{"id":2514,"date":"2014-01-07T11:37:56","date_gmt":"2014-01-07T06:07:56","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=2514"},"modified":"2014-01-07T11:37:56","modified_gmt":"2014-01-07T06:07:56","slug":"how-banks-help-keep-real-estate-prices-high","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2014\/01\/07\/how-banks-help-keep-real-estate-prices-high\/","title":{"rendered":"How banks help keep real estate prices high"},"content":{"rendered":"

\u00a0\"India-Real-Estate-Market\"<\/a><\/span>Vivek Kaul<\/span><\/span><\/span>
\n\u00a0<\/span>John Maynard Keynes, the greatest economist of the twentieth century, once remarked \u201c<\/span><\/span><\/span>markets can remain irrational longer than you can remain solvent<\/i><\/span><\/span><\/span>.\u201d In simple English, one of the interpretations of this statement is that the bubbles can keep running for a very long period of time.
\nThe Indian real estate sector is an excellent example of the same. It has been a bubble for the last few years now, but hasn’t burst.
\nBefore we go any further it is important to define the word ‘bubble’.\u00a0The\u00a0<\/span><\/span><\/span>Financial Times Lexicon<\/i><\/span><\/span><\/span>\u00a0defines an asset bubble as follows:\u00a0\u201cWhen the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely – at which point the bubble bursts.\u201d
\nThe problem with this definition is that no one really knows when the bubble will burst. The fundamentals may point out to the fact that the bubble might burst any time soon, but that may or may not happen.
\nLets try and understand this in the context of Indian real estate. How good are the fundamentals? It is a well known fact that real estate companies are having a tough time trying to sell homes they have already built up (or what in technical terms is referred to as inventory). As a November 2013 report of Colliers International points out \u201cPressures of increasing unsold inventory and a liquidity crunch resulted in fewer project\u00a0launches. There was an increase in the incentives being offered to sell property, such as easy payment plans, discounts and free gifts with bookings.\u201d
\nSo homes in projects that have already been built up are lying unsold. And the number of new projects being launched have come down. As a December 2013 report\u00a0<\/span><\/span><\/span>in the Business Standard points out<\/span><\/span><\/span><\/span><\/a>\u00a0\u201cNew property launches in the residential segment across cities declined 12 per cent in the year, with Chennai recording the sharpest drop at 39 per cent, followed by the National Capital Region at 33 per cent and Pune at 20 per cent, according to a report by Cushman & Wakefield. Mumbai recorded just 6 per cent growth in launches.\u201d
\nWhat this tells us is that the demand for real estate has slowed down. So, why aren’t prices coming down is the logical question to ask? One reason is the fact that a lot of homes that have already been bought have been bought by investors, who are in no hurry to sell out. Shashank Jain executive director, PwC India explained\u00a0<\/span><\/span><\/span>this point in a recent interview to the Daily News and Analysis (DNA)<\/span><\/span><\/span><\/span><\/a>. He said that investors are largely of two types\u2014those looking to deploy black money\u2014and senior executives looking to invest in their in a second or third home.
\n\u201cOne, the business community with an element of unaccounted surplus being parked in realty. The government is trying to control them by imposing TDS (tax deducted at source) of 1% on an amount of Rs50 lakh and more. Two, a significant chunk of investment is made by white collar executives, especially in the metro micro markets. This class of investors is putting its surplus income in a second or third home. They don\u2019t have exit pressure. That again means that prices will not come down significantly,\u201d said Jain.
\nThis explains to some extent why real estate prices are not falling. But it does not explain why real estate companies are not cutting prices to get rid of their surplus inventory. It only explains why investors are holding on to homes they have already bought.
\nIt is important to understand that any bubble keeps running till money keeps coming into it. Between 2005 and 2012, a lot of money came into real estate through the private equity route. As Manish Bhandari of Vallum Capital writes in a report titled\u00a0<\/span><\/span><\/span>The End game of speculation in Indian Real Estate has begun \u201c<\/i><\/span><\/span><\/span>Private Equity investments drove in hordes after opening of Foreign Direct Investment (FDI) in real estate sector in the year 2005. The high structural growth story of India attracted a lot of private equity capital the in real estate industry during the Yr 2005-2012, with major inflows coming in the Year 2007-09. Close to $US 20 bn of inflow came to into real estate & construction business, which has put the prices on steroids.\u201d
