Real Estate

1.2 crore vacant homes – This one number tells us all that is wrong with Indian real estate



Vivek Kaul

Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd., in a recent article writes that “around 1.2 crore completed houses” are “lying vacant across urban India”. This one number tells us all that is wrong with Indian real estate.
Even though there is a huge housing shortage in urban India, 1.2 crore completed homes are lying vacant. As the latest Economic Survey points out: “At present urban housing shortage is 1.88 crore units.”
So, we have this situation where 1.2 crore completed homes are lying vacant even though there is a housing shortage of 1.88 crore in urban India. What explains this discrepancy? “95.6 per cent [of housing shortage] is in economically weaker sections (EWS) / low income group (LIG) segments,” the Economic Survey points out.
What the huge number of vacant homes also tells us is that real estate companies have been building and selling homes at price points at which there are few takers. Why is that? The answer for that lies in the fact that homes are being built essentially for those who want to invest and speculate.
Hence, investors control the real estate market in India instead of those who want to buy and live in homes. These investors are more comfortable keeping the homes empty and not put them on the rental market. The rental yield (i.e. annual rent dividend by the market price of the home) currently varies between 2-4% depending on which part of the country you live in. Hence, the return is not good enough to compensate for the risks involved in letting the house out on rent. Given this, a lot of homes are bought and then stay locked.
The next question that crops up is why is there so much investment demand for homes? The simple answer is that the amount of black money that is being generated has gone up tremendously over the years. Global Financial Integrity estimates that between 2003 and 2012, the total amount of black money leaving the country jumped from $10.1 billion to $94.8 billion, a jump of more than 9 times.
No reliable estimates are available for the total amount of black money that would have been generated during the same period.
But what this tells us is that the amount of black money being generated has grown up manifold over the years. It is safe to say that a lot of this black money has found its way into real estate, where it is very easy to park black money. And this has pushed up real estate prices to levels at which most people cannot afford to buy a home to live in. The buying and selling of real estate is now a game played majorly between the black money wallahs.
As a recent study by the business lobby FICCI titled A Study On Widening Of Tax Base And Tackling Black Money published in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP15 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.”
And this has led to a situation where we have more than a crore homes where no one is living. AkhileshTilotia, makes a similar point in his book The Making of India—Gamechanging Transitions. As he writes: “Thanks to its love for real estate investments, India is in a curious position of having more houses than it has households.”
This becomes clear from the Census 2011 data. “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households,” writes Tilotia.
Unless the black money menace is brought under control, homes will continue to remain locked and unaffordable for most Indians. Further, renting has to be made an attractive option for those owning homes. As Magazine of CBRE points out: “The Rent Control Act 1992 is slightly skewed towards tenant protection, and is aimed at controlling rent. It tries to protect tenants from eviction and from having to pay more than a fair/standard rent amount. The Act may need to be revisited to make rental housing attractive enough for landlords as well.”
If more homes at affordable price points do not become available in the years to come, more and more of our cities will become slums. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.”
Now that is something worth worrying about.

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

The column originally appeared on Firstpost on Apr 30, 2015 

Recover black money from India first, Modi. Instead of making noises about what lies in Swiss banks

