Real Estate

A few confessions on real estate forecasting

India-Real-Estate-MarketIn the recent past I have written quite a few columns on real estate. In some of these columns I have clearly said that I expect the real estate prices to continue to fall in the time to come.

In response to this point a question that gets often asked is: “Should I buy a home now?” This is a very difficult question to answer, given that it has zero information built into it. It doesn’t tell me where the person asking the question is based out of.  Does he want to a buy a home to live in? Or is he looking to invest? Further, what is the financial situation of the individual? So on and so forth.

I will try and answer this question in today’s column in a fairly general sort of way. If you are looking to invest in real estate this clearly is not the time to invest, given that the prices are falling and the return over the last one year has been extremely subdued. The time to invest in real estate will come once the prices have fallen from the current levels.

How about buying a home to live in? That really depends on your financial position and how stable you are in the current rented accommodation you are living in. If the landlord is likely to let you continue to live, then it is best to wait it out. You will definitely get a better deal in the days to come.

If he is not and you have enough money going around then it is best to buy a home. Obviously, you need to ensure that you aren’t using up all your savings in making the down-payment and stretching your home loan limit to the hilt. While you will end up paying more now than if you were to buy a home somewhere down the line, there will be other happier things to look forward to.

The social pressure that comes with not owning a house will go away. The child (or children) will have a more stable environment to live in. And given these reasons, if you have the money and need a home to live in, it makes sense to go ahead and buy one.

All this comes with a small caveat—if you are thinking of buying a home in the National Capital Territory, be very careful. As Santhosh Kumar, CEO – Operations & International Director, JLL India recently wrote: “The National Capital Region (NCR) has some locations that buyers are best advised to avoid. Various issues like delays in delivery, oversupply, speculation and infrastructure deficit have been plaguing these markets, rendering them unsuitable for first-time home purchase.”

Another question that is often asked is: “By when do you think price of real estate will fall dramatically?” This remains a very tricky question to answer because there is no credible price-volume data going around on Indian real estate. (i.e. how many homes were sold and what at price).

The only real estate data that is available at the agglomerated level is supplied by real estate consultants. The trouble is that these consultants make more money when the real estate sector is doing well i.e. prices are on their way up. Given that, even though the data supplied by them is showing excessive inventory of unsold homes and more or less flat prices on an average across the country, the actual situation might be much worse (which means the crash in real estate prices might happen sooner rather than later, but this cannot be said for sure).

Further, the data supplied by real estate consultants is at best limited to metropolitan cities. Given that, there is almost no information about the price-volume trend of real estate beyond the top cities in the country. So how does one predict, when will prices fall dramatically all across the country without much data?
Further, the real estate indices that India are not “real time” enough. The two main indices put out by the National Housing Bank and the Reserve Bank of India, are really not up-to-date.

Then there is the biggest variable of them all: black money. How does one figure out whether the total amount of black money going into real estate has gone up or come down? In this scenario one can make educated guesses from the data that is available and anecdotal evidence that keeps coming in.

An interesting experiment was carried out by a friend of mine recently. He called up several real estate brokers from two different numbers. On the first call he pretended to be a buyer and was told “Sir, daam abhi bhi badh raha hai (the price is still going up).” On the second call he pretended to be a seller and was told “Sir, there are no buyers in the market.” What conclusion can we draw from this? I leave that up to you.

As far as black money is concerned, the situation in National Capital Region, makes for an interesting reading. As analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled Real Estate: The unwind and its side effects: “In Delhi, the ratio of unaccounted value of real estate transactions to the total value is as high as 78%. The same ratio is 50% in Kolkata and Bangalore. In smaller towns and semi urban centres, nearly 100% of property transactions are conducted in cash.”

Hence, among the bigger cities, the maximum amount of black money goes into real estate in Delhi and the National Capital Region. And this I feel has been coming down. The real estate rating and research agency Liases Foras estimates that the National Capital Region had an unsold home inventory of 71 months (the real situation might be worse) as on March 31, 2015. This means that if sales continue at the current pace it would need another 71 months to sell the existing number of unsold homes. An inventory of eight to 12 months is considered healthy.

What this huge inventory clearly tells us is that the amount of black money coming into real estate has come down in the National Capital Region and this is good news for genuine buyers who want homes to live in.

