A Real Estate Story That Everybody Should Read


I am in Delhi these days.

And Delhi and the National Capital Region around it, as you would know, dear reader, have their share of real estate stories.

There are stories of builders who have taken the money from prospective buyers and not delivered.

There are stories about builders who have taken the money from prospective buyers and simply disappeared.

There are stories about builders who have taken the money from prospective buyers and abandoned construction midway.

There are stories about prospective buyers continuing to pay their EMIs with no idea of when their dream home will be delivered. Meanwhile, they also continue to pay rent.

There are stories about builders now demanding a bailout from the government.

All in all, the overall real estate story in Delhi and the National Capital Region, is a mess.
Nevertheless, recently I came across a slightly different sort of story, which tells us the different kind of problems that people face with real estate and why sometimes there are really no solutions to a problem.

One of my relatives, who are now very old, have lived a good part of their lives in a DDA colony in South Delhi. The flat was bought in the early 1980s at around Rs 2.5-3 lakh and is now worth close to Rs 3 crore. Of course, South Delhi is a great place to live.

All the everyday amenities from banks to vegetable vendors to milk booths to medicine shops etc., everything is within walking distance and almost everything you can think of is home-delivered.

But the relatives I am talking about here are now old and want to move to a different part of Delhi, to be close to their immediate family, which stays there. That part of Delhi is much cheaper than South Delhi. A similar sort of flat can easily be bought at around 40-50 per cent of the price in South Delhi.

If things work as smoothly, as they are supposed to in theory, this would mean selling the flat in South Delhi for around Rs 3 crore, buying a new one for around Rs 1.5 crore and paying a capital gains tax on the remaining Rs 1.5 crore. And then, they can live happily ever after.

Now only if things were as smooth as that.

As I well known, no real estate transaction can happen in Delhi-National Capital Region in full white money i.e. the full payment is made through a cheque, demand draft, bank transfer etc. A part of the transaction will always have to be carried out in black, which means a payment needs to be made in cash.

How would a Rs 3 crore sale go? Around Rs 1-1.3 crore would be paid in black. The remaining would be in white. Typically, when this happens, the black money is then used to buy more flats, and this is how the vicious cycle of black money continues.

In this case, the flat in the new locality costs around Rs 1.5 crore. Of this around Rs 50 lakh will have to be paid in black. And the remaining in white. This means that of the Rs 1-1.3 crore of the original black money received, around Rs 50-80 lakh will remain.

This is a lot of black money for someone who has never really dealt with black money. What does he do with this black money? At his age, there is no point in investing in more flats (given that the real estate sector is down in the dumps and also the fact that more money would be needed to do the same) or buying gold for that matter.

Given this conundrum, the sale is stuck. At his age, there is no possibility of a home loan as well.

In fact, this is an excellent example of a situation where an individual is asset heavy and liquidity light. Of course, in this case, he didn’t arrive at this situation because of the choices he made. Over the years, that is exactly how the situation turned out to be.

A part of Delhi, which no one really wanted to go and live in, turned out to be its most posh part, over a period of three decades and more. And given, this real estate prices sky-rocketed. A flat which cost Rs 3 lakh, was worth 100 times or Rs 3 crore, nearly 35 years later. This means a whopping return of 14 per cent per year (without taking any maintenance cost into account). In fact, at its peak price nearly five years back, the flat would have gone for anywhere between Rs 3.5-4 crore.

Of course, from the investment point of view, it has been a superb investment. But 35 years later, the situation is such that the flat cannot be sold. And this is a lesson for everyone who believes that real estate is the best way to invest.

The biggest problem with real estate is that it lacks the liquidity of other forms of investment, even though the returns might be superb. While, in this case my relatives can continue to live in this flat, so it doesn’t matter much. But there are other cases when people need liquidity to meet expenses, like the higher education of their children, their weddings, a medical emergency, and so on. In a real estate market like the one that exists today, selling a property quickly at the right price (if at all there is anything like that in Indian real estate) is never easy.

Of course, one can always take a loan against property, but then even that has to be repaid and the regular income may not be good enough to repay that loan.

This is something that everybody who swears by real estate as the best form of investment, should keep in mind.

Real estate may not have the liquidity, when you need money the most.

What happens then?

The column originally appeared on Equitymaster on October 24, 2017.



Of Nida Fazli, David Foster Wallace and Occam’s Razor.


बहुत साल हमारे प्रिय मित्र Vijay (जो के दीनानाथ चौहान हाइन नहीं है) ने निदा फ़ाज़ली साहब का एक शेर सुनाया था. बड़ा ही ज़बरदस्त शेर है.

के कुछ तबियत मिली थी ऐसी चैन से जीने की सूरत न हुई, 
जिस को चाहा उसे अपना न सके जो मिला उस से मोहब्बत न हुई.

