Ranking Indian Cities based on Home Price Movement

Increasing mobility and rising income levels of Indian families are adding an investment perspective to home buying. realism.IN analyzes the home price appreciation (from year 2007 - 2011) of 15 cities comparing them with a combined perspective of risk and return based on RESIDEX data released by the National Housing Bank. Download full paper for the explanation of the graphic below and more. Click here to download for free. Once you submit the form, you will be given a link to download the file. 




Image: Ranking Indian cities based on real estate risk and return

Seasonality in Home Prices

realism.IN expert finds out the seasonal effects of home prices and how to correct for them in valuation; a study published by the Appraisers Journal

Valuation of real estate is a complex activity. In addition to the intrinsic characteristics of a piece of property, a number of extrinsic factors play a role in putting a price on real estate. For example, however the quality of construction (good or bad), there is a 'bias' effect on the property-price based on the locality in which it stands. Some researchers found that a small house in a nice neighborhood enjoys a positive value premium but the contrary was not true (i.e. a large house in an inferior neighborhood suffers from a price discount).  Of course, when determining price a number of factors are into play including intrinsic factors such as size, number of bedrooms, construction quality, number of bathrooms, etc. and extrinsic factors such as locality, access to public transport, security, proximity to market place and so on. 

When an appraiser (valuation expert) is asked to put a price on a real estate asset, s/he considers most of the factors mentioned above. However, note that all these factors are non-temporal; meaning that they do not vary so readily with time. The appraiser, in the simplest valuation approach, compares the property under question with some similar properties which were sold recently to ascertain the price. Most often the 'temporal' (time dependent) factors are ignored which may lead to faulty valuations. The home price movements may have three components: trend, seasonality and random changes. A number of indices may claim to capture the 'trend' component. However, the seasonality component may be ignored and may often hide behind the 'random' component. A study by Dr. Vivek Sah, Head of Strategy at realism.IN and a professor of real estate at the University of San Diego (USD) and Dr. Norm Miller (USD) addresses the issue of seasonality in home prices. The paper titled "Correcting for the Effects of Seasonality on Home Prices" will soon be published by The Appraisal Journal. 

"By definition, a comparable is assumed to have similar characteristics to that of the property being appraised and adjustments  are made for time since sale, size, quality, features and location..." says the paper, "...when appraisers must reach back several months for comps it is doubtful that they consider making a seasonal adjustment to estimate what the comp would sell for if it sold in the current month, beyond some general market trend for appreciation or depreciation patterns which attempts to adjust for the average annualized time impact."

That home price is independent of the time of the year when a house is sold, may be an erroneous assumption, claims the study: "say for example, the subject property is being appraised in the month of June, while the comparable property being used was sold in the month of January. This would mean that the price of the property has to be finally adjusted (after adjusting for all other factors) by the difference in the seasonal adjustment factors between the two months...".
"Although the study is based on the U.S. data, the phenomenon of seasonality in home prices may be universally applicable," says Vivek Sah, Ph.D., "and similar studies should be carried out in India to separate the seasonal components from the overall house price indices... we are in talks with data providers for potential research collaborations in India." 

Conducting seasonality studies requires a relatively larger time series data of house prices indices. Most house price indices in India are very recent. For example, although holding a great promise for future research, the Residex (from the National Housing Bank) was started only in 2007 and has been released at rather irregular intervals. While data availability is a basic requirement, substantial amount of academic rigor, econometric skills and professional insights are required to develop a meaningful seasonal series for house prices. realism.IN offers expertise in these areas and is exploring collaboration with potential data providers.

Some pertinent References:

• V. Sah & N. Miller, "Correcting for the Effects of Seasonality on Home Prices," The Appraisal Journal (2012), forthcoming
• K.E. Case and R.J. Shiller, “The Efficiency of the Market for Single Family Homes,” American Economic review (1989): 125-137.
• K.E. Case and R.J. Shiller, “Forecasting Prices and Excess Returns in the Housing Market,” Journal of the American Real Estate and Urban Economics Association (1990): 253-273.
•  J. Goodman, “A Housing Market Matching Model of the Seasonality in Geographic Mobility,” The Journal of Real Estate Research (1993): 117-138.
• C.L. Kuo, “Serial Correlation and Seasonality in the Real Estate Market,” Journal of Real Estate Finance and Economics (1996): 139-162.
• G. Kaplanski and H Levy, “Real Estate Prices: Seasonality's Sentiment Effect,” Working Paper (2009): Available at SSRN: http://ssrn.com/abstract=1438826
• N.G. Miller, V. Sah, M. Sklarz and S. Pampulov, “Is there Seasonality in Home Prices – Evidence from CBSAs,”, Forthcoming, Journal of Housing Research (2011)

Green Buildings protect against Down Markets: realism.IN expert

realism.IN expert discovers how 'green' real estate rental premium changes in favorable direction during down-markets; a study published by the Journal of Sustainable Real Estat.

