Unsold homes

Slash Prices: Arun Jaitley’s Advice To Real Estate Companies Is Spot-On

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

The Associated Chambers of Commerce and Industry of India (Assocham), a business lobby, recently released a study titled Real estate investment: State-level analysis.

In this study, it estimated that 75% of the 3,540 real estate projects in India remained non-starter as of the end of March 2015. The business lobby estimated that the projects had total outstanding investments worth over Rs 14 lakh crore. This means that the average size of a project is around Rs 395.5 crore.

Assocham further said that a total of 2,300 projects in the real estate sector remained non-starter. Further, 1000 projects are facing a significant delay in completion.

Why is this happening? Real estate companies have two major sources of finance: banks and investors. The monthly sectoral deployment of credit data released by the Reserve Bank of India (RBI) points out that the total bank lending to commercial real estate grew by a minuscule 2% between September 19, 2014 and September 18, 2015. This, when the overall lending by banks grew by 8.4%.

Now compare this to how things were in September 2014. Bank lending to commercial real estate between September 20, 2013 and September 19, 2014, had grown by a massive 20%. The overall bank lending by banks had grown by a similar 8.6%.

This clearly shows that the lending by banks to real estate companies has slowed down dramatically. Between September 2013 and September 2014 banks lent Rs 26,958 crore to real estate companies. This has crashed to Rs 3,157 crore between September 2014 and September 2015.
What this clearly shows is that banks are not interested in lending money to real estate companies anymore. And in this scenario real estate companies do not have enough money to start or complete projects. 

Other than banks a major source of finance for real estate companies are investors looking to deploy money in under-construction properties. It seems they are staying away from the sector as well.

The returns from the real estate sector have been very low over the last few years. Further, many projects are massively delayed. As the Assocham study points out: “On an average, real estate projects in India are facing a delay of 33 months in completion… Realty projects in Andhra Pradesh are facing maximum delay of about 45 months followed by Madhya Pradesh (41 months), Telangana (40 months) and Punjab (38 months).”

Given this, it is not surprising that the investor interest in real estate seems to have come down dramatically, leading to major fund crunch for real estate companies. This also becomes clear from the spate of goodies and discounts that real estate companies are willing to offer to anyone who is willing to invest in a fresh project.

Commenting on the real estate sector, the finance minister Arun Jaitley said on October 31: “The essence of your industry can’t be that I will only survive on subsidies. You will have to survive on the strength of the market economy itself [italics are mine] and you will have to survive on the strength of our banking system to finance you.”

The phrase to mark in the above paragraph is “You will have to survive on the strength of the market economy itself”. What did Jaitley mean by this? What this meant was that the real estate companies will have to allow the market economy to operate. Up until now, despite a major fall in demand for real estate, prices haven’t fallen at the same pace.

In this scenario, the real estate companies are stuck with a massive amount of unsold homes. Even a fall in interest rates hasn’t helped given that most of the real estate in India’s bigger cities, where the bulk of the market is, is way too expensive and beyond what most people can afford. This anomaly needs to be set right. Real estate companies need to cut prices at a much faster rate than they currently are. For once, Jaitley’s comment on real estate is spot-on.

The RBI governor Raghuram Rajan said something similar sometime back: “I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up.”

It is important to understand here that real estate is a very important cog in the wheel of the Indian economy. It employs a large number of unskilled and semi-skilled labour. It has major backward linkages into sectors like cement and steel. The point being no home can be built without cement and steel. A revival of real estate sector will lead to a definite pick up in cement and steel sectors as well.

To conclude, if real estate demand has to pick up, prices need to fall much more than they have up until now. The question is how soon will the real estate companies come around to cutting prices at a much faster rate than they currently are? On that your guess is as good as mine.
Stay tuned!

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

The column originally appeared on Huffington Post India on Nov 2, 2015

RBI needs to answer some questions on home loans

RBI-Logo_8
One of the things that young journalists (or even old ones) are taught when they first join a newspaper is to think of a headline first, before they start writing.

The logic for this is pretty straightforward. Newspapers have limited space and pieces written using this concept tend to be more structured and readable.