अभी करीब आधे घंटे पहले, लेखक Mayank Tewari के पसंदिता राइटर David Foster Wallace का लिखा, कुछ पढ़ा.

“I tend to be interested in women that I turn out not to get along very well with. And the ones that I get along very well with, I’m not interested in in a kind of romantic way. So that I’ve got a lot of really good women friends. But I tend to have a really hard time with girlfriends, because the ones I’m attracted to are a lot of fun you know for, in the standard ways, for like a couple of weeks. But in terms of the daily, let’s-go-shopping stuff, that we tend not to get along really well.” (from “Although Of Course You End Up Becoming Yourself: A Road Trip with David Foster Wallace” by David Lipsky)

जो फ़ाज़ली साहब ने दो पंक्तियों में कहा, वही कहने में David Foster Wallace ने छे-सात पंक्तियाँ लगा दी.

अगर आज की सोच लगायी जाये, तो कौन किस से इंस्पायर हुआ होगा? क्या फ़ाज़ली साहब मुंबई की बरसाती रातों में David Foster Wallace को पढ़ते थे?

या David Foster Wallace ने देवनागिरी/उर्दू सीख रखी थी?

दोनों ही इस दुनिया से कूच कर चुकें हैं, इस लिए इस सवाल का जवाब दे पाना मुश्किल है.

पर अगर कांस्पीरेसी थ्योरी से दूर रहे है और Occam’s Razor लगाया जाए, तो शायद दोनों को ये काफी सिमिलर सा ख्याल, अलग अलग ही आया होगा.

अब आप सोचेंगे के ये मैंने क्यों लिखा? तो कभी कभी बैठे बैठे खाली खुरापाती दिमाग में बस ऐसे ही ख्याल आते हैं.


दीन दयाल उपाध्याय रोज़गार योजना

दो एक दिनों से दिल्ली में हूँ और सुप्रीम कोर्ट की कृपा से छींक नहीं रहा हूँ.

पिछले छे आठ महीने से पिताजी जिस सोसाइटी में रहते हैं दिल्ली में, उधर सारी बिल्डिंगों की मरम्मत चल रही है है.
अब आप भी सोचेंगे के किस पुरानी खंडर किस्म की बिल्डिंग में वो रहते हैं. ऐसे तो बिल्डिंग ज़्यादा पुरानी नहीं है, बने हुए केवल दस-बारह साल हुए हैं.

तो फिर मरम्मत क्यों? बिल्डर ने सीमेंट से ज़्यादा रेती मिलाई ? या उसने जहाँ जहाँ ईटें लगानी थी, वहां भूसा भरा? अब ये तो बड़ी आम बात है, इसपर क्या टिपण्णी की जाए.

पर ये भी कहना ज़रूरी है, के वो बिल्डर बहुत बड़ा देश भक्त था (शायद अब भी हो, कौन जानता है).
और देश भकत होने के अलावा वो बहुत दूरदर्शी भी था.

अब आप पूछेंगे कैसे? तो देखिये, जब ये बिल्डिंग पहले बनी तो इस पर काफी लोगों ने काम किया. इस से रोज़गार पैदा हुआ. अब क्योंकि बिल्डर ने रेती ज़्यादा मिलाई और भूसा ज़्यादा भरा, एक दशक के बाद, बिल्डिंग पे फिर से काम हो रहा है. और फिर से काम हो रहा है तो फिर से रोज़गार भी पैदा हो रहा है.  बस रोज़गार ही नहीं, फिर से सीमेंट भी खाईदा जाएगा। उस में रेती भी मिले जाएगी.

और रोज़गार को इस देश को बहुत ज़रुरत है. आसानी से मिलता नहीं.

तो था न हमारा बिल्डर देशभक्त और दूरदर्शी? अब ये अलग बात है के इस बार जो रोज़गार पैदा हो रहा है उस में बिल्डर का एक नया पैसा नहीं खर्च हो रहा है.

अब ये कहाँ की बात हुई, के देश भक्ति भी करें और साथ में पैसा भी खर्च हो? न जी न.

काफी लोग जो अंग्रेजी में मेरा विश्लेषण पढ़ते है, उनका ये कहना के, ये सब तो ठीक है, पर ये बताएं के इसका solution क्या है? लगता है केमिस्ट्री खूब पढ़ी है इन लोगों ने.

अब ये जो कहानी हमने यहाँ बताई है, इस से इस देश के लिए बहुत बड़ा solution निकल सकता है — दीन दयाल उपाध्याय रोज़गार योजना (अरे आप को क्या लग रहा था, के मैंने हैडलाइन बस ऐवें ही आपका ध्यान आकर्षित करने के लिए लगाई है…)

केंद्रीय सरकार और राज्य सरकारों को ये नियम बना देना चाहिए, के हर बिल्डिंग की मरम्मत, पांच साल के बाद होनी चाहिए. इस से रोज़गार पैदा होगा, और वो भी सेल्फ-एम्प्लॉयमेंट वाला, जिसकी आजकल काफी चर्चा है (और बस चर्चा ही है).

