Analyzing of uncertainty in capital growth forecasts
Analyzing property markets existed with many early twentiethcentury pioneers stressing the importance of real estate supply and demand(Marshall 1925; Babcock 1932; Bonbright 1937). The importance of marketanalysis was further developed during the evolution of the property disciplinein the mid-20th Century (Murray 1949; Lawrence and May 1943; American Instituteof Real Estate Appraisers 1951). During this period Ratcliff (1975) wrote apaper entitled “Appraisal is market analysis”; this focus on market analysis isstill relevant today. Whilst a regular, butnot substantial, number of publications on property market analysis havecontinued over the years, there has, recently, been a trend to develop moresophisticated economic models to assist the process. Researchers such as Brooksand Tsolacos (2010) have assisted in the advancement of modellingtechniques. Several recent marketanalysis studies appear to favour autoregression modelling (Hepsen and Vatansever2011; West and Worthington 2006; Zhang and Chen 2011). However the qualitativebehavioural studies are also highly relevant (Gallimore et al 2000; Barnham2008). The applicability ofproperty market analysis studies can, to some degree, be measured by theirability to forecast future market movements.
McAllister, Newell and Matysiak(2008) undertook an independent study of the accuracy of forecasts of UnitedKingdom commercial property. This study found that the level of uncertainty incapital growth forecasts was substantially greater than rental growth forecastsand that forecasters had great difficulty in forecasting yield shifts. Whenexamining the success of forecasters against a native forecast (that assumes a”same change” in the future), the study found that the property forecasts were,generally, not substantially better than native forecasts and that the onlynon-property determinant that was accurately estimated by forecasters was GrossDomestic Product (GDP). Hence thedemand pattern forecast should not be generalized to the whole country and a forecastmethod which respect consideration of forecasting discretely for discreteregions with similar characteristic rather than generalizing it to the country.So is the result of our effort in studying demand patterns and effects ofvarious factors on demand at these three cities (Pune, Hyderabad andBangalore). 5.
1 Introduction Thisdissertation aims at exploring the factors affecting real estate housing demandand explaining about the real estate movements in the sub markets considering 3cities i.e., Pune, Hyderabad and Bangalore in India and determines whetherthere are lucrative opportunities for investment in the market. The researchstudy was split into four broad sections for conducting the primary research.
The four research areas were; importance and growth of the real estate industryin the above mentioned 3 cities ofIndia, different avenues for investment in the sector, concerns regarding thesector, sources available to realty developers and the future potential of theindustry. The data and information were all representatives of the real estatemarket, comprising of real estate development companies, i.e. property agentsand consultants and finally realty analysts specializing in forecasting thefuture market trends of the industry. These preference are given depending on theobserved demographic characteristics of the household, such as the size of thehousehold, income profile, first time buying, investments etc. There can stillbe considerable heterogeneity in preferences even after accounting for allhousehold demographics that affect housing demand. India’ssecond and third rung cities are coming of age. Given their historicalimportance, many of these cities — Pune, Hyderabad and Bangalore for instance —boast of an illustrious past.
It is now time for them to regain their pastglory, as a host of real estate market and brands reach out to them. Gearing tocompete with the other developed nations, these cities are the new growth centersof resurgent India. Thereal estate sector in past five years has witnessed the heights of glory andlows to dust. Evidently the cycles of boom and bust in the sector hasconsiderably shortened, which historically has been familiar to long cycles.
With short cycles, the response time to react has considerably reduced leadingdevelopers to constantly plan and re-plan their strategies to get resultsright. As developers rehash and redraw their strategies, Government has alsorealized the importance to have a strong regulatory framework in place tosustain growing pressures of urbanization. We believe that real estate sectorin India is trending itself into right direction, but still has some distanceto cover which would require all the stakeholders to perform their roleseffectively and diligently. Indeed, nearly 35 Indian cities with amillion-plus population are proving to be as lucrative a market as the Tier Icities or metros. Developers would like to have estimates for future demand,rents and prices.
Investors with loan portfolios, including those secured onreal estate, demand objectivity and transparency in the analysis of futuretrends. Scenario analysis concerning future rent and cash flows is alsoimportant. For many, the winning formula is now not just having good judgmentabout the future direction of the market, but also making a carefulquantitative analysis explaining cyclical movements and the impact of broadertreads. Hence, anin-depth study of time analysis of residential markets is required, which woulddevelop a detailed study/ framework on factors affecting real estate housingdemand for next 5 years. 5.