Given their limited space, newspapers do not have space for rambling (or at least they should not). So all news-reports as well as analysis ideally needs to be definitive, where there is no scope for being all over the place.

The trouble with this approach is that while it helps come up with structured reports as well as analysis, it leaves very little scope for rambling and stuff that is not so definitive.

I know I have been rambling up until now, but just humour me a little more and I might come to the point sometime later in this column.

And actually that’s the beauty of writing on the web. There are no space constraints. This allows writers like me to ramble once in a while and come up with stuff that is not so structured and not so definitive.

This helps, given that life as well as the economy are largely unstructured, not so definitive and a little all over the place. And this is one such column.

Every month, the Reserve Bank of India (RBI) declares the sectoral deployment of credit data. This provides details of the different kind of lending carried out by banks. One of the data points that the RBI shares is the total amount of home loans given by banks.

The latest data was released on October 30, 2015. As per this data, between September 19, 2014 and September 18, 2015, banks gave out home loans worth Rs 1,04,135 crore. This forms 21.6% of the total lending carried out by banks.

How was the situation a year earlier? Between September 20, 2013 and September 19, 2014, banks had given out home loans worth Rs 75,058 crore. This formed around 16.5% of the overall lending by banks.

So what does this tell us? Between September 2014 and September 2015, the banks gave out a greater amount of home loans both in absolute as well as proportionate terms, in comparison to the period between September 2013 and September 2014.

So far so good.

Now compare this to the news that you keep hearing about real estate companies sitting on huge number of unsold homes. If that is the case then how are home loans being given by banks going up?
What this perhaps means is that people are no longer buying under-construction properties (which make up for a significant part of unsold homes of real estate companies) and that is why the number of unsold homes has not been falling.

Instead people are buying completed homes. These are homes which were completed in the past. Investors who had bought these properties are now perhaps exiting. I am not sure about this, but that is the best possible explanation that I can come up with and it’s clearly not definitive.

Why are people buying fully completed homes? For the simple reason that too many under-construction homes over the last few years have continued to be under-construction. A recent report brought out by the business lobby Assocham pointed out on that an average a real estate project in India was delayed by 33 months or close to three years. In this scenario, it will take a real brave-heart to buy an under-construction property.

Further, with banks giving out more home loans, does that mean home prices have fallen, leading to people buying more homes? There is no way this can be figured out from the data as it is currently put out by the RBI.

What the RBI needs to reveal along with the total amount of home loans is the number of home loans as well. If this number is provided then it will become very easy to calculate the average home loan size. This average home loan can then be compared to the average home loan from the previous years and that can give us a good indication of which way home prices are headed.

If home loan size has gone up then we can safely say that prices have gone up as well and vice versa. Further, if the RBI can provide an average loan to value ratio (i.e. the total amount of the home loan divided by the market price of the home being financed), it will give us an even better indication of actual home prices and which way they are headed. One trouble here is that almost all real estate transactions in India have a black money component and there is no way the RBI can estimate that.

Nevertheless, despite this problem, if the RBI gives out the number of home loans along with the loan to value ratio (data which should not be very difficult to agglomerate) it will become slightly easier to make much more definitive statements about the real estate sector in India.

This becomes even more important from the point of view of the fact that there is very little data available on Indian real estate. Most data currently is provided by real estate consultants and they have an incentive in projecting things to be much better than they currently are.

Further, the current real estate indices (the RBI’s All-India Residential Property Price Index and National Housing Bank’s Residex) which give us some indication of which direction the real estate prices are headed, by the time they are published are fairly dated. There is no real time data coming out on Indian real estate which can be used to estimate which way are the real estate prices are headed. And that’s the most basic piece of information needed from any market.

At the same time, the National Housing Bank (which is wholly owned by the RBI) and regulates housing finance companies, should also be putting out similar data. One estimate here suggests that banks give out two-thirds of all home loans and housing finance companies, the remaining. In a country where the entire real estate sector is rigged against the consumer, this will be one consumer friendly move, which will be definitive.

Hope the RBI is listening.

(The column originally appeared on The Daily Reckoning on Nov 2, 2015)

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

India-Real-Estate-Market

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)