I plead guilty to being less than laudatory of the Real Estate sector in recent posts. This comes partly from experience: investments where I was promised the Moon have yielded negative to negligible returns. Again, I understand the caveat emptor argument (my ventures being ill-advised, risk-reward equation etc). It could be sour grapes too: nerves made me sit out the boom years and now I am priced out. Yet, it remains true that many of us are wary of the sector and its general functioning in our country.
Logically, things ought not to be in a bind. The dictum of being in money when investing in mitti had been ancient wisdom. Further, India's long term housing shortage story had its takers a decade ago. Little wonder then that, as friendly interest rates and rising household incomes fed core demand, realty prices pushed north. Investors 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). 'Buy pre-launch sell pre-possession' became the go-to strategy while a few risk averse or financially constrained folks like I fretted on the boundary!
This is where it began to go crazy. Developers overleveraged themselves using all avenues under the sun to raise money domestically (banks, IPOs) or across borders (ECB, FDI, PE). In short order (unlike most parts of the world), this borrowing stopped funding construction. Instead we had a mad frenzy to build ‘land banks' driven by continuous new project launches, and realty valuations feeding off every cycle. End-users were relegated to the sidelines; investor mood swung into high speculation zone. Fly-by-night developers sprung up dime-a-dozen in urban India, more than a few clearly headed towards a debt trap.
Enter GFC 2008. Liquidity dried up and demand, speculative or otherwise, was hit. It was mayhem. Buyers, caught unware, were the worst off; New India was abuzz with protests against project delays or defaults. The response from even the most well-known realty names was not much to write home; dharnas and court cases became the order of the day. The government could finally not look the other way, virtually leaning on banks to go easy on real estate loans to stop the bleeding for getting worse.
Today, we have come off the crisis edge. Property prices almost regained their peaks last year (although 2011 appears flat). The fundamental issues in the sector, however, have not been fixed for good. Like much else in our beloved country, there is more than meets the eye:
Logically, things ought not to be in a bind. The dictum of being in money when investing in mitti had been ancient wisdom. Further, India's long term housing shortage story had its takers a decade ago. Little wonder then that, as friendly interest rates and rising household incomes fed core demand, realty prices pushed north. Investors 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). 'Buy pre-launch sell pre-possession' became the go-to strategy while a few risk averse or financially constrained folks like I fretted on the boundary!
This is where it began to go crazy. Developers overleveraged themselves using all avenues under the sun to raise money domestically (banks, IPOs) or across borders (ECB, FDI, PE). In short order (unlike most parts of the world), this borrowing stopped funding construction. Instead we had a mad frenzy to build ‘land banks' driven by continuous new project launches, and realty valuations feeding off every cycle. End-users were relegated to the sidelines; investor mood swung into high speculation zone. Fly-by-night developers sprung up dime-a-dozen in urban India, more than a few clearly headed towards a debt trap.
Enter GFC 2008. Liquidity dried up and demand, speculative or otherwise, was hit. It was mayhem. Buyers, caught unware, were the worst off; New India was abuzz with protests against project delays or defaults. The response from even the most well-known realty names was not much to write home; dharnas and court cases became the order of the day. The government could finally not look the other way, virtually leaning on banks to go easy on real estate loans to stop the bleeding for getting worse.
Today, we have come off the crisis edge. Property prices almost regained their peaks last year (although 2011 appears flat). The fundamental issues in the sector, however, have not been fixed for good. Like much else in our beloved country, there is more than meets the eye:
- core demand stays strong, a good chunk unmet. It ought to rise over time for population and prosperity reasons (the good);
- scope for corruption is unabated, ranging from Money Matters borrower scam variety to land acquisition, clearances etc (the bad);
- cash preponderance makes it a money-laundering magnet. Shahid Balwa types shall fester, with vested interest from powerful neta-naukarshah-businessman nexus (the ugly)
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4 comments:
Amit,
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??
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.
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.
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