Segregated Funds Group Residential “Forward” Vs “Spot” Market : Empirical Analysis of Property Prices & Investment Selection (A Case Study of Gurgaon, India) In Collaboration with: Department of Financial Studies, South Campus, Delhi University & NCFMR JLL SFG Technical Research Paper 1 / Sep 2014
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Segregated Funds Group
Residential “Forward” Vs “Spot” Market :
Empirical Analysis of Property Prices &
Investment Selection
(A Case Study of Gurgaon, India)
In Collaboration with:
Department of Financial Studies,
South Campus, Delhi University &
NCFMR
JLL SFG Technical Research Paper 1 / Sep 2014
Agenda
I. Introduction
a) Defining Spot and Forward Residential Real Estate Market
b) Research Background
II. Research & Analysis
a) Defining Key research questions
b) Key results and empirical analysis
III. Key Findings Summary
IV. Predictive Analytics
V. Annexures
1
Recently….
2
3
News & Data
Does Data create News? Can we Predict the News using Data?
4
Data “..Data is no longer regarded as static… data is becoming the raw material of business.. Used to create economic value, innovation and new Services and can reveal secrets to those with the tools to listen..”
•Viktor Mayer Schonberger & Kenneth Cukier in their book “Big Data”
“Small Data” Correlation:
Comparable” & Micro
market based data
analysis approach
Causality & Correlation:
Sampling & Statistical
Hypothesis based data
analysis.
“Big Data” Probabilistic
model
Probabilistic & Aggregate
Data based approach
Future Past Present
Data Analytics & Real Estate Investment Management
Data Analysis is key to “underwriting” assumptions, Investment selection, asset
management and driving overall risk adjusted returns
Data Analytics key to
Investment management
in the future
6
I. Introduction
Introduction
a) Defining Spot &
Forward Residential
Real Estate Market
b) Research Background
I. Introduction
7
Forward and Spot Market Definition
FORWARD MARKET
SPOT MARKET
Time = t0 Time – t1
1st Quarter
2nd Quarter in 5 years (20 quarters)
Booking amount =
10% (Buyers equity)
5% installment
(Buyers equity)
Buyers equity = 20%
Mortgage Financing (LTV) at t0 = 80%
Monthly EMI based on 20 year loan
We Define Under Construction as “Forward” and Completed as “Spot”. The Forward is not a
direct “derivative” of the spot as the underlying asset (residential unit) is also being created.
However in 5 years a Forward asset becomes a Spot
Under construction
Completed
land
5% installment
(Buyers equity)
Mortgage Financing (LTV) = 80% at time t3 (after buyer has
paid 20% equity) Monthly EMI based on 20 year loan
The Starting Point…
8
#1 Residential “Prices”: Data based on “Price” of transaction without “Attribute” analysis
#2 Market “Separation” View : We view Forward Market as an indirect “derivative” of the Spot market. A Long run relationship needs to be identified
#3 Market “Causality”: Data focusses on “What” and not “Why”. Information flow between Spot and Forward needs to be analysed
#4 Perception Vs Pricing: Most studies focus on Pricing leading to Perception. The opposite may be true.
#5 Investment Selection & Returns: Can Risk Adjusted Returns Probability aid
Investment Selection?
Research Background - Gurgaon Micro Market Analysis
9
Gurgaon Micro-markets
3 Micro markets
1. Golf Course Road,
2. Golf Course Extn. and
3. Sohna Road
97 projects were
evaluated
1. 37 (Completed) Spot
2. 60 (Under construction)
Forward
Period of Study: Q1
2008 to Q4 2013
The projects were
detailed out in terms of:
1. Pricing;
2. Number of units;
3. Qualitative attributes;
4. Forward Projects became
Spot 5 years from launch
10
II. Research & Analysis
Research & Analysis
a) Defining Key Research
Questions
b) Key results and empirical
analysis with methodology
I. Perception Survey
II. Data Stationarity &
Statistical Tests
III. Long Run Relationship
between Forward and
Spot Markets
IV. Market Value of
Invested Equity (Spot
Vs Forward)
V. Risk Adjusted Return
Analysis
VI. Quality Premiums
Analysis
Key Research Questions (Forward vs Spot)
Attributes &
Investment
Selection
1 Risk
Adjusted
Returns
4 Forward vs
Spot - Long
Run
Relationship
2 Market Value
of Invested
Equity
Intra Market
Premium
3 5 What factors
do buyers
evaluate in
residential
property?