अब इस में रिस्क ये है, के बिल्डर लोग सीमेंट कम और भूसा ज़्यादा वाला फार्मूला लगाएंगे, जिस से के कुछ एक बिल्डिंगें बनते बनते ही गिर जाएँगी.

अब इतनी बड़ी जमूरियत है, एक आधी बिल्डिंग तो गिरती रहती है, इस में परेशां होने की कोई खास बात नहीं. बड़े बड़े देशों में अक्सर छोटी छोटी बातें होती ही रहती है.

और अगर बिल्डिंग जल्दी गिरी तो रोज़गार भी जल्दी पैदा होगा.

हाँ हाँ हो सकता हैं, नौ महीने में ही. नहीं तो 2019 तक तो बिलकुल पक्का…

अरे क्या? 2019, 2022 तक स्थगित कर दिया गया है? तो चलिए फिर 2022 ही सही.

The Delusional Optimism of India’s Real Estate Companies


Daniel Kahneman, the Nobel Prize winning psychologist, in his brilliant book, Thinking, Fast and Slow, writes: “One of the benefits of an optimistic temperament is that it encourages persistence in the face of obstacles…[The] confidence [of the entrepreneurs] in their future success sustains a positive mood that helps them obtain resources from others, raise the morale of their employees, and enhance their prospects of prevailing. When action is needed, optimism, even of the mildly delusional variety, may be a good thing.”

This optimism of an extreme delusional variety has been visible among India’s real estate entrepreneurs. For the last five to six years, they have been saying that a recovery in the sector is just around the corner, and the fact that it hasn’t happened yet is because the Reserve Bank of India (RBI) refuses to play ball by cutting interest rates, adequately.
Rajeev Talwar, the Chief Executive of DLF, recently told the Business Standard: “We are in a new economic cycle… When demand picks up, it will take everybody by surprise.”

Niranjan Hiranandani, chairman of Hiranandani group, told the same newspaper: “Any depression will not last long.”

Isn’t a period of five to six years a long enough time?

A report by Crisil Research points out that the absorption of new homes (i.e. sales) in in top 10 cities (Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR) and Pune) has fallen by 8 per cent per year on an average in the last six years.

What does this mean? It means that if real estate builders sold 100 new homes in India’s top 10 cities in 2010, in 2016, they managed to sell only 63. In absolute terms, this is a fall of 37 per cent. And Mr Hiranandani is talking about any depression not lasting long. I guess six years is a long enough time.

In fact, things haven’t looked good even in the last three months. As per real estate research firm, PropEquity, housing sales stood at 22,699 units during the period July to September 2017, in eight key cities. The sales had stood at 34,809 units during the period April to June 2017. This means a collapse of close to 35 per cent in a period of just three months.

The eight key cities are Gurgaon, Noida, Mumbai, Kolkata, Pune, Hyderabad, Bengaluru and Chennai.

What are the reasons for this collapse? As I have been saying over and over again, real estate prices in India, are beyond what most people can afford and unless this anomaly is corrected, sales will continue to remain sluggish.

Over and above this, real estate companies have really worked hard to break whatever little trust the prospective buyers had in them, by not delivering homes on time.

Further, investors are no longer the driving force in the market, given the sluggish returns in the sector. For a real estate investment to be a viable proposition, after taking in the costs and the risk involved, it should be generating a return of at least 10 per cent per year. And this hasn’t happened for a while.

The overall economy continues to remain sluggish. Take a look at Figure 1, which plots the growth of the non-government part of the GDP, which forms around 90 per cent of the Indian economy.

non govt GDP growth

Source: Centre for Monitoring Indian Economy.

The growth of the non-government part of the economy has fallen from well over 9 per cent to a little over 4 per cent in a period of 18 months between January 2016 and June 2017. This also means that incomes are not going up at the same pace as they were in the past. And given this, it is but natural people are going slow on buying a new home, which is the biggest financial commitment that they make in their lives. During a time when the rental yield (annual rent divided by market price of a home) is around 2 per cent, this makes immense financial sense.

The fear of job losses in the IT industry has also had an impact. The state of the IT industry has a major impact on real estate sales in cities like Pune, Hyderabad and Bengaluru.

