## The Delhi/NCR real estate market is dead

The real estate consultant Knight Frank has released a research report on the real estate market in Delhi and the National Capital Region (NCR). The most important point in the report is that home sales in Delhi and NCR have crashed by 50% to 14,250 units, during the period January and June 2015, in comparison to the same period last year.

The launch of new homes has also crashed dramatically by 68% to 11,360 units, during the period January and June 20115, in comparison to the same period last year. The total number of unsold homes in Delhi and NCR currently stands at around 1.89 lakh units as per Knight Frank.

Hence, the quarters to sell unsold inventory has jumped dramatically. As of June 30, 2015, the quarters to sell unsold inventory number was at 19 quarters. What does this mean? Knight Frank defines quarters to sell unsold inventory as: “The quarters to sell unsold inventory (QTS) is the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter.”

Hence, quarters to sell unsold inventory is derived by dividing the total number of unsold homes currently, by the average rate at which homes have been selling over the past eight quarters.

Given that the average sales over eight quarters or two years is considered, the current average sales rate is lower than the overall average sales rate. Hence, if the quarters to sell unsold inventory were to be calculated using the latest average sales rate, the number would be even higher than 19 quarters.

Let’s do some basic maths and try and understand this. The total unsold inventory of homes in Delhi and National Capital Region stands at 1,89,678 units. The quarters to sell unsold inventory is 19 quarters. This means that the average sales rate for the last eight quarters thus stands at 9,988 units (1,89,768 divided by 19).
What is the latest sales rate? For the first six months of 2015 the total number of homes sold in Delhi were 14,250 units. This means a sales rate of 7,125 units (14,250 divided by 2) on an average, over the last two quarters.

If this number were to be considered as the average sales rate, then the quarters to sell unsold inventory would jump to 26.6 quarters (1,89,678 divided by 7,125) . What does this mean? If the total number of unsold homes continue to sell at the rate that they are currently selling at, it would take more than six and half years (26.6 quarters divided by 4), to sell them totally. And this, if no new homes were to be built in the days to come.

As can be seen from the accompanying graph, the quarters to sell unsold inventory has jumped big time over the last one year.

 Quarters To Sell (QTS) Unsold Inventory Analysis

As Knight Frank points out: “NCR has moved from a quarters to sell unsold inventory of 14 to 19 in a six-month period. Though January to June 2015 was the leanest half in terms of new launches, the absence of sales velocity has pushed the quarters to sell unsold inventory to nearly 5 years.”

In fact, as the earlier calculation shows the actual quarters to unsold inventory might be more than six and a half years. This is the kind of mess that the real estate sector in the Delhi and National Capital Region is in. Some of the unsold inventory is more than three years old, as can be seen from the following graph.

 Micro-Market-Wise QTS vs Age Of Inventory

Data Source: Knight Frank Research.
In fact, to realise how quickly the situation is deteriorating we need to look at how things stood at as on June 30, 2014, a year earlier. The total unsold inventory one year back stood at 1,67,000, data from Knight Frank tells us. The quarters to sell unsold inventory stood at 9. One year later it is at 19.

Also, the average sales rate was at 18,556 units (1,67,000 divided by 9). Currently it is at 9,987 units, which is a fall of more than 46%, during the course of one year. As Knight Frank points out: “The opening up of new land parcels for development while the existing ones were still not fully utilised is seen as one of the reasons behind the inventory pileup in NCR.”

What makes the situation worse is that new supply (despite falling) will keep hitting the market. As of December 2014, 1,92,568 units were under various stages of construction in Delhi and National Capital Region. The latest report of Knight Frank does not provide an updated number. But given that only 11,360 new homes hit the market, the under-construction number as on June 30, 2015, cannot be significantly different from the December 2014 number.

To conclude, the real estate market in Delhi and the National Capital Region is dead. It will take many years for this market to recover. Your money will be better invested somewhere else.
Postscript: Hopefully, next week I won’t write on real estate.

The column originally appeared on The Daily Reckoning on July 31, 2015

## Buyers can’t be fooled all the time: Lessons from a 50% fall in home sales in Delhi

Vivek Kaul

If you are still in denial that all is well with the real estate sector, this should wake you up. The real estate consultant Knight Frank has released a research report in which it points out the depressing state of the real estate sector in Delhi and the National Capital Region.

As analyst Ankita Sood writing for Knight Frank points out: “The market registered a year on year dip of 50%, with 14,250 units sold.” Hence, home sales in the National Capital Region for the period January to June 2015 dropped by 50% in comparison to the same period last year.