How are Spot
and Forward
market
related?
How does
value of
investment
vary in Spot
and Forward?
How does risk
adjusted
return vary in
Spot and
Forward?
Do buyers
price
differentiated
quality?
11
Key Research Questions (Forward vs Spot)
Attributes &
Investment
Selection
1 Q1) Attributes & Perception
What are Key Attributes defining investment selection?
What are Relative Weightage of Attributes assigned by buyers?
Methodology
Detailed Primary & Secondary Survey carried out.
5 Broad Attributes agglomerated from 29 sub-parameters
97 Projects ranked against all sub-parameters
Weightage assigned to each parameter
Composite Score on a scale of 1 to 10 identified for each
project
Projects Classified into A, B+, B- and C category on basis of
composite score
Cronbach Alpha : 0.816
indicating internal reliability
of scale of survey. We
received 82 detailed
responses.
12
Key Results & Analysis
Attributes &
Investment
Selection
1 The properties were divided into homogeneous groups
separately for Spot and Forward according to their
composite scores.
Range of composite score of for Spot: 5.67 to 8.45.
Range of composite score for Forward : 4.67 to 9.17
Division of homogeneous groups
(for both Spot and Forward) :
• Above 7.5 : Category A
• 6.75 – 7.5 : Category B+
• 6 to 6.75 : Category B-
• Below 6 : Category C
Composite score =
Rank of property for the parameter * Weightage of particular parameter
13
Key Research Questions (Forward vs Spot)
1 Forward vs
Spot Long
Run
Relationship
2 Q2) How are Forward and Spot Markets related
Are these Markets Correlated or Co Integrated
Testing for which market leads and which follows
Testing for Causality and direction of information flow
What is the long term association between
macroeconomic variables and Spot/Forward prices?
Methodology
Weighted Mean Prices tabulated for projects in category
Augmented Dickey Fuller Test: Data Stationarity
Johanson Co-integration Test: Market Co integration
Vector Error Correction Model (VECM) Test: Spot
Market dominant Forward follows
Granger’s Causality Test: Information flows from Spot
to Forward.
14
Key Results & Analysis
1 Forward vs
Spot Long
Run
Relationship
2
Results
ADF test Conclusion:
Data was stationary for First / Second difference of prices for all
categories. This implies the mean and variance of the data will be
the stable over time for the Spot and Forward market. However at
the price level the data was non stationary
Johanson Co-integration test Conclusion:
Spot and Forward market share common long run information
for each category (A, B+, B-, C) and there is a price discovery
process. Therefore, showing informational efficiency between the 2
markets.
VECM test Conclusion:
The spot markets leads the price discovery process and the
forward market follows it for all classes (A, B+, B-,C) In the event
of deviation from equilibrium in the short run, it is the forward market
that makes a greater adjustment than the spot market in order to
restore the equilibrium.
Granger’s Causality Test Conclusion:
It is confirmed that Spot market is causing Forward market.
