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Main Reasons for the Increasing Price of the India’s Real Estate

Monday, March 18th, 2013

India is regarded as a hot spot for foreign investments, setting up ventures and coming to see the Incredible India for the foreign nations. India has become more attractive to these countries than any other nation in the world. Apart from these international reputation India also grew in respect of National Security, Telecom and Infrastructure and others.

All the good things for India started happening during this period. Nation witnessed a handsome foreign investment and activities. This not only helped India to grow faster but also to become a more self-dependent Nation. India with its vision, attracted foreign countries and companies to invest and set up their business through various pacts and deals. These deals automatically invented a fast rate of development of real estate and other sectors in India. There can be given many reasons behind the rise of the real estate property and prices.

In recent years, real estate development has been seen in every possible dimension even after the change of the previous Government. The prices of the real estate unites are rising day by day, if not day by day, we can say every fortnight. It has been a most common thought of a real estate investor that (if he is buying a real estate property in India) “is it the right time to buy this one?” Some people stay confused over buying a property and never even take a step forward. Some visionary and experienced real estate investors use their knowledge while getting a property deal and earn some really smart returns. Now, lets see what are the main reasons behind the India growth:

The growth of India’s population
India is the second most populated country in the world after China. It is being said that it will soon overtake the top position because of its very high birth rate. The main reason behind the India’s mammoth rate population is its high birth rate and lesser mortality rate. Yes, India is one of the places, where life expectancy has increased. These can be considered as the main reason behind India’s being second most crowded nation in the world. Now this giant population needs a home to live. If they want a place, others already have their places ready to sell them. Its a simple law of economics. If there is a demand, there will be a supply. And if this demand is being made by the 1.21 Crore people, rates will also increase along with the rising demand.

Increasing income of Indian work force
Government has implemented the 6th pay commission for the Governments employees. It gave the working class a freedom to buy. And if they’ll have more money, they are very much hopeful to buy and more hopeful to deal into a competitive price. These are just the two reasons behind the rising rates of real estate property in India market.

Indian Economy

Thursday, August 9th, 2012

Before the global meltdown, India’s growth has been broad-based, unlike the cyclical one historically. The silver lining has been the structural change in policy making that has given wings to corporate India. The huge working population that drives a robust consumption given the changing demographics and increase expenditure on infrastructure are the key factors of growth in India.

India’s structural growth impulses continue to remain strong, given the high domestic saving rate, sound financial system and growth-supportive macroeconomic policy environment. The strong forex reserve backed by favourable external factors has helped country to receive huge FDI inflows. We expect a sustained and strong industrial capex to accelerate going forward.

Consumption is the key growth driver as India is predominantly a domestic demand driven market. By 2016, more than 50 per cent of the current population would attain the status of ‘middle class’. The ‘high income’ segment could more than triple. Share of ‘low income’ households could halve to 7 per cent from the current 16 per cent. Therefore the growth this time will be an urban-led story with an increased income levels.

We still believe the risk reward for the Indian markets is in favor though it is trading at the higher band of the market valuations. We have used three valuation methods on P/E basis, Dividend Discount model and Price to Book of the Sensex and in all these cases we have arrived at a value of 15000 to 19000 for FY11. We expect the Indian markets to trade at 14.5 to 18.5 times on a PE basis. On price to book valuation methodology we are currently valued at 3x, historically the market has been trading at a price to book of 3.4, which is fairly valued. On a dividend discount model taking 8 per cent yield we arrive at a range of 15000 to 18900.

A normal monsoon as expected would bring down the food prices cooling off the inflationary pressure. Higher crude oil prices put pressure on on the inflationary front. Global sovereign defaults could add to the woes that could keep the markets depressed.

Government stimulus seems to prove beneficial for India. For the last six quarters, the growth is mainly due to the government spending. Therefore, with government spending, backed by the spending by the private sectors is likely to end with 8 per cent GDP growth. Coming to the last quarter and the fiscal 2010 results, it has been giving out mixed cues. Topline is increasing but the margins are facing some pressure due to the increasing raw material costs. But going forward, we feel the raw material costs would come down, providing some respite to the margins of the companies.

We are betting on sectors based on the domestic demand like industrial, consumer discretionary and non-discretionary, IT, ferrous metals, construction, healthcare and infrastructure. We are neutral on banking and finance and underweight in sectors like telecom and real estate. At this juncture we suggest a top pick from a sector-perspective and a bottoms-up approach to stock picking with a preference for large caps. In mid-caps when you are investing, it is preferable to invest in niche mid-caps.