At the same time the number of new launches also fell dramatically by 68% in January to June 2015 in comparison to the same period last year. The new project launches stood at 11,360 units.

There are a number of lessons that can be drawn from these numbers:

1) Investors do not have endless patience: The real estate market in and around Delhi has primarily been investor driven. This is primarily because of the massive amount of black money that the city manages to generate. Black money is money which has been earned but on which taxes have not been paid.
Falling home sales clearly indicate that investors are no longer interested in buying more new homes, given that they are still sitting on the ones they had bought over the last few years. And the returns on these apartments have been negative or next to nothing. Hence, investors are looking to sell out the homes they had bought.

As Sood writes: “The growth rate of the weighted average price has been witnessing a downward trend since 2013, and has slowed down considerably…Long-term investors who were with the developers over the 3–4 year construction period are now looking for an exit, owing to the depressed market sentiments. Stagnant prices and delayed project deliveries have contributed towards investors entering into a ‘distressed resale’ mode, as they are now offering to exit at a 15% to 20% discount than the primary market price.”

This “offer to exit” at 15 to 20% discount tells us very clearly that real estate prices do fall. And as more and more investors hit the market to sell what they have been sitting on, prices will fall further.

2) The total amount of black money coming into real estate has been coming down: As far as the metropolitan cities in India is concerned, the maximum amount of black money goes into real estate in Delhi. 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.” In Mumbai, they put the ratio of black money to total value at between 10-30%.

Hence, among the bigger cities, the maximum amount of black money goes into real estate in Delhi and the National Capital Region. And this has been coming down. How can we conclude that? The Delhi and the National Capital Region have approximately 189,678 unsold units, Knight Frank data suggests.
If black money were coming into real estate at the same pace as before, this number would have been much lower. A fall in new launches by 68% is another good indicator that black money coming into the sector has been coming down.

3) You can’t fool all the people all the time: The Delhi and the National Capital Region has had too many instances of builders disappearing as well as not delivering homes on time. As Santhosh Kumar, CEO – Operations & International Director, JLL India, wrote in a recent research note: “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.”

Kumar gives the example of the Greater Faridabad area. As he writes: “Many instances of fly-by-night operators (and even some established developers) reneging on their commitments to buyers have been evident in Greater Faridabad. There have even been cases of developers absconding altogether after selling as many flats as they could without finishing the projects.”

Obviously, such fraud cannot go on forever. Buyers have come to know about these things over a period of time and have decided to stay away from buying real estate. In fact, Kumar even warns people to stay away from under-construction property, such is the state of real estate in Delhi and National Capital Region.
As he writes: “Keep away from pre-launches. Instead, look for bargain buys when investors exit. At that point of time, construction will be closer to completion or completed, and Gurgaon is witnessing distress sales from investors.”

A real estate consultant asking people not to invest in pre-launches needs to be taken very seriously.

4) An end user market:  With investors staying away and the total amount of black money finding its way into real estate coming down, if things continue in this way, Delhi and the National Capital Region real estate market, will become a market which is driven by those people who are looking for a home to live in, rather than invest. In fact, Sood of Knight Frank suggests that is already the case: “NCR is now an end user-driven market – developers restrict new launches, while buyers carefully select clean projects.”

5) You can’t keep making a product which the consumer does not want: The main reason why the real estate sector is in a mess is because prices have gone way beyond what most people can afford. This is a fundamental reason that most people associated with real estate refuse to acknowledge. On being given this reason, they come up with reasons like there is corruption in the government, laws are complicated, so on and so forth.

These might be genuine reasons but that does not negate the point that real estate prices have gone way beyond what most people can afford. Even the “rich” that real estate companies were building for cannot afford real estate at current prices. A product cannot be endlessly priced above what people are willing to pay for it.

As Knight Frank points out: “Policy fallacies such as the opening up of new land for development, allotment of group housing licences in areas with no infrastructure, project delays due to litigations and the liquidity crunch, and stagnant incomes[emphasis is mine] have affected NCR’s real estate appetite adversely.”

It is nice to see a real estate consultant acknowledge stagnant incomes as one of the reasons for one of the mess in the real estate sector. What it means in simple English is that incomes haven’t been able to keep pace with real estate prices i.e. prices are now way beyond what people can afford. And this cannot go on forever.