Over and above this, the real estate prices have run up way beyond what most Indians can afford. And once you take this into account, prices are bound to fall. This becomes very clear from the point that rental yields are now as low as 2% (again a data point provided by real estate consultants and given that the situation might be worse). Rental yield is essentially annual rent that can be earned from a home divided by its market price. No market can keep working beyond a point without catering to what the customers really want.

All these reasons, lead me to believe that real estate prices will continue to fall in the days to come. Though please don’t ask me when will they crash? Because I really don’t know.

This is one of those funny situations where one will be partially wrong till one is proven right. All I can say to conclude is: stay tuned!

The column originally appeared on The Daily Reckoning on July 28, 2015

How real estate consultants are trying to confuse home-buyers

India-Real-Estate-MarketVivek Kaul

One of the bigger problems with Indian real estate is that there is almost no independent data available for consumers to trust.  For instance, you may want to buy a home in a particular locality, how do you find out what the going price is?

Till very recently you would have had to call up a relative who has some idea of these things. Or you would call up a real estate broker. The real estate broker does not always have the best interest of the buyer on his mind simply because for him it is a one-time transaction.  He is unlikely to be dealing with the buyer ever again. With the advent of websites one can get some idea of what the price scene is in a particular locality.

The point being that the insiders who are a part of the real estate sector in India have no incentive in making things easy for the end consumer. And on most occasions they are bound to mislead.

Take the case of real estate consultants who are the major source of data when it comes to the real estate sector in India. Here is one instance where an attempt has been made to mislead prospective buyers. As Ashwinder Raj Singh is CEO – Residential Services of JLL India points out in a June 2015 column in The Indian Express: “Rental yields vary across the globe, but an average of 2 per cent of rental yield is considered a good deal for residential properties in India.”

Rental yield is essentially the annual rent that can be earned by renting out a home divided by its market price. Singh goes on to write: “In India, the cities which currently offer a higher rental yield are Mumbai, Pune, NCR-Delhi, Bengaluru, Kolkata, Chennai, Hyderabad, Ahmedabad. All these cities offer a rental yield of 2 per cent and above, and you can be assured that the average is not going down anytime soon. Investing in these cities will offer you the maximum returns on investment in properties bought for generating rental income.”

What is Singh saying here? You can hope to earn a return of 2% or a little more, by renting out a home, almost all across metropolitan India. The question is why would anyone in their right mind invest when the prospective return is 2%? That Singh does not tell us. And this when most savings bank accounts pay an assured return of 4%. There are banks which even pay 7% interest on their savings bank accounts.

Further, earning a return by depositing money in a savings bank account is a very easy of making money in comparison to earning a rent by buying a home. Real estate investment comes with its share of hassles. And earning a 2% return for those troubles is simply not go enough.

Singh of JLL India then goes on to say that the rental yield of 2% is not going to go down any time soon. Well, hasn’t it gone down enough already?
The second question is why have real estate consultants now started recommending real estate as a mode of earning a rental income. As anyone who has ever invested in real estate will tell you, investors buy real estate in the hope of making capital gains. Very few investors buy real estate in the hope of earning a rental income. There are easier ways of earning a regular income than through renting out real estate.

The problem is that real estate prices have not gone anywhere in the recent past. As Atul Tiwari and Rishi Iyer of Citi Research point out: “Different data points continue to suggest broad-based deceleration in residential prices across India. Residential prices grew just ~0.5% year on year as on March 31, 2015.”
The Citi analysts have used data from Prop Equity. They further point out that prices had been rising at double digit rates before this.

Data from Liases Foras, a real estate research and rating company, shows a similar trend. The average price in six cities (Mumbai Metropolitan Region, National Capital Region, Hyderabad, Chennai, Bangalore and Pune) went up by around 1%, for a one year period ending on March 31, 2015.

So, the insiders are telling us that the real estate prices have stayed almost flat over the last one year. And this explains why Singh of JLL India had to write a column pitching rental income of 2% that can be earned from investing in real estate.

In fact, there is enough anecdotal evidence to suggest that prices have fallen by almost 20% in many parts of the country. Given that there is no neutral agency putting this data together, there is no way of knowing how bad the scene is at the aggregated level. My guess is that it is much worse than what the real estate consultants are telling us.

