Jasmeet Chabbra is the chief investment officer overlooking funds to the tune of around $900 million for Indiareit Fund Advisors Pvt. Ltd, which operates real estate private equity funds. In an interview with him, we talk about the state of Indian residential real estate in metro cities and why one can’t generalize demand and supply for any location. He also emphasises that real estate inventory is more a source of wealth than a burden for developers.
As a fund what are the various kinds of real estate projects that you invest in or evaluate?
Our investment framework is restricted to large cities—primarily residential developments and some commercial but no hotels, hospitals and other large-scale projects. We work with mid-tier developers not necessarily the largest developers. The key is to ensure that the project has sufficient capital. Construction is a function of buyer’s money coming in—so it’s a negative working capital cycle and land is the only investment. Short-term borrowing is needed only for working capital requirement. Hence, we look at real estate as a cash flow business.
Jasmeet Chabbra, director investments, Indiareit Fund Advisors Pvt. Ltd.
In today’s scenario, how true is it that residential inventory is piling up in major cities?
For real estate, you have to look at inventory differently. It’s like this: you can’t treat real estate inventory as you do for, say, consumer durables. Inventory in real estate is also wealth and not a commodity that will get spoilt tomorrow. The fact is, if I have 100 flats to sell in Lower Parel, Mumbai, as a developer to make my project self-sustaining I only have to sell 25 flats. So now the moment 25 flats are sold, the rest 75 can be released in the market slowly and the developer can make more money on it. An alternative piece of land in Mumbai is that much more expensive. A prudent developer who doesn’t have excessive debt on books and pending payments will try to make the most of this remaining inventory. He is under no obligation to sell it—this is a way of wealth preservation. Inventory has to be coupled with a desire to sell, so it is a burden when you want to sell and can’t sell, but not when it doesn’t have a shelf life and you are not in need of selling it. This is more the case in a city like Mumbai.
Is it riskier to look at stand-alone projects rather than townships?
Real estate risk is a function of delivery. Typically, the probability of completing a smaller project is much higher and so investors may feel that they should bet on smaller projects rather than townships. From a risk perspective, the appreciation in a township can be potentially higher, while a stand-alone project will also have to go through the same set of sanctions. Though in terms of size, bigger projects will take longer to complete, risk perception can’t be judged on size. You have to assess the developer’s capability to execute the project—stand-alone or township.
Why are prices still high when demand has slowed down?
I would not make that a generic statement because the moment one leaves Mumbai, prices are subdued. Prices outside Mumbai are a function of affordability and quite stable at their current levels. Smaller cities are volume players rather than high prices. Developers look at regular turnover. In Mumbai, prices don’t ease up fast as developers are willing to hold on to the inventory much longer because the opportunity cost of buying new land is much higher and financial closure happens at a lower level of sales volume. The other reason is infrastructure—poor infrastructure in some way is a facilitator for pricing to stay at high levels. Also, prices tend to be higher in areas that have a high economic catchment. Supply is limited at the end of the day.
What about National Capital Region (NCR)?
NCR is a more speculative market. Mumbai has a more end user-driven demand. NCR also has political money in real estate and a huge nexus between brokers, developers and investors with black money keeping prices high. The economics there are different and prices tend to be artificially high.
For residential housing, which are the growth pockets in the country?
From a retail investor’s perspective, if you look at the options in India, because of infrastructure and job opportunities that metro cities provide, that’s where population migrates to. As a fund we don’t see fundamental demand in most small cities and if as a fund we find it hard then for an individual it gets harder and riskier. So the only option for an individual investor if they have to go to tier III cities is to go to their home towns. And then if you want to invest in real estate, stick to land. Land appreciates in time and a flat may or may not. Growth pointers on land are much higher. But there are issues such as you can’t leave the land unattended.
You should buy your first house for consumption. Don’t buy a financial asset before putting a house over your head. Buying houses for investment is challenging when people buy multiple houses under construction without looking at the builder’s background and with the intention of selling it before completion.
Will retail investors be able to invest in funds like the one you advise, but is only accessible to high net worth individuals as of now?
Eventually, we will have to move to that scenario. Globally, the concept of real estate investment trusts or Reits is there, which helps retail investors access the market. The reason it hasn’t happened yet in India is that we are still a nascent real estate market. For all practical purposes we are just a 12-year-old market. If you are not used to handling capital and you take a lot of retail assets, which typically come in huge quantum, it may create an asset bubble. We need to create a large and more stable base for Reits-like structures to start.