Vivek Kaul

Narendra Modi and his government have had quite a fascination for the black money that leaves the country. Black money is essentially money that has been earned, but on which a tax has not been paid.
During the electoral campaign for the 2014 Lok Sabha polls, Modi promised that all the black money that had left Indian shores would be recovered and Rs 15 lakh deposited in the bank accounts of every Indian. Later Amit Shah, the president of the BJP, dismissed this as a chunavi jumla.
In the budget presented in February 2015, the finance minister Arun Jaitley focussed on black money and said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”
At the same time Jaitley unleashed a series of measures to counter the menace of black money leaving the shores of this country. “Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment upto 10 years,” was one of the measures that Jaitley spoke about during the course of his speech.
Recently, the Income Tax department issued new income tax forms which asked for a plethora of information from individuals travelling abroad. This was again seen as a step to curb black money. These forms had to be withdrawn after a wave of public protests.
As per the Global Financial Integrity report titled Illicit Financial Flows from Developing Countries: 2003-2012, around $439 billion of black money left the Indian shores, between 2003 and 2012. What is interesting is that in 2003 the total amount of black money leaving India had stood at $10.1 billion. By 2012, this had jumped more than nine times to around $94.8 billion. In comparison, the money leaving China during the same period grew by less than four times during this period.
Given this, one really can’t blame the government for being overtly worried about the black money leaving the country. Also, black money that remains in the country has some benefits. Cambridge University economist Ha-Joon Chang explains this in his book Bad Samaritans—The Guilty Secrets of Rich Nations and the Threat to Global Prosperity, in the context of a minister taking a bribe (which is also black money, given that the minister is not going to declare the bribe as an income).
As he writes: “A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth.” If the minister taking the bribe decides to spend/invest that money in the country, it has a positive impact on economic growth, as the spending creates economic demand and the investment creates jobs. At least in theory, the idea seems to make sense.
In comparison, the black money leaving the country is a total waste. As Chang writes: “A critical issue…is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment—which is one way odious money can partially ‘redeem’ itself.”
Once we take this factor into account Modi government’s crackdown on black money leaving the shores of the country starts to make immense sense. But the question is how good are the chances of recovering the money that has already left the shores?
There is a great belief in India that all the black money is lying with banks in Switzerland. But this belief is incorrect. As Chang writes: “Switzerland is not a country living off black money deposited in its secretive banks…It is, in fact, literally the most industrialized country in the world.”
Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore in 2013. In 2006, the total amount had stood at Rs 41,000 crore.
The reason for this fall is simple. Over the last few years as black money and Switzerland have come into focus, it would be stupid for individuals or companies sending black money out of India, to keep sending it to Switzerland.
There are around 70 tax havens all over the world. And so this money could be anywhere. Getting all this money back would involve a lot of international diplomacy and cooperation. Also, the question is why would tax havens return this money. The economies of many tax havens run because of this black money and no one undoes a business model that is working.
An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland and beyond the reach of any tax authorities. Some of this money must have definitely originated in India.
Long story short—it would be next to impossible to get back any of this black money.
Now let’s get back to domestic black money. As per Chang this money if invested properly can create jobs as well as economic growth. In the Indian case a lot of this money gets invested into gold and real estate. Money going into gold does not create any jobs. And money that goes into real estate has driven up home prices in particular, all over the country, to extremely high levels. Most middle class Indians cannot afford to buy a home now.
Given this, it makes tremendous sense for the government to crack down on domestic black money, instead of making noises about recovering black money that has already left the shores of this country. Further, focus should be on ensuring that the number of people paying income tax goes up in the years to come.
In short, the black money menace first needs to be tackled domestically.

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

The column originally appeared on DailyO on Apr 27,2015

Of budget, black money and housing

India-Real-Estate-MarketVivek Kaul

Arun Jaitley’s second budget as finance minister was slightly high on the policy front. One of the things that Jaitley talked about was tackling the black money menace in the country. This was the first time anyone from the Modi government has talked comprehensively about the black money within the country. Before this, the entire focus was on getting back the black money which has left the shores of the country. Focusing on black money in the country makes more sense simply because it would be easier to recover.
Jaitley announced a spate of measures in the budget to curb domestic black money (though he announced many more to curb black money leaving the country). He said: “a new and more comprehensive Benami Transactions (Prohibition) Bill will be introduced in the current session of the Parliament…This law will enable confiscation of benami property and provide for prosecution, thus blocking a major avenue for generation and holding of black money in the form of benami property, especially in real estate.”
The finance minister also said that the Income Tax Act would amended to “prohibit acceptance or payment of an advance of Rs 20,000 or more in cash for purchase of immovable property.” How will this provision be implemented remains to be seen.
Further, quoting of the permanent account number(PAN) has been made mandatory for purchase or sale exceeding the value of Rs 1 lakh. This is a good move. In fact, it would have been an even better move if Aadhar cards were made compulsory for real estate transactions, given that it is a tad easier to fudge the PAN card in comparison to the Aadhar card.
The ministry of finance now also plans to use technology to improve tax enforcement. As Jaitley said: “To improve enforcement, Central Board of Direct Taxes(CBDT) and Central Board of Excise and Customs(CBEC) will leverage technology and have access to information in each other’s database.”
The move to leverage technology is very interesting. In the February 2013 budget speech, the then finance minister P Chidambaram had estimated that India had only 42,800 people with a taxable income of Rs 1 crore or more. Contrast this with the fact that more than 30,000 luxury cars are sold in India every year. Both Audi and Mercedes sold more than 10,000 cars in India in 2014.
What this clearly tells us is that a lot of Indians are not paying their taxes properly. And technology can help in narrowing down who these people are.
Income on which taxes are not paid ends up as black money. A lot of black money that is generated finds it’s way into real estate in benami form. This is the major reason why real estate prices do not fall, despite sales having come to a standstill for a while now.
Further, once black money enters real estate it tends to generate more black money. Consider this—an individual buys a house for Rs 50 lakh, of which he pays 30% or Rs 15 lakh in black. The proportion could be higher or lower depending on which part of the country the individual is in. The black money portion tends to be on the higher side in the national capital territory. The same cannot be said about cities like Bangalore.
Getting back to the example. Let’s say a few years later the price has gone up to Rs 1 crore. The individual now sells the home and gets Rs 30 lakh in black, which is 100% more than what he started with. This amount then finds its way back again into real estate.
This phenomenon has led to a situation where a huge portion of the homes being built are just being built so that investors can hide their black money. This essentially ensures that those who want to buy homes to live in simply can’t afford them. As the latest Economic Survey points out: “The widening gap between demand and supply of housing units and affordable housing finance solutions is a major policy concern for India. At present urban housing shortage is 18.8 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment to overcome.” The housing shortage in rural India stands at 43.1 million homes.
A recent report by Liases Foras, a real estate research and rating company, put the weighted average price of a flat in Mumbai at Rs 1.32 crore. For the National Capital Territory the price was around Rs 75 lakh. Even in a smaller metro like Pune, the average price was around Rs 57 lakh.
Most Indians can’t afford these kind of prices. Akhilesh Tilotia in his new book The Making of India, makes an estimate of the price range at which homes will be affordable: “A large portion of the unmet housing needs are at an economic value of Rs 5-10 lakh. Assuming that households of five members can crowd into space of between 250-400 sq ft, housing stock in the range of Rs 1,250-Rs 4,000 per sq ft will be needed.” What this clearly shows is that homes that are currently being built in cities are way beyond what most people can afford.
And this explains why “real estate and ownership of dwelling” constitute only “7.8 per cent of India’s GDP in 2013-14”. In comparison, as data from the National Housing Bank shows, China was at 20%, Malaysia at 29% and the United States at 81%. This number needs to go up in the years to come. And the only way that is possible is if affordable homes become available.
In order to ensure that the nexus between real estate and black money needs to be broken down, so that builders start making homes for people to live in. Whether Jaitley’s efforts bear some fruit remains to be seen, given that many real estate companies are essentially fronts for politicians to hide their ill-gotten wealth.
The last financial year’s Economic Survey made a very interesting point: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.” If affordable homes are not built, where will all these people live?