Green office properties enjoy several types of premiums over comparable non-green buildings. A number of studies by researchers across the globe analytically establish the economic benefits of investing in green buildings. Several of these studies are focused at developed markets due to availability of data in these places. Yet, useful insights may be derived from these markets which could also be applied to Indian real estate markets. 
It has been found that green buildings (e.g. LEED certified buildings) enjoy around 6% to 18% higher rental rates. When comparing the sale price of real estate, green buildings outwit non-green buildings by up to 118%! Similarly, some studies have shown that the occupancy rates in green buildings are around 8% higher compared to non-green counterparts. Studies conducted by different researchers in the Netherlands, the United Kingdom, Singapore and Australia have established that the 'green' premium of buildings is not limited to the U.S. only; but is rather a universal phenomenon. On the other hand, the findings were contradictory in Japan where a study found that the buyers of green condominiums (multistory residential units for sale) capitalize the high maintenance cost of green buildings into the price. Therefore, green units sell at 6-10% lower prices. Nevertheless, the difference they found was statistically significant. In other words, green real estate has significantly different performance characteristics compared to non-green properties.

A recent study conducted by Prashant Das, the Head of R&D at realism.IN (and a research scholar at the Georgia State University, USA) along with Alan Tidwell (Columbus State University, USA) and Alan Ziobrowski (Georgia State University, USA) found that the rental premium of green commercial office spaces changes with market cycle. The paper titled "Dynamics of Green Rentals over Market Cycles..." (2011, Journal of Sustainable Real Estate published by the American Real Estate Society and supported by CoStar) asserts that green office properties were found to provide a 'hedge' against the market cycle. The study suggests that the changes in green premium 'tend to stabilize rental rates across various real estate market conditions'. The study also establishes that the 'green premium is counter-cyclical: positive and significant in down-markets, but substantially reduced in up-markets.'

This study provides some additional insights which are equally interesting. For example, quarterly changes in the rental rate of commercial office spaces is somewhat predictable; which is not true for non-green buildings. The study also suggests: '...as more green developments are constructed ... the dynamic nature of green premiums may diminish.' Green building premiums may potentially be attributed to their novelty effect and the economic premiums will shrink as more green buildings are supplied. If we read between the lines, real estate investors who would want to capitalize upon the green premiums should not wait for very long. More the competitive supply, lower the premiums!

Are these findings equally relevant to Indian real estate markets? There are very few reasons to believe that they are not!  After all, what is found in studies about the 'green premium' related to one country (U.S./Europe/Asia) has, more or less, been  corroborated by studies in other countries a well. The advent of green commercial spaces in India is almost contemporary to that in other nations. The novelty effect of green buildings is relevant to Indian buildings in similar fashion to other nations. Also, green buildings are quite distinguishable in India as in other nations. "Yet, we need concrete empirical studies about Indian buildings in order to establish the findings for India," says Prashant, "we hope that the IGBC (India Green Building Council) shall be as generous with data to our research efforts on India as the USGBC has been in the US." realism.IN has been working on empirical analysis pertaining to the Indian real estate markets for green buildings. However, data scarcity poses a major challenge.


Further readings:

• Das, P., Tidwell, A., & Ziobrowski, A. (2011). Dynamics of Green Rentals over Market Cycles: Evidence from Commercial Office Properties in San Francisco and Washington DC. Journal of Sustainable Real Estate, 3 (1).
• Dermisi, S. V. (2009). Effect of LEED rating and levels on office property assessed and market values. Journal of Sustainable Real Estate , 23-47.
• Eichholtz, P., Kok, N., & Quigley, J. M. (2009). Doing Well By Doing Good? Green. Retrieved from UC Berkeley: Center for the Study of Energy Markets: http://escholarship.org/uc/item/4bf4j0gw
• Fuesrt, F., & McAllister, P. (2009). An investigation of the effect of eco-labeling onn office occupancy rates. Journal of Sustainable Real Estate , 49-64.
• Harisson, D., & Seiler, M. (2011). The political Economy of Green Office Buildings. Journal of Property Investment and Finance , 29 (4/5), 551-565.
• Miller, N. G., Pogue, D., Gough, Q. D., & David, S. M. (2009). Green buildings and productivity. Journal of Sustainable Real Estate , 65-89.
• Wiley, J. A., Benefield, J. D., & Johnson, K. A. (2008). Green design and the market for commercial office space. Journal of Real Estate Finance and Economics .