Spot and Forward Markets
are Co-integrated with Spot
Leading the Forward and
information flowing from
Spot to Forward
15
Relationship between macroeconomic variables and Spot /Forward prices Forward vs
Spot Long
Run
Relationship
2
Key Results & Analysis
16
Spot Market
Category GDP
Rupee / $
Exchange
Rate
Inflation Bank
credit
Home loan
interest
rates
Stock
Market
(NIFTY)
Time period for Property prices to follow
macro-economic variables
A × × × GDP - 4 quarters ; Bank Credit - 1 quarter
B+ × × × × -
B- × × GDP - 1 quarter; Bank Credit - 1 quarter
C × × × GDP - 1 quarter; Bank Credit - 1 quarter
Forward Market
Category GDP
Rupee / $
Exchange
Rate
Inflation Bank
credit
Home loan
interest
rates
Stock
Market
(NIFTY)
Time period for Property prices to follow
macro-economic variables
A × × × GDP - 4 quarters ; Exchange Rate - 4
quarters
B+ × × × × GDP -3 quarters ; Bank credit - 3 quarters
B- × × Bank Credit - 4 quarters
C × × × GDP - 2 quarters ; Bank Credit - 2 quarters
India’s
GDP
Currency
Movements
India’s
Inflation
(WPI)
India’s total
non-food
bank credit
India Home
loan Interest
Rates
Stock
Market
(NIFTY)
Valid relationship between
macro-economic variable
and Spot/Forward
Spurious relationship
between macro-economic
variable and Spot/Forward
× No relation between
macro-economic variable
and Spot/Forward
Key Research Questions (Forward vs Spot)
Market Value
of Invested
Equity
3 Q3) How does Market Value of Invested equity vary
What is the general trend of invested equity in Forward
and Spot markets independently
What is the long run equilibrium relationship of invested
equity in Forward and Spot within each category
Invested Equity in Spot market at time t :
σspot t = Pspot 0 * [X0 + i*∑t t=0(1- X0 )] + (Pspot t - Pspot 0 )
Where,
• (Pspot 0*X0 ) : upfront down payment (at time t=0);
• Pspot 0 [i*∑t
t=0(1- X0 )] : invested debt
Both these two factors combined to form the overall equity invested factor
• (Pspot t - Pspot ) : market premium
Invested Equity in Forward market at time t :
σfwd t = Pfwd 0 * ∑2
t=0Xfwd t + Pfwd 0 * i3* ∑tt=3Xfwd t + (Pfwd t - Pfwd 0)
Where,
• (Pfwd 0 * ∑2
t=0Xfwd t) : upfront down payment (at time t=0, 1, 2)
Sharpe Ratio 0.2588 0.4433 0.3733 0.2785 0.2395 0.1555 0.2260 0.3348
B+ properties give
highest return in
Spot market
C properties give
highest return in
Forward market
21
4
Key Research Questions (Spot vs Forward)
Intra Market
Premium
5 Q5) What has been the Impact of Perception on Pricing
What are buyers willing to pay from moving from a lower
category to higher category in Forward and Spot Market
Independently.
Do buyers discount or compound price commensurate to
perception quality?
Methodology
Each property in our data has been given a composite
score according to their quality and goodwill.
Weighted Mean Prices tabulated for projects in category
We analysed the trends in the extra price premium
buyers pay for moving from a lower category to a higher
category residential property.
22
Key Results & Analysis
Intra Market
Premium
5 3392
293
3966
-65
-1000
0
1000
2000
3000
4000
5000
Spot Market Quality Premium
Moving from Sb+ to Sa Moving from Sb- to Sb+ Moving from Sc to Sb-
-276
3461
1979 1562
-1000
0
1000
2000
3000
4000
Forward Market Quality Premium
Moving from Fb+ to Fa Moving from Fb- to Fb+ Moving from Fc to Fb-
Higher Premium for slight
improvement (B- to B+) in
perception in both Markets.
Category A has been
heavily Price discounted
by buyers for a short while
23
III. Key Findings Summary
Key Findings Summary
Attributes &
Investment
selection?
1 Risk
Adjusted
Returns
4 Fwd. vs Spot
Long Run
Relationship
2 Market Value
of Invested
Equity
Intra Market
Premium
3 5 1. Developers Goodwill (Branding) perception is a high contributor to Investment Selection in Forward Market
2. Spot and Forward Markets are Co-integrated with Spot Leading the Forward and information flowing from
Spot to Forward
3. The Slope of The Forward to Spot Ratio is lowest in Category B+ and highest (upward trending) in Category C
4. In the Spot market, higher quality projects (B+) perform better, while in the Forward market, the lowest
quality projects perform better in terms of risk adjusted returns.
5. Higher Premium for slight improvement (B- to B+) in perception in both Markets. Category A has been
heavily Price discounted by buyers for a short while
25
IV. Predictive Analytics Predictive Analytics
a) Building Blocks of the
model
Predictive Model
Predictive Analytics based on
Information flow from Spot
Relationship with Spot
Investment return
benchmarks
Information flow to Forward
Relationship with Forward
Investment Return
benchmarks
Perception analysis of attributes
LTV, interest rates and Macro
economic factors
Price as per category
Perception analysis of attributes
Interest rates & Macro economic
factors
Price as per category
Spot Forward
Building Blocks of the Model
Disclaimers JLLIA
28
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