The column originally appeared in the Daily News and Analysis dated Mar 3, 2015 

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]) 

One of the best kept secrets of Indian real estate is out…

India-Real-Estate-Market

Vivek Kaul

The Economic Survey for the last financial year states: “Data shows that the first claim upon the savings of households is physical assets such as gold and real estate.”
That Indians love their ‘real estate’ would be like stating the obvious. But sometimes it is necessary to state the obvious as well. Why? That will soon become clear.
AkhileshTilotia, a thematic research analyst with the institutional equities arm of the Kotak Mahindra Group, makes a very interesting point in his new book The Making of India—Gamechanging Transitions. As he writes: “Thanks to its love for real estate investments, India is in a curious position of having more houses than it has households.”
This becomes clear from the Census 2011 data. “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households,” writes Tilotia.
So what is happening here? One explanation for the number of houses rising faster than the number of households may lie in the fact that houses are being bought as investment and not to be lived in.
What this means is that many Indians own more than one house and then there are many more who do not own any, because prices are way beyond what they can afford. Further, given our penchant for owning real estate, a lot of real estate is being built sheerly from the point of view of fulfilling investment demand.
The Caravan magazine in a 2011 article, when real estate investment was at its peak, quoted Gautam Bhan, a consultant with the Indian Institute for Human Settlements, to make this point: “This economy is being built solely on speculation…These properties are being built solely for investment cycles. Why else would you build halfway to Agra? If you have ten businessmen who occasionally want to get rid of black money, you’ll have an apartment building. These flats will be bought and resold and bought and resold. Nobody even needs to live there.”
This is the best possible explanation for why the number of houses has gone up at a much faster pace than the number of households.
Further, those who have black money to hide, don’t bother much about the location of where houses are being built. And that explains why houses even miles away from India’s biggest cities are so expensive.
So what is the way out of this mess? How can houses be built and sold at prices so that people can buy them to live in them? As I have mentioned more than a few times in the past, the government needs to actively go after the black money hidden in physical assets like gold and real estate. There is no point in trying to actively pursue all the black money that has left the country and not do anything about all the black money lying in the country.
A crackdown on black money will lead to better tax compliance, meaning more taxes for the government. Further, it will also bring down the amount of black money that goes into black estate. This is easier said than done and will need solid political will for many years, if it has to be pursued seriously.
Further, it is high time that agricultural income be brought under the tax net. There is no reason that rich farmers should not be paying income tax. In fact, in cities like Shimla, Chandigarh and even the National Capital Region, all the untaxed agricultural income chasing real estate has also been responsible for driving up home prices, among other things.
Ensuring affordable housing becomes available at a large scale level should be a major priority for the Narendra Modi government. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.” If affordable housing does not become the order of the day slums will become as common place in other cities, as they are currently in Mumbai. And that is not a happy thought to look forward to.
Also, as Tilotia points out in his book, “more than three-fourths of urban residents live cheek by jowl in cramped spaces.” This basically happens because of two reasons. The first reason is the low FSI ratio which has made land very expensive. The second reason is “the inability to commute cheaply and quickly, which means that people have to congregate in and around areas where they can find economic activity and public infrastructure.”
If affordable housing has to take off, all this needs to be set right.

