J.P. Morgan - India Real Estate

India Real Estate Sample Housing Start Up Index released. No dramatic read-through but could be a game changer longer term

RBI has today launched the Housing Start Up Index taking baseline data from 27 cities from 2009-11. The aim is to first stabilize the methodology and then extend the coverage to 300 cities and eventually improve the frequency to release the data on a frequent (quarterly) basis. Compilation of housing starts has never been done exhaustively, given the presence of multiple authorities at different levels and lack of any methodical approach to collating data. This index, if stabilized, may eventually lead to better policy prescription for the Real Estate sector (10% of GDP and relationship with 250 ancillary industries) which has frequently complained about excessively tight policies and regulations governing it. Also this will give markets likely a better nuanced understanding of the wide variation seen in trends across different cities.

· HSUI could improve policy prescription-RE sector has been very tightly controlled in terms of overall policy and suffers from various procedural delays in granting approvals. An HSUI, by reflecting the data back to relevant government authorities and also making it public, could help reduce approval lags and also reduce lead times on timeliness and extent of measures regarding policy. At the margin we note that regulators have taken a slightly lenient view given the general slowdown, by reducing risk weights and provisioning norms for residential construction lending.

· Data read through confirms long held belief that Tier2 is doing better than metros- the data albeit released with a huge lag confirms the belief that new construction growth has largely been led by Tier 2 cities as opposed to Metros, which in general have seen limited recovery post 2009. Post 2014, however, we think the equation will likely change in the favor of metros as city expansion, localized infrastructure creation will likely create opportunities for suburban growth. Bangalore as of now continues to be the most favored market

Figure 1: Quarterly Housing start up index based on 27 cities data.

Source: RBI

Real Estate

JPMorgan-- Relatively aggressive bidding for 900 MHz spectrum; 1800 MHz final spectrum price not much different from reserve price

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Relatively aggressive bidding for 900 MHz spectrum; 1800 MHz final spectrum price not much different from reserve price

The DoT released the status report of spectrum auction after day 1 (and 7 rounds).The 1800 MHz spectrum price is settled for all circles except Gujarat, where spectrum demand is still higher than supply. In 900 MHz band, Mumbai spectrum price is yet to be finalized. As we had expected, there is relatively aggressive bidding for 900 MHz spectrum as incumbents have to defend their existing spectrum holdings. The final price for 1800 MHz spectrum is not meaningfully higher than reserve price in 21 of the 22 circles (Gujarat spectrum price is yet to be discovered). The information about who has won how much spectrum (which we believe is the most critical question) will be released after end of the auction. As discussed below, Reliance Jio seems to be actively participating in some circles (especially in the metros for 900MHz going by the price).

· Auction is still ‘on’ for 900 MHz spectrum in Mumbai and 1800 MHz spectrum in Gujarat. The demand for spectrum is higher than spectrum put on auction in these two circles. As we had suggested in our earlier note (“Reliance Jio's earnest money deposit point to serious pan-India ambition; potential negative for the sector & incumbents” dated Jan. 19^th 2014), the supply-demand condition is relatively favorable for 1800 MHz spectrum in the current auction. Hence, spectrum reserve price (or price not much higher than it) will be the final/discovered price in 18 of the 22 circles for 1800 MHz spectrum as supply for spectrum is apparently higher than demand in these circles. Operators will pay a modest premium on initial spectrum reserve price for 1800 MHz spectrum in Bihar (8% premium), UP (west) (6% premium) and West Bengal (1% premium) circles. Auction is still on in the Gujarat circle as operators have bid for 14.2 MHz spectrum (at the end of round 7) vs. availability of 12.0 MHz spectrum only. Gujarat 1800 MHz spectrum price is already 4% above initial spectrum reserve price and will likely increase further. Similarly, Mumbai 900 MHz spectrum demand of 21 MHz is also higher than supply of 16 MHz and incumbents (Bharti and Vodafone) will try their utmost to retain their existing 900 MHz spectrum.

