Gurgaon Mania
Will the property market crash or is it just the beginning?
Hey there,
Today, we will be discussing whether the Gurugram’s residential property market (formerly Gurgaon - name used interchangeably in this blog - part of Delhi NCR region) is showing signs of a bubble. We will look at a few instances of excesses before examining whether there are fundamental issues in this market to determine if the excesses are short-term or if we are at a multi-year peak mania. Let’s get started!
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Signature - The Sign Of Luxury?
When the BJP government came to power in 2014 in India, affordable housing became a key focus area, evident through initiatives like the Pradhan Mantri Awas Yojana (PMAY), which was launched the next year. Its primary aim was to provide affordable housing to the urban poor by 2022. The scheme offered interest subsidies on home loans, making housing finance more accessible to economically weaker sections (EWS) and low-income groups (LIG). Even though the target of "Housing for All" remains a distant dream in 2024, the BJP (NDA) government continues to prioritize affordable housing. Their first decision after the recently conducted national election was to further expand PMAY to construct 3 crore additional rural and urban houses.
2014 was also when a real estate company named ‘Signature Global’ was started in the Delhi NCR region—India’s National Capital Region—to benefit from the push for affordable housing led by the Modi government. During this period, there was a dearth of property players as many had gone bankrupt, including Unitech, Amrapali, Ireo, and Jaypee Infratech, which led to severe distress in the Delhi NCR property market for several years. Signature Global attempted to fill that gap in the lower rate segment. Here is a December 2021 video of the management discussing their vision and mission to continue thriving in the “affordable housing” segment.
Over the years the company became a well-known name within the region and launched multiple projects. As of the Financial Year 2022, the company did revenues of INR 900 Crores as per their DRHP - continuing to launch products in the range of INR 15 Lacs to 1 Crore. However, by the end of 2021-22, they began to realize that focusing solely on 'affordable' housing was no longer viable. After the onset of Covid-19, it was the premium/luxury segment that started performing extremely well, driven by India's K-shaped recovery. Consequently, Signature Global decided to pivot and launch luxury products starting at INR 4 crores. Recently, they achieved pre-sales of INR 2,700 crores in their latest luxury launch in Sector 71 of Gurugram. Following a trend started by DLF in 2023, Signature Global also placed a full-page advertisement celebrating the successful launch of its product. Such advertisements help generate more interest in the product, aiding developers in clearing remaining inventory in a shorter span of time:
But here are 2 catches to take care of when you see these Ads in the newspaper:
Assuming a new product launch has been technically ‘sold out,’ it actually implies that the builder has received only 5-10% of the total value of the flat as an initial payment from the customer, with 90% still due to be paid over time. Even considering payments made during the first year after being considered ‘sold,’ builders typically receive just 20% to 35% of the flat's value. Additionally, customers are free to sell the under-construction flat whenever they want, which leads to a wide set of investors and speculators entering the market. Here is a snippet from one of DLF’s recent projects named ‘DLF Privana West,’ which sold out in early May 2024:
Recently, a few of Gurgaon’s realtors have actually increased the sales commission twofold which they offer to their channel partners/brokers on successfully bring customers to purchase the property. Many developers are giving 7-8% commission to brokers so that they get buyers fast, which will help them clear their inventory. This has not been the case with the larger players like DLF who give 2% commission to brokers on pre-sales. A point here is that many times those brokers over-commit in order to get the commission by getting the product sold and the consumer suffers in the end.
Hence, in such scenarios, the purchase of real estate becomes a ‘push’ product rather than a ‘pull’ product, making it difficult for the actual buyer to distinguish between lower-quality and higher-quality offerings.
The Tale of Gurugram Developers
Let’s shift focus to some other developers like Ashiana Housing (listed) and M3M (unlisted), which have had a presence in the Delhi NCR/Gurugram region for many years.
In April 2024, Ashiana Housing's Amarah project in Gurugram sold out all 224 flats in Phase 3 within just 15 minutes of launch, generating a total pre-sale of INR 440.32 crores. The project was oversubscribed four times, with the company receiving 800 cheques for the 224 units, showcasing the immense demand from buyers in the Gurugram market. To put it in context, they received bids from just one project equal to half of their market cap at the time of the project. After the news of the sell-out was received, the share price of Ashiana Housing went up by over 25% in 2 days.
These high over-subscriptions are also happening because of the low entry barrier, where a buyer just has to submit a refundable cheque of a mere INR 5-10 lakhs at the time of applying during the launch of the product (EOI) to participate in a lucky draw. As a result, multiple members of the same family often submit separate EOIs to boost their chances in the draw, which pushes the over-subscription levels higher. In response, large developers like DLF have recently increased their application amount to INR 50 lakhs by cheque and allowed only one application per family during their recent DLF Privana Series product launches in an attempt to curb this practice to some extent.
Another major and controversial developer with a multi-decade presence in the Gurugram property market and one of the largest land banks in the area is M3M India. This developer has delivered multiple projects, but its promoters were arrested by the ED in June 2023 for a money laundering case and were granted bail in March 2024. Recently, we came across a few social media posts about ‘Flash Sales’ where their existing unsold inventory was offered at a discounted price of 10-20% by some channel partners. Many of their projects are under construction and have been facing delays, which has forced the builder to offer higher discounts to customers and increased commissions to brokers to push sales.
Will the Gurugram Property market crash?
People tend to overestimate a trend in the short term but also tend to underestimate it in the long term - Amara's Law
After examining the different cases of builders in the affordable housing space suddenly entering luxury segments and experiencing rapid sell-outs at their launch events, let's take a step back and look at the Gurugram market holistically.