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

The column originally appeared on www.firstpost.com on Feb 18, 2015

One thing that Jaitley can do to control speculation in real estate

India-Real-Estate-MarketIn response to yesterday’s column I got an interesting email from a reader. The email has prompted me to write another column on real estate.
Talking about the budget presented by the Narendra Modi government in July 2014, the reader said: “The most detrimental thing that the government did was hike the deduction limit from Rs 1.5 lakh to Rs 2 lakh!!!”
The finance minister Arun Jaitley had said in his budget speech: “Housing continues to be an area of concern for middle and lower middle class due to high cost of financing. Therefore, to reduce this burden, I propose to increase the deduction limit on account of interest on [home] loan in respect of self occupied house property from Rs 1.5 lakh to Rs 2 lakh.”
This should not have been done the reader suggested, as it leads to more speculation in real estate. As he wrote in his email: “ Even in Vasai or Virar or any other distant suburb from where people come to Mumbai to work, flats are not cheap.” What makes the situation worse is the fact that “people with high incomes living in Mumbai invest in such distant suburbs to avail tax benefits and capital appreciation.”
What the reader was basically saying is that individuals who already own flats and are living a comfortable life in Mumbai, buy “cheaper” flats in suburbs to avail tax benefits. I am sure something similar must be happening in other cities as well.
At the same time such individuals hope to make capital gains from the purchase in the years to come, as real estate prices keep going up. With more money chasing the same number of flats, prices go up. This makes flats more expensive for people who want to buy and live in them.
While the reader has got the speculation bit right, he has got the tax part of it wrong. It doesn’t make any sense for an individual to buy a flat for the sake of investment, so that he can get a deduction of Rs 2 lakh on it and save Rs 61,800 in the process (assuming he comes in the top tax bracket and pays a total tax of 30.9%).
The amount is too small to be taking on the headache of owning a flat in a distant suburb. Further, chances are that the individual would be already repaying a home loan for the flat that he lives in. Hence, he can’t take the same deduction for two flats.
Nevertheless, it would still make sense for an individual looking to buy a flat(and this need not be limited to just one flat) for investment purposes to go ahead and save money in the process.
In fact, the Income Tax Act actually encourages people to speculate in real estate. There is no restriction on the number of homes against which a tax payer can claim a tax deduction on the interest paid on the home loan to fund the property. Only one of these properties needs to categorized as a self-occupied property. On this self-occupied property, an interest of up to Rs 2 lakh can be claimed as a tax deduction.
This limit applies only to the self-occupied property and not on other homes that a tax payer may choose to buy. Any amount of interest paid on home loans can be claimed as a deduction as long as a “notional rent” is added to the income. We all know that these days “rents” are relatively low in comparison to the EMIs that need to be paid in order to repay the home loan.
Hence, the interest component tends to be massive during the initial years and helps people with two or more homes, claim huge tax deductions. This was the point that the reader who sent in an email was trying to make, even though he got the tax deduction part wrong.
This “deduction” has been used over the years by well paid corporate employees to bring down their taxable income. Further, individuals who use this deduction benefit on two fronts—tax deduction as well as capital appreciation. Even if, the capital appreciation is not huge, such individuals are happy in claiming just the deduction than actually making money from an increase in price. Hence, they may not sell the flat, even in a scenario where prices may be falling.
While offering a tax deduction on a self occupied property makes some sense, there is no logic to offering a tax deduction on a home, one is not living in. This “deduction” needs to be plugged immediately as it encourages speculation.
Arun Jaitley has an opportunity to do a huge favour to the people of this country by removing this deduction in the forthcoming budget. Whether he goes around to do that will only become clear once the budget is presented on February 28, later this month.

Postscript: I had written in a column last week that I would be surprised if the economic growth for this financial year would be greater than 7%, as per the new method of calculating the GDP. Data released yesterday by the ministry of statistics and programme implementation suggests that the Indian economy is likely to grow by 7.4% during this financial year. Turns out I was wrong in writing what I did.
As per the old method of calculating the GDP the economic growth during this financial year was supposed to be at 5.5%. No reasonable explanation has been offered for this jump in growth. At the same time other high frequency data like bank loan growth, corporate profitability, stalled projects, massive slowdown in collection of tax revenues etc., seems to suggest that the economic growth should be more around 5.5% than 7.4%.
I will keep track of this and in the days to come will try and come up with a possible explanation for this huge difference in the two numbers.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Feb 10, 2015