Here is an email I received from a reader of The Safal Niveshak Post some time back.
I am an NRI living in the Gulf, with no plans to return to India in the near future. Now the problem is that, my wife and all her relatives are insisting that I invest in real estate in Chennai. They feel that it is the real “solid” investment, all the rest is in paper. They keep giving me examples of other people, especially relatives, who have seen terrific returns by investing in real estate.
But, when I see the current prices when compared to the rental yield and the risk and hassle which we take upon ourselves when we invest in real estate, it makes me hesitate. Also when I went to the OMR (Old Mahabalipuram Road) I saw at least 15,000 to 20,000 new units coming up…including Hiranandani, Purvankara and the others. Most of the purchasers there are investors who are planning to rent them out.
Will it not create a glut of housing in the near future and bring down the rents even more?
I already have an own house in Chennai, so, even when I come to India, I have a place to stay.
Because I’m an NRI, all my money is white and I feel that the high prices in Chennai or anywhere in India, are due to a large extent due to the black money involved.
Another reader asked me recently why I don’t like companies from the realty sector as I’ve mentioned on the StockTalk page.
Then, one attendee at the Art of Investing Workshop in Chennai asked my opinion on the future of realty prices in India.
While I have provided my answers to the respective gentlemen, I thought a post on this subject was long overdue. Thus I am writing today my personal views on where I see realty prices in India moving in the future.
Let’s start with…
What ails India’s real estate?
Well, there is clearly a demand for real estate in India.
Unlike the US or other developed countries that continue to bear the burden of their housing bubble burst, most people in India don’t have their first home. And most of those who have their first homes, it’s almost like a cubicle.
As per some statistics, India has an unfulfilled demand for around 20 million homes, 5 million office units, and around 150,000 hotel rooms.
Then, we require hundreds of schools and colleges to educate millions of children. Apart from this, we also need to construct hospitals to take care of millions of elderly people who have been ignored by their children.
Roughly, India needs to build some 3 billion square feet of property over the next 5-10 years to partially meet some of this demand.
So I see no problem in terms of demand – there’s going to be a massive expansion in the amount of square footage that people (and companies) will be buying in India going forward.
So what ails India’s real estate?
The only – and the biggest – problem I see with real estate in India is that the sector is very closely connected to the politicians.
Sam Zell, one of the most famous real estate experts globally, was in India in late 2006. When asked about his view on the real problems in the Indian real estate market, he said something like this – “…there is no shortage of land in India; there is a shortage of zoned land.”
Zoned land is what the politicians ration to builders thus creating artificial shortages.
So the shortage of zoned land – on which real estate is constructed – is a man-made shortage in India…a shortage created by policy.
As we saw during the license raj days of 1980s, you had the Ambassadors and Fiats as the only cars selling in India. These were the worst cars in the world selling at one of the highest prices for quality in the world.
This is exactly what the problem is with India’s real estate.
You have limited amount of real estate being sold because the land zoning (that creates artificial shortage of land for construction) is there to make the friends of the politicians (builders, real estate companies, etc.), and the politicians, rich…at your cost.
So unless there’s a revolution to end this nexus, the mess in India’s real estate is not going to get cleaned up (and buyers like I and you will continue to wait for prices to fall, which won’t happen).
See what happened to property prices in India…
If you look at what happened after the Lehman crisis that started in September 2008, foreign investors who were investing in real estate projects and backing realty developers took money out of real estate in India.
There was a fall in realty prices in some of the hyped locations. Bangalore, Hyderabad, Chennai, Mumbai…all corrected sharply.
Source: National Housing Bank
But see where prices in these cities are as of now – they’ve all gone right back up!
In short, even when realty prices globally are reeling under trouble after the Lehman crisis, property prices in India didn’t fall as much as they should have or for as long as they should have.
“So what’s the reason?” you may wonder.
See, this may be coincidence, but then if you remember, we had elections in April 2009.
As per RBI data, starting 6 months prior to this i.e., around October 2008, bank lending to realty companies went through the roof (see the green bar in the chart below).
Source: Reserve Bank of India;
Note: These loans are only to real estate companies, and exclude housing loans to individuals
The PSU banks whom we have our deposits with, took our money – our savings – and gave it as loans to realty companies so that they could stay afloat and they were not forced to sell their real estate to you at cheap price.
This is because once the banks gave them the money, the ‘about to go bankrupt’ realty companies had the holding power…the power to stay alive.
So your savings went – and continue to go – to realty companies…so that property prices are kept high…so that you are denied a home.
Amazing, isn’t it?
Maybe you should talk to your PSU bank branch manager the next time you meet him, and ask him where have your deposits been ‘deposited’.
So where are India’s realty prices headed?
My answer to this question depends entirely on what happens to the politician-builder nexus in the future.
Economics tells me that realty prices should go down, but politics (which has always had a heavy hand in India) tells me that this is not going to happen.
I see India’s real estate to remain a massively corrupt industry. This coupled with the ever-rising demand will keep this industry in a bubble..always waiting to pop!
What do you say?
By the way, I recently wrote an article on why a house is a great investment for someone starting on his investing career. Let me clarify one thing here – my view on house as a great investment is assuming that you are able to buy the asset at the right price after doing a proper assessment of prices in your area. It’s dangerous to speculate on housing prices, and it’s equally dangerous to buy a house just because you see prices continuing to rise in the future.