All the price and sales data that is currently available comes from real estate consultants. And they have an incentive in the real estate prices continuing to go up. Their incomes depend on it.

Hence, there is a clear need for an independent agency which collates real estate data in the country. This will be a huge help to genuine real estate buyers who want to buy a home to live in. Hope the Modi government is listening.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Yahoo India on July 22, 2015

How UPA govt subsidies helped generate black money and contributed to the real estate bubble

bubble
One of the points that I have made over and over again in the columns that I have written on black money is that theNarendra Modi government needs to concentrate on domestic black money as well.

Since coming to power in May last year, the Modi government has made a lot of noise and come up with legislation on trying to curb the black money leaving the shores of this country. Black money is essentially money which has been earned but on which tax has not been paid.

Nevertheless, it is important to realise that ultimately almost all the black money is domestic i.e. it is generated within the country when people earn money (through legal or illegal means) and do not pay any tax on it.

Given this, it is more important to concentrate on trying to bring down the total amount of black money being generated instead of trying to get back the black money that has already left India. One way to do this is to get more people under the income tax net. Efforts are being made on this front.

A PTI report points out that: “The income tax department has launched an ambitious drive to bring under its net 10 million new taxpayers, after the government recently asked the official to achieve the target within the current financial year.”

Region wise targets have been set. Pune leads the list with a target of more than 10 lakh new assesses. This is an interesting move and if it is successful this will lead to more people paying income tax and hence, the total amount of black money within the system will come down.

When the total amount of black money comes down, lesser black money will go into real estate. And this will help in ensuring that only those who really want homes to live in,will buy. This will help in controlling real estate prices.

Other than getting more people to pay income tax, the government also needs to concentrate on blocking leakages on the subsidy front. In 2004-2005, the total subsidies offered by the government stood at Rs 47,432 crore. By 2013-2014, this number had ballooned to Rs 2,54,632 crore. The total subsidies of the government had jumped by 5.4 times during the period. In comparison, the total expenditure of the government had jumped by only 3.15 times.

Only if the subsidies were reaching those for whom they were intended for, it would not have been a problem. In October 2009, Montek Singh Ahluwalia, the then deputy chairman of the Planning Commission had said: “a Plan panel study on PDS [public distribution system] found that only 16 paise out of a rupee was reaching the targeted poor.”

So where did the remaining 84 paise go? It was stolen in between. Obviously people who stole the subsidies would neither be declaring this money as income and nor be paying any income tax on it.

As Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research titled Real Estate: The unwind and its side effects: “Subsidies under the UPA regime grew at a staggeringCAGR[compounded annual growth rate] of 19% per annum…A substantial portion of these subsidies(30-50%) was pilfered by the political class and used by them to fund investment in gold and real estate.”

In comparison to Ahluwalia’s estimate, Mukherjee and Shekhar are being extremely conservative. Nevertheless, the point being made is the same—that government subsidies are terribly leaky. The politicians who stole this money obviously did not declare this as income. This black money then found its way into real estate and drove up real estate prices.

As a FICCI report on black money published in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.”

So what has happened since the UPA was voted out of power? In 2015-2016, the total amount of subsidies have been budgeted at Rs2,43,811 crore, which is lower than the Rs 2,54,632 crore that had been spent in 2013-2014. One reason for this is obviously a fall in oil prices. The number in 2014-2015 had stood at Rs 2,66,692 crore.

This cut in subsidies along with the fact that some subsidies are now directly being paid into bank accounts is likely to help bring down both black money as well as real estate prices. As Mukherjea and Shekhar write: “The NDA has cut subsidies sharply (down 9% in 2015-2016) and is shifting subsidies to Direct Benefit Transfer (DBT); at least 10% of the overall subsidies have already been moved to the DBT. As a result, the ability ofthe politician-and-builder to pilfer subsidies to fund real estate construction has been checked.”

While cutting down on subsidies further may not be politically possible, if more and more of subsidies are paid directly into the bank account of the beneficiaries, the total amount of black money within the system is likely to come down.

Taking these steps rather than chasing black money that has left the shores of this country makes more sense and will have a greater impact on bringing down real estate prices in India. This will go a long way in making homes affordable for those who want to buy homes to live in rather than to invest.