About 30 years ago, the city was merely a collection of small towns and villages with vast open spaces and a sparse population. In 1990, 92% of the Gurugram district was agricultural land which was little over to 85% at onset of 21st Century, even after 9 years since the economic reforms of 1991 spurred rapid urban growth in Indian cities due to increased corporate activity. However, after 2000, the depletion accelerated significantly. Today, it's estimated that less than 45% of the city's land remains as agricultural, marking a sharp decline of 40% in just over two decades.
Today, the city area is ~25% of Gurugram and 29% are sub-urban areas (Note: the data points were available only till 2017 in the research paper, hence were estimated for later years based on trend):
The fate of Bengaluru, Hyderabad, and Pune has followed similar lines where rapid urbanization has placed immense pressure on city services. One significant factor contributing to population growth is their proximity to New Delhi and its airport. Considering the population pools of big corporate cities in India, Delhi NCR has a population of 3.2 crore(Cr), Mumbai stands at 2.2 Cr, Bengaluru at 1.4 Cr, Hyderabad at 1.1 Cr, and Pune at 0.7 Cr.
Where the core Delhi city has land bank constraints with hardly any open areas, and major parts are government-owned considering it is India’s national capital, a significant chunk of demand for real estate in the region is shifting to Gurugram. Core Delhi now contributes merely 4% of total property sales that happen in the NCR region. Even a few of politicians like Priyanka Gandhi are now living in DLF Magnolias in Gurugram where her husband Robert Vadra owns a flat, leading Sonia Gandhi frequently paves visits to the place as well.
From Insolvency to Prosperity
While the adjacent Noida property market has seen bankruptcies of major developers like the recent insolvency of Supertech Goup’s Supernova project, which is North India’s tallest building project of 80 floors and the demolition of Noida’s Twin Tower in 2022 after a Supreme Court order, it is the Gurugram market that has witnessed significant turnarounds post-bankruptcies. An interesting case study which we shall now discuss is a project located on Golf Course Road in Gurugram, which was up for sale for approximately INR 450 crores about three years ago. Today, its value stands well over INR 4,500 crores—a remarkable 10X increase!
This project named 'Tulip Monsella' (formerly known as 'Aarohan Residences') by Vipul Ltd went bankrupt and was acquired by Tulip Infratech in a joint venture only in March 2021.
Location being north India's hottest market right now, Tulip knew that if they executed this well and fast, it was going to be a gold mine for them. And today, the flats of this project are amongst the hottest under-construction flats in the town, selling for well over INR 9 Crore for 3BHK. Tulip is not only selling the remaining flats at a huge premium but also plans to launch another set of 5 towers on the remaining land bank attached to this project.
In Gurugram, the presence of big names like DLF, India’s largest listed real estate player, has safeguarded property demand and prices despite many big projects failing to deliver. Recently, DLF acquired 29 acres of land from bankrupt IREO in Gurugram, taking over bad loans amounting to INR 825 crore associated with the land. The liquidity in the market has attracted other major players from different property markets to enter Gurugram in a significant way, including Sobha, Oberoi Realty, and even Godrej, all launching multiple projects post-COVID.
Supporting the argument on a significant increase in liquidity, Anarock’s report recently highlighted that within India, Delhi-NCR has clocked a maximum of 12 land deals for 160 acres during January-March 2024 and 29 land deals for 313 acres in the entire 2023-24 fiscal.
This liquidity is not just limited to land banks and bankrupt residential projects but also extends to under-construction commercial projects, which has been unprecedented in Gurugram.
Japanese investors enter Gurugram!
We shall now talk about 'DLF Atrium Place' being developed by a joint venture of DLF Ltd and Hines. It is a 2.88 msf, Grade A+ office project in Gurugram spread across nearly 12 acres with the first phase of four towers, anticipated to be completed by 2025. In totality, it's a whopping $3 Bn commercial project. This under-construction building just provided the sovereign fund investor - Abu Dhabi Investment Authority (ADIA), with its biggest *Indian* exit of 2024.
But how did UAE's sovereign wealth fund, ADIA, come into the picture? Hines, which is a leading global real estate investment manager owns and operates $93 Bn of property assets on behalf of a diverse group of institutional/private wealth clients with ADIA being one of them. Consequently, ADIA became the ultimate backer as a Limited Partner (LP) in this joint venture on behalf of Hines, which holds a 33% stake, with the remaining stake held by DLF.
Now, Hines has brought in a big Japanese investor - Daibiru Corp, who is investing INR 1,000 Cr in this under-construction 'DLF Atrium Palace' and hence facilitating an exit for ADIA. A large Japanese institutional investor providing an exit for a sovereign fund investor in a world-class commercial office project developed by DLF and Hines is a one-of-a-kind deal. This transaction highlights global investors' confidence in the maturity of the Gurugram real estate market and brands like DLF.
To Summarize
The Gurugram market is now witnessing buoyancy after over a decade of dullness caused by multiple factors, the biggest being the bankrupt builders who destroyed the value for years. This buoyancy supported by immense liquidity, has caused some excesses in a few pockets we discussed in the first half of the blog, but doesn’t not appear as the end to the bull run we are witnessing in the demand for the property, especially in the luxury category.
As Gurugram prepares to add the highest amount of office space it has ever added in the next 1 to 3 years, if everything goes well, this bull run can have many more legs before we call it a day!
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We are not a SEBI registered advisor; personal investment/interest in the shares exists for the company mentioned above; this isn’t investment advice but my personal thought process; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the decision maker is responsible for any outcome.
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