In this scenario, the real estate builders have been offering discounts in order to get prospective buyers interested. As Crisil Research points out: “Pressure on residential real estate prices across top 10 cities was clearly visible during H1 2017 [January to June 2017]. While several developers offered upfront per square feet discounts, a few large developers bundled financing schemes and reduced interest schemes to offer ‘all inclusive house prices’. Home buyers, in many cases, were also offered indirect benefits such as reduced floor charges or premium location charges. Taking into account these aspects, the effective price correction was 5-10%.”

But even this 5-10 per cent correction isn’t enough to pull buyers in. This basically means that home prices continue to remain expensive. As I have often said in the past, home sales will revive as and when home prices become affordable, which is currently not the case. For home prices to become affordable builders need to cut prices from current levels. Given that a majority of them are in no mood to do so, it basically means that home sales will remain sluggish in the years to come.

Crisil Research expects that “in the next 12-18 months, prices are likely to remain stable at current levels on account of weak demand and moderation in new supply additions.” This basically means that instead of a price correction, the real estate sector in India is seeing a time correction. If prices remain stable over the years, they lose value once adjusted for inflation and in the process, they might become affordable.
Keep watching this space.

The article originally appeared on Equitymaster on October 16, 2017.

Where are the jobs?


One million Indians are entering the workforce every month. This makes it around 1.2 crore a year, which is around half the total population of Australia.

This is India’s demographic dividend, which is supposed to find a job, earn and spend, pull India’s crores out of poverty. At least, that is the story that we have been sold over the years. But the theory is not translating into practice.

The land-owning communities across large parts of the country have been on the streets, protesting. This includes the Marathas of Maharashtra, the Jats of Haryana, the Kapus of Andhra Pradesh and the Patidar Patels of Gujarat.

The average size of the land farmed by the Indian farmer has fallen over the decades and in 2010-2011, the last time the agriculture census was carried out, stood at 1.16 hectares. In 1970-1971 it had stood at 2.82 hectares.

This has happened because of the division of land across generations. Further, this fall in farm size has made farming in many parts of the country, an unviable activity. And this explains why the land-owning castes across the country have been protesting and want a reservation in government jobs.

The trouble is that the government does not create jobs any more. In fact, between January 2006 and January 2014, the number of central government employees went up by just 30,000. The total number of people working for the public-sector enterprises has fallen over the years.

Only three out of five individuals who are looking for a job all through the year, are able to find one. In rural India, only one out of two individuals who are looking for a job all through the year, are able to find one. This has been the state of things since 2013-2014.
In fact, as far as Indian industry is concerned it favours expansion through capital (i.e. buying more machines and equipment) than recruiting more people.

Nikhil Gupta and Madhurima Chowdhury analysts at Motilal Oswal, use data up to 2014-2015, from the Annual Survey of Industries, and based on it conclude that over a period of 35 years up to 2014-2015, the rate of employment in the Indian industry has increased at 1.9 per cent per year on an average. In comparison, the capital employed by industry has grown at the rate of 14 per cent per year.

Clearly, capital has won the race hands down. Or if I were to put it in simple words, when it comes to Indian industry, machine has won over man for a while now. The Indian corporates like the idea of expanding their production and in the process their business, by installing new machines and equipment, rather than employing more people.

One of the reasons for this is the huge number of labour laws that Indian firms need to follow. As Jagdish Bhagwati and Arvind Panagariya write in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.”

The National Manufacturing Policy of 2011 estimates that, on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations.  At the same time, these units sometimes need to file as many as 100 returns a year.

This basically ensures that an average Indian firm starts small and continues to remain small. In the process, jobs aren’t created. This is reflected in the fact that close to 85 per cent of Indian apparel firms employ less than eight people. As per an Economic Survey estimate, close to 24 jobs are created in this sector per lakh of investment. Despite, this firms in this sector continue to remain small.

The points discussed up until now are essentially big structural issues, which have been around for a while. In the recent past, demonetisation which overnight made 86.4 per cent of the currency in circulation, useless, ended up destroying many firms operating in the informal sector. The Goods and Services Tax has added to this.

These days the presence of informal sector is seen as a bad thing because it doesn’t pay its fair share of taxes to the government. This isn’t totally true. People who work for these firms do spend the money that they earn and pay their share of indirect taxes. Also, as the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping unemployment low.”

As economist Jim Walker of Asianomics wrote in a research note sometime back: “There is nothing intrinsic that says that the informal economy is a less effective or beneficial source of activity than the formal economy.” This is something that the Modi government needs to understand.

In its quest for more taxes, it is working towards destroying large parts of the informal economy, which is a huge part of Indian economy. Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a research note: “India’s informal sector is large and labour-intensive. The informal sector accounts for ~40% of India’s GDP and employs close to ~75% of the Indian labour force.” 

And this is something that the government needs to remember in its bid to forcibly formalise the Indian economy.

The column originally appeared in the Deccan Herald on October 15, 2017.