The column first appeared on Firstpost on July 30, 2015

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

## Trump’s wrong: How the Big Mac burger tells us Mumbai real estate ain’t cheap

Vivek Kaul

In a recent interview to the Forbes India magazine, Donald Trump the billionaire American investor and business tycoon said “Your real estate is unbelievably cheap…Mumbai is a great city and yet it is not priced like other comparable cities. It is priced lower than cities that are less important. That gives investors a tremendous amount of growth potential.” He made similar statements in interviews to several other publications.
This statement needs closer examination. Let’s do that by comparing prices in Mumbai and New York, the largest city in the United States.
A July 2014 report in The Times of India quotes Pankaj Kapoor of property research firm Liases Foras as saying “In Mumbai, the average cost of a flat is Rs 1.2 crore.”
In comparison,
the price of a median home in New York in July 2014 stood at \$524,500. For most of July 2014, one dollar was worth Rs 60. Hence, in rupee terms the price of a median home in New York stood at around Rs 3.15 crore (\$524,500 multiplied by Rs 60). While Trump did not go into these details, this is the logic he must have used to say that the real estate prices in Mumbai are cheap, in comparison to other big cities around the world.
The trouble with this calculation is that it has been carried out at the market exchange rate. It doesn’t take the purchasing power of the currencies into account.
Purchasing power is essentially a concept which takes into account the fact that how many “units of a country’s currency [are] required to buy the same amount of goods and services in the domestic market[in this case India and the rupee] as a U.S. dollar would buy in the United States.” This is necessary because foreign exchange market determined exchange rates do not always take this into account.
There are several ways of taking purchasing power into account. A quick and dirty way is to consider
The Economist’s Big Mac Index. This index compares the price of McDonald’s Big Mac hamburger in various countries around the world. In July 2014, the Big Mac had an average price of \$4.80 in the United States. In India it was sold at an average price of \$1.75.
Hence, what could be bought at \$1.75 in India would need \$4.8 in the United States. This means Rs 105 (Rs 60 multiplied by 1.75) is worth \$4.8. Or in other words one dollar is worth Rs 21.9 (Rs 105/\$4.8), in purchasing power terms.
If one dollar is worth Rs 21.9, then the price of a New York city median home in rupee terms works out to Rs 1.15 crore (\$524,500 multiplied by Rs 21.9). In comparison the average cost of a flat in Mumbai is Rs 1.2 crore. Hence, the real estate prices in New York are slightly cheaper than Mumbai once we take the purchasing power into account.
As mentioned earlier, using the Big Mac index was a quick and dirty way of taking purchasing power into account. Data from the World Bank can be used to carry out a more reliable calculation. In case of the Big Mac index we are just taking the price of one particular brand of burger for taking purchasing power into account. As per World Bank data one dollar is worth Rs 16.8, once we take purchasing power into account.
This means that the price of a New York median home in rupee terms is around Rs 88.1 lakh (\$524,500 multiplied by Rs 16.8). This is almost 32% cheaper than the price of an average home in Mumbai.
These calculations clearly tell us that real estate in Mumbai is not cheap by any stretch of imagination, irrespective of what Trump would like us to believe. In a recent report brought out by UBS Investment Research analyst Ashish Jagnani estimated that Mumbai had 50 months of unsold inventory of homes. This is the highest among all major cities in India. Gurgaon comes in next with 30 months of unsold inventory.
Another recent research report titled
India Real Estate Outlook brought out by real estate consultants Knight Frank points out that the unsold inventory of residential apartments in Mumbai stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“Quarters-to-sell(QTS) can be explained as the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the report points out.
Further, the “inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell,” the report points out. Donald Trump had come to India for the launch of the Trump Tower, located in Worli, South Mumbai.
The enormous level of inventory in Mumbai is because people are not buying homes. This has led to an inventory of unsold homes which is at a seven year high across different cities., the UBS report points out. People are not buying homes, because homes have become too expensive. As Jagnani of UBS mildly puts it, there are “affordability concerns amid property prices” going “up 13-30% in key cities over last 2-years.”
The article originally appeared on www.firstbiz.com on Sep 14, 2014
(Vivek Kaul is the author of the
Easy Money trilogy. He tweets @kaul_vivek)

