering home loan at ~8% and once you take into account the subsidy and tax benefits, the effective EMI for affordable housing would be equal to the rentals, which is a huge incentive to own the house.

The most astonishing part is that unlike other government schemes the modus operandi here is impressive, the interest subsidy will be credited to borrower’s loan account in the beginning itself which will reduce the outstanding loan amount and hence the EMIs. The conditions have been set in a way so as to allow the scheme to benefit maximum people.

Many incentives have been introduced for developers as well:

100% tax exemption for affordable housing projects
Instead of built up area eligibility is now based on carpet area
Granted ‘Infrastructure’ status which will help them borrow at lower rates and
Developers have now five years to complete the project instead of three years earlier.

To discourage speculation and demand from ‘investors’, Government has restricted set-off of loss towards second home against other heads of income up to Rs 2 lakh.

We believe these incentives could provide strong tailwinds to real estate sector and this could emerge as a mega trend.

So how does one benefit from this MEGA TREND?

One obvious way to play this theme is to directly invest in listed developers who cater to or plan to enter affordable housing segment. However, there are hardly any quality companies listed from this space (~90% of the sector could be unlisted), and rare ones with strong balance sheets, high quality execution and respected management teams already trade at rich valuations leaving little upside from these levels.

Some interesting proxies could be:

1. Housing Finance
2. Cement
3. Building Materials

PVC Pipes
Ceramic Tiles
Bathroom Fittings
Plywood & Laminates
Decorative Paints

4. Electrical Fittings & Small Appliances
5. White Goods/Large Appliances
6. Furniture & Fixtures

Some of these categories have large presence of unorganized players who are expected to loose their low cost advantage from tax evasion post demonetization & GST (India’s Consolidation Wave). This adds another tailwind to organized players including all listed companies from industries mentioned above.

We know most investors would simply shun the theme saying valuations are exorbitant and we agree to some extent that

Yes, the headline indices are at life time high..
Yes, the PE ratios too are pretty high..
Yes, there could be a bubble in small and mid caps..

However, we strongly believe opportunities are always there in select pockets irrespective of market conditions, one just needs to look harder during a bull market, be a contrarian and have a long-term horizon.

How are we positioned?

In 2017, we have added three stocks to our ‘Stock Ideas’ portfolio, which are all directly or indirectly expected to be big beneficiaries of real estate revival. From a company which is the market leader in a niche building material to a midcap cement company in a sweet spot, we are betting big on real estate revival..