realism.IN @ American Real Estate Society

realism.IN experts conduct an empirical study which compares and contrasts the real estate development process between various types of companies in India and the U.S. The research will be presented at the American Real Estate Society Conference in Florida in April 2012

A paper co-authored by Realism Real Estate Consultancy Pvt. India Ltd. (realism.IN) titled "The Real Estate Development Process: An Empirical Analysis and Construction of Descriptive Models for the U.S. and India" has been accepted for presentation at the American Real Estate Society (ARES) conference. It will be held in St. Petersburg, Florida, USA in April 2012. The ARES conference is one of the world's largest real estate research events which attracts global participation of real estate thought leaders, professionals and researchers.
The research paper has been co-authored by Divyanshu Sharma & Vinod Singh (realism.IN: New Delhi / Guam), Prashant Das (Georgia State University : Atlanta), Vivek Sah & Louis Galuppo (University of San Diego: California). realism.IN facilitated a "process-tracing" survey in which an online platform equipped with "skip-logic" technology is utilized. The survey documents the process of property development by the decision makers in real estate development companies. Over 65 Indian real estate companies including some very large and start-up companies participated in the study. The researchers at the University of San Diego, with assistance from realism.IN, are currently collecting data from the U.S. developers.

Divyanshu Sharma
Head of Operations

Unlike point estimates (such as company size, investment amount, return on investments, etc.), it is challenging to mathematically analyze and model a process adopted by a firm in delivering the final output (e.g. developed properties). That is why, in spite of some "anecdotal" documentations of the real estate development process in India, to the authors' knowledge. there are no studies which address the issue statistically. Surprisingly, no such studies seem to have been done in the U.S. as well. The study adopts a unique probability distribution test to compare and contrast the real estate development processes between the U.S. and Indian samples and within the sub-samples of India. The method is based on a paper titled "How Appraisers do their Work" authored by Prof. Julian Diaz III. The analysis of Indian developers suggests that the overall real estate development process in India differs from the normative process suggested for the U.S. While the difference is significant in certain sub samples (such as the older, larger firms; or those operating in smaller cities or not seeking foreign investment); no differences were detected in the subsamples which are complimentary to these (e.g. newer, smaller firms operating in larger cities or seeking foreign investment). The study further provides details on where the differences actually exist.

Vinod Singh
Head of Innovation

'Although it may appear to be a purely academic endeavor', says Divyanshu Sharma, a co-investigator and the Head of Operations at realism.IN, 'we had a very specific purpose: to objectively understand the "what's" and "where's" of the differences. This will not only help the real estate developers in filling their skill gaps (and make their processes more efficient); but will also prepare them in standardizing their processes for effective collaborations.' The study is particularly timely as the world witnesses cross-national collaborations for real estate development projects. 'In the wake of economic slowdown in the domestic markets, a number of U.S. developers such as Hines, Trump, Tishman Speyer among others are now trying to tap the Indian markets even more eagerly. An analytical understanding of how their development processes differ from the Indian players will help both the sides', adds Vinod Singh, another co-investigator and the Head of Technology &  Innovation at realism.IN.
realism.IN intends to release an 'industry-friendly', well illustrated report with the findings of the study which should be available from the company website soon.


 About realism.IN

The new 'ism' in Indian real estate

realism.IN™ (Realism Real Estate Consultancy Pvt. India Ltd.) is a partnership of academicians and industry professionals striving to provide high quality knowledge backbone to the real estate industry in India. realism.IN™ is the first of its kind eLearning content provider to group customers (educational institutions, corporates and organizations) offering real estate education deeply embedded in the Indian context and reinforced by the U.S. pedagogical principles. In addition, realism.IN™ conducts high quality research independently and for clients. realism.IN™ also publishes focused white papers and OpEds to its subscribers and clients. More at http://www.realism.in