2Summing up the Study Mainresearch findings are summed up below:1. Growing Infrastructuredemand in small cities 2. Growing economy ofsmall Cities3. Shift of Its and BPO 4. Better Demand andsupply 5. Linkage of 3 citiesi.e.
, Pune, Hyderabad and Bangalore.6. Multiplier effect ongrowth7. Growing urbanpopulation8.
Factors influencingurban residential markets.9. Timely analysis anddemand patterns10. Major contributions ofthe inferring factors. 5.3 Achievement of the Objectives of the StudyThe main objective of this study was togive a detail study on factor influencing real estate housing demandconsidering 3 cities i.e., Pune, Hyderabad and Bangalore and giving timelyframework on how demand pattern change.
The study includes four key objectives as follows: 1. To know thetraditional and socio-economic factors definition of demand and distinguishbetween different demands concepts, such as effective demand, post demand andpent-up demand. 2. To identify importantfactors among these that contribute to the demand at large.3. To analyse the impactof those factors on real estate residential demand and draw definitions ofimpacts.4. Explain results ofimpact by key factors those drive the residential real estate market in India.
5.3.1 Objective 1: To know the traditional and socio-economic factorsdefinition of demand and distinguish between different demands concepts, suchas, effective demand, post demand, and pent-up demand. 5.
3.1.1Social and emotional factors affecting demand 1. Traditional economic theory focused heavily onobjective factors affecting demand such as price and income. More recentdevelopments in the subject, especially behavioral economics, gives more weightto psychological and social factors that affect our preferences and choices inmarkets.2.
There are many social factors affecting demand and thismeans that our spending decisions are rarely taken in isolation. We arestrongly influenced by the choices of other people especially when we share thesame social groupings and networks. Herd behavior can be a powerful force inmarkets. Socialfactors: 1. Social awareness e.g. lack of knowledge in pricing models 2. Social norms – changing norms of behavior e.
g. thefalling demand for housing in high end areas for M.I.G (Middle income group)3. Social pressures e.
g. peer pressures affecting demand.Emotionalfactors: People’s acting and thinking are oftenbased on a long-term vision in order to provideContinuity and security in life. (PostDemand)1. Emotional arousal can affect the demand for housing inhistorical legacy areas and the targeted crowd for the housing in their hometowns.2.
Group housing- people willing to opt to live where there aresimilar demand of products. E.g.: software employees prefer to own a housenearby an IT hub.5.3.2 Objective 2&3: To identify important factors among these that contribute tothe demand at large.&To analyse the impact of those factors on real estateresidential demand and draw definitions of impacts.
Availability of mortgages. Most people are dependent on getting a large mortgage up to 95% of house value. If mortgages become less available then demand will fall.2.
E.g. since credit crunchavailability of cheap 95% mortgages has declined. Banks are demanding biggerdeposits that many first time buyers don’t have therefore demand for housinghas fallen.
Price expectations / confidence. People don’t like to buy when house prices are falling because they will be able to buy it later for cheaper. Interest rates. Interest rates determine the cost of paying a variable mortgage. Lower rates make interest payments more affordable.E.g.
: Hyderabad-lowinterest rate compare to Pune and Bangalore (source: knight fank’2015) Cost of renting. The main alternative to buying a house is renting. If the cost of renting to buying rises, we would expect to see a fall in demand.6. E.g.
: Bangalore- due to heavyboost in rents, resulted in fall of occupancy rate.(R. H. Dholakia(2014) Economic growth / unemployment. Higher economic growth and falling unemployment will lead to rising demand. 5.3.
3. Objective 4: Explain results of impact by key factors those drive theresidential real estate market in India. The demand of Residential Real Estateis derived by many factors and it also depends on the type of cities. It isseen from the graphical analysis that in cities like Pune , Hyderabad , andBangalore which is largely driven by IT Industries has following parameterswhich drive Residential real estate whether it is first time home buyer or aninvestor.
Both, the first time home buyer as well as an investor see certainfactors which they important according to their need. The factors which arecovered under this study are Geographical factors, monetary factors,Sociological factors, and Project specifications. According to the graphicalanalysis the most important factor people see are: 1. Connectivity/Transportationas majority of the people have to travel daily to reach their work placewithout any difficulties. 2. Zone i.e. AResidential zone/Commercial Zone/Industrial Zone.
3. Distance from thecentral business district as how much time they would need to reach CBD/Urbanfacilities. 4. In Monetary terms themost important factor is Income of the people through which they decide thathow much they can invest and also how much loan they can get from the financialinstitutes.
5. The another importantfactor is human behavior which plays very important role irrespective of all ,as if personally people are not satisfied of what they getting from thedevelopers/builders they won’t get converted into potential customer. 6.
