National Council of Financial Market Research

POLICY PAPERS

Real estate investment selection and empirical analysis of property prices : Study of select residential projects for Gurgaon, India

The paper studies the residential micromarket of the Gurgaon region of the Delhi National Capital Region in India, to identify the key determinants of real estate investment selection and perform empirical analysis of property prices. A primary survey suggests that the goodwill of the developer is the most important factor for investors in the case of residential properties that are under construction (forward projects). Other factors include location, amenities, project density and construction quality. These factors enjoy almost equal importance in selecting completed projects (spot projects). The factor information can be used to construct property quality rating classes. High risk adjusted returns are provided by high quality spot projects and low quality forward projects. A long run equilibrium relationship is observed between spot projects and forward prices with the former playing the lead role. Gross domestic product and non-food bank credit are the macroeconomic variables that can predict property prices. The highest pre-tax internal rate of return is observed for forward projects in the first quarter holding itself while for spot projects, it is around the eighth quarter. The research has implications for property developers, real estate investors and market regulators. The study contributes to the real estate investment literature on emerging markets.

On the Possible Impact of a Commodity Transaction Tax on India’s Commodity Derivatives : An Empirical Study

In this paper, we have analyzed the relationship between bid-ask spreads, futures market trading activity, and intra-day futures price volatility for five commodities. Analyzing multivariate VAR based IRFs, we find a negative relationship between bid-ask spreads and trading volume and a positive relationship between bid-ask spreads and intraday volatility. We re-examined these relationships under the possible scenario of an imposition of a CTT set at 0.017%. The CTT will increase the transaction costs and therefore we factor it into the bid-ask spreads. We find that any such tax imposition will have an adverse impact on trading volumes by making them fluctuate to a great extent, although it may not significantly change the price volatility in those commodities. Our findings are in conformity with most international studies. We recommend that the government abstain from imposing CTT under the current scenario, when most global markets are removing and reducing taxes to make their trading platforms more competitive. In the era of low economic growth, any flight of capital from market platforms should be avoided. Further, owing to its adverse impact on market liquidity, the CTT will reduce the pricing efficiency of the Indian commodity market. The CTT could also make the price risk management exercise more expensive and, by impacting futures price volatility, might also create inflationary pressures due to the linkage between futures and spot price volatility. Price discovery and risk management are the primary functions of trading platforms and not merely vehicles for fiscal collections. Fiscal collections should be a byproduct of increased activity and a source of income and employment generation through these trading platforms. Therefore, it is advised that the government make an active effort in the development of commodity trading platforms in India by providing them with infrastructure and fiscal incentives and making these markets more price competitive. Being an emerging market, as well as a major producer and consumer of most commodities, India should realize the importance of taking a lead in an era of global markets.