· Relatively aggressive bidding for 900 MHz spectrum; Mumbai final spectrum price yet to be discovered. Final spectrum price is likely to be meaningfully higher than reserve price for 900 MHz spectrum in all three circles (Delhi, Mumbai & Kolkata), where 900 MHz spectrum has been put on auction. Mumbai 900 MHz spectrum price after day 1/round 7 is 44.3% higher than spectrum reserve price. It is about 2.3x final 1800 MHz spectrum price and will move up further as aggregate demand for 900 MHz spectrum is 21 MHz vs. available supply of 16 MHz. Bharti and Vodafone own this spectrum currently and they will likely bid aggressively to retain their spectrum. We currently do not know who the challenger (operator) in this circle is (it is likely Reliance Jio as per news reports). Kolkata 900 MHz spectrum price has settled 38.5% above initial spectrum reserve price, while Delhi spectrum price has tentatively settled at 19.1% above initial reserve price. Kolkata and Delhi 900 MHz spectrum price has settled at 2.4x and 2.0x 1800 MHz spectrum price. We note that Bharti and Vodafone will likely try their best to retain their existing spectrum holding in these circles as their current infrastructure supporting 900 MHz spectrum will go redundant if they fail to win it back. It will imply significant capex.

· List of winners is not yet available; whether or not Reliance Jio wins significant spectrum will impact the future of the industry. The DoT will release the list of winners after the culmination of the auction in all bands and circles. Reliance Jio seems to be actively participating in some circles (especially in the metros for 900MHz going by the price). The million dollar question is whether Reliance Jio will win significant spectrum across circles in the current auction. We believe that just the higher spectrum price is a one-time hit and the impact is easy to quantify/digest. However, the event of Reliance Jio’s (expected) significant entry (if it gets evident from the auction outcome) is the bigger worry. We would judge “significant” entry by Reliance Jio based on the circles for which it bags spectrum, amount of spectrum won and the nature of the spectrum (900 MHz versus 1800 MHz).

Table 1: Relatively aggressive bidding for 900 MHz spectrum; spectrum price yet to be discovered for 1800 MHz spectrum in Gujarat and 900 MHz spectrum Mumbai

		Spectrum put on sale	Aggregate demand after round 7	Provisional winning price per MHz after round 7	Initial spectrum reserve price	Premium on reserve price at the end of Round 7
		in MHz	in MHz	in mn per MHz	in mn per MHz
1800 MHz spectrum
	Andhra Pradesh	22.6	18.4	1,630	1,630
	Assam	11.4	11.2	70	70
	Bihar	4.2	2.2	400	370	8.0%
	Delhi	22.8	17.6	2,190	2,190
	Gujarat	12.0	14.2	1,487	1,430	4.0%
	Haryana	16.4	5.0	270	270
	Himachal Pradesh	20.4	10.2	60	60
	J&K	6.2	1.8	50	50
	Karnataka	24.6	22.6	1,550	1,550
	Kerala	28.0	20.6	520	520
	Kolkata	26.8	17.0	730	730
	Madhya Pradesh	19.2	10.6	430	430
	Maharashtra	14.0	13.8	1,730	1,730
	Mumbai	25.2	18.0	2,070	2,070
	North East	26.8	14.4	70	70
	Orissa	28.0	10.0	160	160
	Punjab	18.4	12.8	540	540
	Rajasthan	20.8	10.4	260	260
	Tamil Nadu	30.2	10.0	2,080	2,080
	UP (east)	9.8	6.2	610	610
	UP (west)	2.4	0.6	657	620	6.0%
	West Bengal	13.0	5.6	212	210	1.0%
900 MHz spectrum
	Delhi	16.0	16.0	4,289	3,600	19.1%
	Kolkata	14.0	13.0	1,732	1,250	38.5%
	Mumbai	16.0	21.0	4,732	3,280	44.3%

Source: DoT, J.P. Morgan; Note: Highlighted cells suggest circles where demand is higher than supply after round 7 of auctions; red highlighted cells suggest where spectrum price is yet to be discovered

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