Brand name or previoustrack record of the company, the type of working class living in the vicinityand also the dominant occupant of the area were observed to be of concern whilesearching for property. This makes them comfortable moving to a new place. 7. Project specificationsand the urban infrastructure facilities in which people most preferred isParking, orientation, common areas, corporate discounts, relaxations inregistration fees or any other gifts from developers such as Fully furnished homes,Kitchen utilities , AC’s etc. If these factors are considered by thedevelopers/builders then there can be great demand in the Residential RealEstate Sector. 5.
4 Observations and Findings Factors affecting Residential Real Estate from2014 onwards: 1. Key Driver Patterns2. Net Migration or Population Change3. Residential Vacancy Rates4. Employment Levels5. Housing Construction6. First Time Home Buyers7. Gross Return on Investment 8.
Average Rentsand income9. The Availability of Financing10. GDP11. Interest Rates12. Real EstateValues13. Real EstateAffordability14. Number ofDays It Takes to Sell Real Estate15.
Revitalization andRenewal16. Real Estate Listings17. InfrastructureSupport Apart from the mentioned, studies also revealed that fewother factors that are affecting the demand in residential real estate marketare: A. Factors AffectingReal Estate Market Of Pune1. Formation of a regulatory body,CREDAI-Pune Metro2. Lucrative market policy for developers3. Spreading of Urban agglomeration in the city4. Slum-dwellers to get Development Rights Certificate5.
Pune real estate will provide affordable housingproject6. Pune witnesses increasing demand for student housing7. Pune will get Metroin coming years8.
HNIs pushing up thedemand for premium real estate projects9. Pune has become the hottest destination for IT and BPOrelated industries B. Factors Affecting Real Estate Market Bangalore1. Residential plots to rule the roost 2. Bangalore willgain a lot of traction and here’s why 3. Heritage citiyis a next big thing 4.
Industrialcorridors to boost infra growth in hinterland 5. AffordableHousing wil be the buzzword 6. ‘Smart City’tag to boost realty prospects7. Bangalore-High Demand for Ready-to-Move-in properties8. Resale Properties in abundance C.
Factors Affecting Real Estate Market Hyderabad1. Prevailing uncertainties in decision of Telangana stateformation.2. City’s potential as anIT/ITeS hub3. West Hyderabad, wheremajority jobs are created.4. Maximum traction inresidential space.5.
Development of OuterRing Road.6. Hyderabad metro.7. Lower land prices andhigher fsi 8. Growth connection withample land availability.9. Good connectivity withother states existing of 4 national highways passing through the city.
10. International airport. 5.5 LIMITATION AND FURTHER SCOPE OF STUDY: Significant research has based upon the data and informationcollected by the previous reports of credit rating agencies, report offinancial institutions and come other consultancies such as JLL, HDFC housingfinance, CREDAI, Knight Frank, C& K etc.
and it had been conducted in the real estate field of 3major cities (Pune, Hyderabad and Bangalore) in order to study various factorssuch as determination of the highest growth segment, factors influencinghousing demand which helps in bridging the gap between demand and supply,degree to which problems in the sector hinders growth levels, comparisons withstock markets returns, risk profile of the city, industry dynamics and newopportunities offered by the market etc. However, most real estate markets of aPune and Hyderabad (Tier- II) cities aremuch less well developed compared to Bangalore (Tier- I) in India and effortsto gather real estate and economic statistics, growth opportunities has only the final frontier of the study.Real estate price indices have also been constructed in a very crude manner,which has undermined the reliability of the indices for serious empiricalresearch. However because of the time and scope limitations, relevantinformation is taken from few cities only. Study has been done on recent dataand reports so there are a plenty of opportunities in future to study overthese matters because of changing social and economic factors in small cities,moreover more cities with different growth profile could enter into categoriesof upcoming developing cities as villages and small towns are growing veryrapidly, urban agglomeration is spreading considerably fast with the newschemes of town/city planning in coming years.5.
5 Conclusion Indeed,smaller cities and towns are offering a better cost advantage over biggerCities. Thus, the returns in cities like Hyderabad, Bangalore and Pune are inthe range. These cities are also attracting manufacturing and IT companies.Besides, even business process outsourcing (BPO) companies are looking towardssmaller towns. MphaSis, Satyam, Wipro, Tata Consultancy Services and Infosysopted to set up their BPO facilities. Apart from cheaper rents, the second rungcities offer an employable stream of educated workforce (thanks to the presenceof good colleges), which is easier to retain due to proximity with theirfamilies.