As Mukherjea and Shekhar put it: “the NDA Government is engineering a clamp down on black money in India. The 2015-2016 Union Budget explicitly aimed to disincentivise the black economy and curb the demand for physical assets. With the new Black Money Bill (which was passed by the Parliament on May 26) and with the Cabinet approving the Benami Transactions Bill in May this year, the crackdown on blackmoney will continue further.”

These steps need to continue.

(VivekKaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on July 20, 2015

 

What if the builder disappears? – The biggest risk of investing in real estate

India-Real-Estate-Market
Last week three different people got in touch with me regarding the problems they have been facing with investments they had made in real estate. In each of the three cases the builder had collected money and was now saying that he didn’t have money to complete the project.
The buyers had taken on a home loan to invest in a home. At the same time they had even put in their own hard earned money into it. The question is how did this unfortunate situation come up in the first place? The answer is simple. The money the builder (or actually the builders in this case) raised for the project was used for other things. It could have been used for repaying past debt. Or it could have been used for completing a previous project.
Builders like to launch new properties in order to raise money. It is the cheapest way of raising money for them. Money from the bank or the informal market, means paying high interest. As I had mentioned in a column last week, builders raise money for a project and use it to pay off debt or the interest on it. To build homes for this project, another project is launched. Money from this is then used to build homes for the first project.
Now, to build homes promised under the second project, a third project is launched and so the story goes on. In the process, all the buyers get screwed and the builder manages to run a perfect Ponzi scheme. A perfect Ponzi scheme is one where money brought in by the newer investors is used to pay off older investors. In this case money brought in by the newer buyers is used to build homes for the older buyers.
Th new e Real Estate Bill seeks to stop real estate companies from running such Ponzi schemes. Half the money raised for a particular project needs to be deposited in a monitorable bank account and be spent on the project against which the money has been raised. But until that happens, real estate Ponzi schemes will continue to run.
The thing with Ponzi schemes is that they all eventually collapse when the money being brought in by the new investors is not as much as needs to be paid out to the older investors whose investments are maturing. This is what seems to have happened to a few builders as well (at least in the case of people who approached me).
The prospective buyers seem to have figured out the Ponzi scheme being run by these builders and stayed away from investing in their new projects. Once that happened, these builders did not have money to complete their older projects. This meant that buyers who had bought homes in the older projects were left in a lurch.
The trouble is that the individuals who approached me had also taken on a home loan to invest in these projects. These borrowers continue to pay interest on these loans even though there is no home in sight.
The biggest learning from this example is for those individuals who keep claiming time and again that real estate prices in India do not fall and hence, owning real estate makes for a terrific investment. I will not get into an argument whether this statement is true at all points of time or not. Nevertheless, investing in real estate goes against a basic tenet of investing—don’t put all your eggs in one basket.
The size of the real estate investment is now so large that anyone who invests in a second (or a third) home ends up betting a lot of money on one investment. Given this, diversification which investment experts keep talking about all the time, goes totally out of the window. If the builder disappears (as was the case in the example I am discussing) the losses are simply too large.
Further, given the system is in India, the builder can simply get away with it. He can even avoid meeting the buyers who had bought into his project. The buyers may approach the court, but that is a long drawn process and may not lead to a quick resolution of the situation.
So, yes real estate prices may not fall, but that doesn’t mean that real estate is an excellent investment all the time. If things go wrong, the investment can be totally wiped out. A similar risk is not there with other forms of investing.
Two out of the three individuals who approached me last week with their horrific real estate investment experiences had in the past, lived and worked in the United States. So a question that naturally cropped during the course of our conversation was—what if I default on my home loan, what happens then? Their logic was if we are not getting any home at the end of it, why should we continue repaying the home loan.
Home loans in several states in the United States are non-recourse loans. This means that in case a borrower decides to default on the home loan by simply walking away from it, the lender cannot go beyond seizing the collateral (i.e., the house) to recover what is due to him. He cannot seize the other assets of the borrower, be it another house, investments, or money lying in a bank account, to recover his losses.
In India, home loans are recourse loans. This means that the banks can come after other assets of the borrower. Hence, walking away from the home loan is a bad idea, even in a situation like this. Further, any default would be reflected on the CIBIL database, leading to the home loan borrowers being deemed unworthy of credit in the years to come.
Once all these factors are taken into account it is very clear that investing in real estate at this point of time is an extremely risky thing to do—the past notwithstanding.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on www.Firstpost.com on Apr 28, 2015