## Properties shouldn’t get expensive: Real estate consultants are just rigging home prices

Vivek Kaul

The American author Upton Sinclair once said that “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
This seems to be true about the “so called” real estate consultants who operate in this country. Their main job it seems is to bring out a research report every few months, where the conclusion is that “real estate prices will continue to go up”.
This despite the fact when their own data contradicts this conclusion. Let’s take the case of a recent research report titled
India Real Estate Outlook brought out by Knight Frank. The report takes a look at the real estate scenario prevailing across some of the biggest cities in India.
In the case of Mumbai, the report points out that there is a huge demand-supply gap. The unsold inventory of residential apartments in the city stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“Quarters-to-sell(QTS) can be explained as the number of
quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the report points out.
What this means is that it will take close to three years to exhaust the existing number of unsold residential apartments in Mumbai, if people continue to buy homes at the rate they have been in the preceding two years. What is interesting is that the unsold inventory has gone up dramatically over the last few years. In December 2011 the number had stood at five, the report points out. This means that in December 2011, it would have taken around one year and three months to dispose of the inventory of unsold residential apartments in Mumbai. By June 2014, the number had increased to three years.
What this tells us is that the supply of residential apartments in Mumbai is substantially more than their demand. And anyone who understands basic economics will know that in order to clear this inventory the real estate companies need to cut prices, so that people come out and buy these unsold apartments.
Nevertheless, the
Knight Frank report goes around to conclude that “On the residential price front…the forecasted increase for the entire year (2014) is 10.1%.” It goes on to explain the reasons for this forecast. “This period [the first six months of 2014] has seen significant completion of transit infrastructure that has the potential to alter the dynamics of the region’s property market,” the report points out. The Versova-Ghatkpoar Metro, the Eastern Freeway and the Santacruz-Chembur Link Road are some of these projects.
The report writers forget(or rather ignore) a rather fundamental point here about how markets operate. Markets start factoring in information well in advance. They don’t wait for a particular development to be completed before factoring in that information into the price. An excellent example of this are the real estate prices in parts of Navi Mumbai, which are close to the proposed new airport. The airport is nowhere in the picture, but prices have been driven up for years, around this story.
Hence, the infrastructure that the report points out to, has already been there in the minds of people for a while now. And if they had been so impressed by it, they would be buying homes, and the quarters-to-sell ratio would have come down. Now that as the report points out, hasn’t happened, making the point irrelevant. Another reason, which is a favourite with most research report writers these days, has also been offered. Now that Narendra Modi is in power, things will improve and people will buy more homes.
As mathematician John Allen Paulos writes A Mathematician Plays the Stock Market “Because so much information is available…something insightful sounding can always be said.” But what sounds insightful need not be correct.
The question that the research report does not answer is: why have the real estate prices in Mumbai going up, despite the fact that people haven’t been buying residential apartments. The Residex Index of National Housing Bank points out that real estate prices in Mumbai have risen by 18.7% between the end of December 2011 and March 2014. This despite the fact that the inventory of unsold residential homes has been growing dramatically. In this scenario, where people are not buying as many homes as are being produced, prices should have been falling and not going up.
The reason for this is straightforward. The real estate market in India is rigged in favour of real estate companies and politicians who are the real owners of these companies.
There is no free market in real estate. Most real estate companies are fronts for politicians. What makes this very clear is the fact that even though there are thousands of real estate companies operating across India, there is not a single pan India real estate company.
And these politicians and their real estate companies have an incentive in holding the prices to be high. They operate as a cartel to do that. Of course, no real estate consultant can “afford” to talk about these reasons given that they make their money from real estate companies. And real estate companies would want its consultants to keep constantly mouthing the lines that “prices will
continue to go up”. The research reports brought out by these real estate consultants play precisely that role. They help in managing the price expectations in the minds of prospective buyers.
Whenever such a report is released, its splashed all over the media. The media, in turn, because it depends on advertising from real estate companies, tends to highlight the price escalation and the sales will increase part (or they just don’t bother to read beyond the press release). They don’t bother to ask the most fundamental question: If there is so much inventory, why are prices going up? Take the case of South Mumbai. As the report points out “the
inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell. The age of inventory, calculated as the time elapsed since launch, is also the longest, at 15 quarters.” So why are prices still rising is something that no one has bothered to ask?
This is how real estate consultants help real estate companies manage price expectations in the minds of prospective consumers. So, the next time you read a report saying real estate prices will go up, check for the source. If a real estate consultant is saying so, the information needs to be taken with a pinch of salt. As Guy Sorman writes in
An Optimist’s Diary “Economic actors don’t all have the same information at their disposal. Without institutions to improve transparency, insiders can easily manipulate markets.” This is precisely what is happening in India—the insiders have managed to take all of us for a ride.

The article originally appeared on www.Firstbiz.com on Aug 30, 2014

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