\nSo, over a period of time, money coming in from the private equity investors has kept real estate prices high. But as Bhandari says private equity inflows peaked during the period 2007 to 2009. There has to be a more recent reason for real estate prices not falling.
\nThe answer lies in some interesting data provided by the Reserve Bank of India (RBI). Between November 30, 2012 and November 29, 2013, the total loans given by banks (excluding food credit) grew by 14.7%. During the same period loans given to commercial real estate grew by a much faster 19.1%. This, in an environment where real estate companies have huge inventories and the launch of new projects has slowed down considerably. So, why are banks lending money to real estate companies? And what are real estate companies doing with that money?
\nThe only possible explanation is that banks are essentially giving fresh loans to real estate companies so that the companies can repay their old loans. This has allowed real estate companies to not cut prices on their unsold inventory. If bank loans had not been so forthcoming, the real estate companies would have to sell off their existing inventory to repay their bank loans. And in order to do that they would have to cut prices.
\nBut that hasn’t happened. Interestingly, between November 2008 and November 2013, total loans given by banks (excluding food credit) grew by 57.4%. During the same period lending to commercial real estate grew by 86.2%.
\nAnd this is what has kept real estate prices high. As Pankaj Kapoor,\u00a0owner and managing director, Liases Foras, a real estate rating and research firm,\u00a0<\/span><\/span><\/span>told Business Today recently<\/span><\/span><\/span><\/span><\/a>\u00a0\u201cif capital availability becomes difficult, developers may have to cut prices to push sales.\u201d
\nIt is also worth remembering that the average life of a private equity fund is seven to eight years. And all that money that private equity investors have brought in over the last few years, will now have to be returned by real estate companies. In order to do that real estate companies will have to sell the existing inventory that they have piled up.
\nAs Bhandari points out \u201cWith the average life of private equity fund being around 7-8 years, the Year 2013 marks the beginning of private equity returning back to shores. The imperative is to see down inventory and return the capital back to investors…The exit of private equity, a fair weather friend of developer, is going to create distress sale situation in real estate industry, shortly. This would lead to depressing price situation for the next 18 months, scaring further fund raising in this sector.\u201d
\nAnother factor that could work towards real estate prices falling are the impending Lok Sabha elections. A lot of black money of politicians is locked up in real estate. And this will have to be unlocked in order to get money to fight elections. As Bhandari points out \u201cAccording to various estimates an election for central government can cost upwards of US$ 5-6 bn, while average state government elections costing around one billion dollar. With impending central and state election in ten states, costing around US $15 bn, Real Estate will witness outflow of money to fund these elections over the next 18 months.\u201d A similar trend played out before the 2009 Lok Sabha elections when prices fell by around 20% in many markets. But that was also an impact of the start of the current financial crisis with the investment bank Lehman Brothers going bust.
\nWhether this happens again remains to be seen, simply because as Keynes said \u201c\u201c<\/span><\/span><\/span>markets can remain irrational longer than you can remain solvent<\/i><\/span><\/span><\/span>.\u201d<\/span><\/span><\/span>
\n\u00a0The article originally appeared on www.firstpost.com<\/a> on January 7, 2014<\/span>
\n(Vivek Kaul is a writer. He tweets @kaul_vivek)\u00a0<\/span><\/span><\/span>
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

\u00a0Vivek Kaul \u00a0John Maynard Keynes, the greatest economist of the twentieth century, once remarked \u201cmarkets can remain irrational longer than you can remain solvent.\u201d In simple English, one of the interpretations of this statement is that the bubbles can keep running for a very long period of time. The Indian real estate sector is an … <\/p>\n

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