How state governments are supporting high real estate prices

For any market to work efficiently to arrive at a right price, transactions need to happen. Buyers need to buy and sellers need to sell. Take the case of the real estate market in the country currently. Transactions have slowed down. In many places they have come to an absolute standstill.

Those who own real estate are not selling it. Those who want to buy real estate are in no mood to buy it. A simple reason for this lies in the fact that the real estate prices all over the country are way beyond what most people can afford. Nevertheless, the reasoning is not as simple as that.

The area where real estate is bought or sold has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of a property between a seller and a buyer should take place. Hence, the buyer of the property pays stamp duty to the state government on the circle rate.

Over the years the market price of real estate in India has usually been higher than the prevailing circle rate. This has essentially led to a situation where the transaction is registered at the circle rate or a little higher, and the remaining transaction is carried out in black money.

Nevertheless, in the recent past the situation has reversed. In many parts of the country the prevailing circle rate is now higher than the market price. And this has led to the transactions in the real estate market coming to a complete standstill. People are not buying and selling homes because of this.

TN Ninan made this point recently in the Business Standard where he said that the circle rates at which stamp duty is collected had been raised three or four times by the Delhi government in the last four years. “The scuttlebutt is that the market rates for property have fallen in the ballpark region of 30-40 per cent. Consequently, the circle rates are now about 50-75 per cent higher than the real rates in the market,” he wrote.

A similar point was made S Murlidharan on Firstpost, where he wrote about circle rates in Sriperembudur near Chennai. The going circle rate in the area for residential land is Rs 600 per square foot. But, as he writes, there are no buyers even for Rs 400 per square foot.

This marked disconnect between the circle rates and the market price has brought transactions to a standstill.

As Muralidharan explains: “Suppose a transaction is done at Rs 350, the consequence for the buyer would be he would have to pay stamp duty on Rs 600 even though he bought for Rs 350 and for the seller capital gains on Rs 600 less cost even though he got only Rs 350.”

A buyer does not want to pay stamp duty on Rs 600 per square foot when he is actually paying only Rs 350 per foot to the seller. Along similar lines, the seller does not want to pay capital gains tax on Rs 600 per square foot when he is getting paid only Rs 350 per square foot. Hence, no transaction happens.

A similar situation prevails in parts of Kolkata as well, as this column points out. As mentioned earlier, the situation used to be exactly opposite in the past when the circle rate was lower than the market price. This used to allow a part of the transaction to be carried out in black.

Now that the circle rate is higher than the actual market price, it doesn’t make any sense for those who have black money to invest in real estate in many parts of the country.

The question is why aren’t state governments cutting the circle rates in parts of the country where this situation prevails? One reason lies in the fact that taxing property is seen as an easy way to fill the state government coffers. But with transactions slowing down that won’t remain true anymore. As an official told the Daily News and Analysis, recently in the context of Mumbai: “A majority of registration is lease and leave and licence. Actual buying is quite low. As a result, our revenue is decreasing. We should be generating Rs 6,000 crore to Rs 8,000 crore revenue a year in Mumbai; the current is Rs4,000 crore and below.”

Secondly, the black money of most politicians is invested in real estate. If state governments start bringing down circle rates, this would lead to the unofficial “wealth” of politicians coming down as well. This would happen primarily because transactions will start happening at lower prices. Currently, transactions where circle rates are higher than the market price, transactions have come to a standstill.

What does this mean? If state governments do not allow real estate prices to fall by maintaining high circle rates, then the mess in real estate will continue for a longer period of time. Transactions will not happen and the market will go through a longer “time” correction. And this can’t be good for anyone—buyers won’t be able to buy, sellers won’t be able to sell. The builders will continue holding on to the excessive inventory of unsold homes that they have accumulated over a period of time.
The column originally appeared on Yahoo India on August 18, 2015

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

Banks have lent no new money to real estate this financial year

It is very difficult to get hold of numbers when it concerns the real estate sector in India. The numbers usually put out are by organisations and institutions close to the real estate companies. The one genuine set of numbers that are put out every month is related to the total amount of lending carried out by scheduled commercial banks to the real estate sector in India. These numbers are put out by the Reserve Bank of India (RBI) as a part of the sectoral deployment of credit data, which is released once every month.

The latest set of numbers were released by the RBI on July 31, 2015, and make for a very interesting reading, especially if you have had a long(and perhaps lost) dream of buying a home to live in. Why do I say that? Allow me to explain.

As on June 26, 2015, the total amount of lending carried out by banks to the commercial real estate sector stood at Rs 1,66,900 crore. As on March 20, 2015, three months earlier, the number had stood at Rs 1,68,000 crore. Hence, the total amount of lending by banks to real estate companies has actually come down by around 0.7%. What can safely be said is that in the current financial year (which started on April 1, 2015) on an aggregate basis, the banks haven’t lent a single rupee to real estate companies.

How did the scene look like last year? As on March 21, 2014, the total amount of lending by banks to real estate companies had stood at Rs 1,54,400 crore. By June 27, 2014, the total lending had gone up by 1.7% to Rs 1,57,000 crore. This year the total lending has fallen by 0.7% during a similar period.

How do the numbers look over a longer horizon of one year? The lending to commercial real estate by banks has slowed down considerably. As mentioned earlier, as on June 26, 2015, the total amount of lending to commercial real estate by banks stood at Rs 1,66,900 crore. Over a period of one year, it has grown by just 6.3%. The overall lending by banks grew by 7.3% during the same period.

This is the third month in a row when the lending to real estate by banks has grown at a much slower pace than the overall lending. In fact, we need to look at numbers in June 2014 to realise how much the situation has changed over the last one year.

As on June 27, 2014, the total lending by banks to real estate companies had stood at Rs 1,57,000 crore. It had grown by 17.2% over a one year period. The overall lending by banks had grown 12.8%. Hence, the lending to real estate companies by banks had grown at a much faster rate than overall lending.
Further, lending to real estate companies by banks had grown by 17.2% last year. This year it has grown by only 6.3%. Also, as mentioned earlier, since the beginning of this financial year, the lending to real estate companies by banks has actually fallen.

And all this should be good news for buyers.  Why? For the simple reason that the funding source of real estate companies is drying out. Real estate companies have to repay the interest on the loans they had taken on previously. They also need to pay interest on it. Over and above this, there are projects that are still being built and need to be delivered by a certain date. Money will be needed for all these things.

All these reasons will ensure that the companies will have to get around to selling the unsold apartments that they have built and have been unable to sell. The number of unsold homes in cities across the country is huge. As per an estimate made by the real estate consultant Knight Frank the number of unsold homes in National Capital Region stands at around 1.89 lakhs. In Mumbai Metropolitan Region it stands at 1.94 lakh. In Ahmedabad the number is at 42,000. In Bangalore the number is at 1.05 lakh. And so the situation is all across the country.

The only way these unsold homes can be sold is by cutting prices. While the real estate companies have resisted this so far, with the funding from banks almost coming to a standstill, they really have no more options left in the days to come.

Finally, acche din should be on their way for those looking to buy homes to live in.

The column originally appeared on Yahoo India on Aug 4, 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