Why real estate Ponzi scheme will continue despite new Real Estate Bill


On April 7, 2015, the union cabinet cleared the Real Estate (Regulation and Development) Bill. The Bill essentially mandates that every state needs to set up a Real Estate Regulatory Authority (RERA), to protect consumer interests.
Every commercial as well as residential real estate project needs to be compulsorily registered with the RERA of the concerned state. Real estate companies need to file project details, design and specifications, with the concerned RERA. They need to put up details concerning the approvals from various authorities regarding the project, the design and the layout of the project, the brokers selling the project etc., on the RERA’s website.
Consumers will be able to check these details on the website of the real estate regulator. Further, only once a project is registered with the RERA will it be allowed to be sold. Also, like is the case currently, a real estate company will not be able to go about arbitrarily changing the design of the project midway through the project. In order to do this the company will need approval of two thirds of the buyers.
If the real estate company makes incorrect disclosures or does not follow what it has stated at the time of filing the project with the RERA, it will have to pay a penalty. There are other provisions also that seek to protect consumer interests. Real estate companies will have to clearly state the carpet area of the home/office they are trying to sell, instead of all the fancy jargons that they come up with these days. Further, the bill allows buyers to claim a refund along with interest, in case the real estate company fails to deliver.
So on paper the bill actually looks great. But there is one provision that essentially makes all these provisions meaningless in a way. The Bill requires real estate companies to compulsorily deposit half of the money raised from buyers for a particular project into a monitorable account. This money can then be spent only for the construction of that project against which the money has been raised from prospective buyers.
This is an improvement from the way things currently are. The way things currently work are—a real estate company launches a project, collects the money and then uses that money to do what it feels like. This might mean repaying debt that it has accumulated or diverting the money to complete the projects that are pending. Given this, at times there is no money left for the project against which the money has been raised. In order to get the money for that, another project will have to be launched. Meanwhile the prospective buyers are stuck.
Developers love launching new projects simply because it is the cheapest way to raise money. Money from the bank or the informal market, means paying high interest. Hence, they raise money for the first project and use it to pay off debt or the interest on it. To build homes under the first project, a second project is launched. Money from this is then used to build homes for the first project.
Now, to build homes promised under the second project, a third project is launched and so the story goes on. In the process, all the buyers get screwed and the builder manages to run a perfect Ponzi scheme. A perfect Ponzi scheme is one where money brought in by the newer investors is used to pay off older investors. In this case money brought in by the newer buyers is used to build homes for the older buyers.
The Real Estate Bill seeks to stop real estate companies from running such Ponzi schemes. As explained above, half the money raised for a particular project needs to be deposited in a monitorable bank account and be spent on the project against which the money has been raised.
The thing is when the Bill was first presented in the Parliament in 2013, the real estate companies had to deposit 70% of the money raised against a particular project in a monitorable account and spend that money on that particular project.
Between then and now the real estate lobby has been able to dilute the 70% level to 50%. What this means that the real estate companies can still use 50% of the money raised against a particular project for other things. And this will essentially ensure that the real estate Ponzi scheme will continue.
Real estate companies will continue to launch new projects to raise money and use half of that money for things other than building the project for which they have raised the money for.
Also, this provision will allow the real estate companies to continue to hold on to their existing inventory and not sell it off at lower prices in order to pay off their debt, given that they can continue to raise money by launching a new project.
The question to ask here is why should a ‘new’ regulation allow money being raised for a particular project to be diverted to other things? It goes totally against the prospective buyers who are handing over their hard earned money(or taking on a big home loan) to the real estate company, in the hope of living in their own home.
A possible answer lies in the fact that if the government had regulated that the money raised for a project should used to build that project, it would have closed an easy way that the real estate companies have of raising money. This would have ultimately led to real estate prices coming down. And any crash in real estate prices would have hurt politicians who run this country, given that their ill-gotten wealth is stashed in real estate.

(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Apr 21, 2015