Thursday, June 23

The Real State of Real Estate

I plead guilty to mentioning the Real Estate sector in less than laudatory terms in recent posts. This comes partly from personal experience: some investments where I was promised the Moon have yielded negative to negligible returns. At the same time, I understand the caveat emptor argument – perhaps my ventures were ill-advised, risk-reward are proportional etc. It could equally be sour grapes – my being unnerved by the boom-bust cycle during the last ten years, or simply priced out. Yet, beyond the math, there remains the truth that a lot of us are wary of the sector and its general functioning in our country.

Logically, things should not have been in such a bind. The dictum of being in money when investing in mitti had been common wisdom for ages. Further, India's long term housing needs was a story with many takers a decade ago. As it transpired, friendly interest rates and burgeoning household incomes fed core demand, pushing realty rates north. Investor sentiment, attracted by visible short-term price upswing (perhaps more than long run potential) and overseas liquidity, added to the momentum. Landowners made fortunes selling ancestral holdings in New India’s cities (NCR, Hyderabad, Bangalore, Pune etc). No less was the killing made by those on a 'buy pre-launch sell pre-possession' strategy (while a few risk averse or financially constrained folks like I sat and fretted on the boundary!).

This is where it began to get a bit crazy. Developers overleveraged themselves using every avenue under the sun to raise money – domestically via banks, IPOs (and buyers) as well as cross-border ECB, FDI and PE etc. Yet, unlike in most parts of the world, the bulk of these were not utilized to fund projects or construction. Instead we had a mad race to build ‘land banks’ and continuously launch new projects, with realty valuations feeding off every cycle. End-users were entirely relegated to the sidelines and investor mood swung into highly speculative zone. Fly-by-night developers sprung up dime-a-dozen in urban India, more than a few of them clearly headed towards a debt trap.

Enter the 2008 Great Financial Crisis. Liquidity dried up and demand, speculative or otherwise, took a hit. In the resultant mayhem, the worst off were buyers - New India was abuzz with protests against project delays, or worse, defaults (unlike the Govt of India, I shall desist from claiming credit for avoiding the mess purely by earlier inaction). Even the most well-known realty names saw dharnas and court cases, neither was their response much to write home about. It could actually have been much worse, but for the government virtually leaning on banks to go easy on real estate loans.

Today, we seem to have come off the larger crisis. Realty rates too have regained their peaks, or almost, last year (though 2011 seems generally flat). I am not sure, however, that the core issues in the sector have been fixed for good. In fact, there is more than meets the eye in what I have recounted above too, like much else in our beloved country. The realty multi-layered reality runs thus:
  • fundamental demand has existed for long, a good chunk of it unmet, and can be expected to increase over time – for population and prosperity reasons (the good part);
  • there is massive scope for corruption – not just Money Matters borrower scam variety, but in land acquisition, clearances etc, exploited to the hilt by both the sarkari as well as real estate operator types (the not so good part);
  • high cash dealings make realty a black market haven – Shahid Balwa is ample testimony to its attractiveness to those seeking to launder dirty money, neither is he the last, hence a vested interest for the all powerful: neta, naukarshah, or businessman (the worrying part)
Clearly, the only way out of this jalebi-like intricate mess is reform. Like some issues mentioned earlier on these pages, this is important – for wannabe investors like I; those looking for basic roti-kapda-makan solutions; and those desiring more upmarket addresses. Mid-week, hope is at a premium – yet I set some aside for this. And may be rethink those Noida Expressway SMSs again :)


Sridhar said...

While a great part of what you are saying holds true from a valuation point of view, you only have to check the greatly discounted stock prices of realty companies, the issue many a times is not the ability but the inclination to complete a project.
For an investor, the game is all about resale and cash out and not completion. End users are limited by their presence in many of the projects launched sometime back. And there are practically no laws to help the end user if the projects are delayed.
It makes lot more profitable sense to launch a new project than complete an old one. Emaar, the most notorious of all is yet to deliver even a single completed project but at the same time has more than a dozen new ones on drawing board. Who is buying, I guess more of the investor category than end user. And many a time, post buying one house, people like you and me too fall into the investor category.
But I think, the points you raised here are pertinent and yes, a strong legislation is required. A Malegaon here too, perhaps??

Arpit Vohra said...

I second this proposition of a regulatory body sitting in some by-lanes of NCR.The bigger question remains - Is it actually viable? We are talking of breaking a tight knit lobby, some of its members are themselves part of law governing ministry.My case is one such demonstration to illustrate.Adarsh CHS,annual MHADA lottery are many more instances to substantiate.Real Estate will remain in this state forever in India, I believe.

HcoRealEstates said...
This comment has been removed by the author.
Rahul said...

Good ideas again although I don't agree that the right place to invest is Noida Expressway, even if I think beyond the land acquisition hassles. Whether greater or not, but Noida has clear limits to demand unless it comes up as an industrial hub or gets more upscale logos to grace it which is where Gurgaon has scored.

On the overall issues affecting land and real estate market, I do agree. I just am not as hopeful as you that the regulation is going to happen in a hurry - in the last year since your piece, there has been negligible movement as you know.