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The Real State of Real Estate in India

Nature has given us a finite supply of land. Land has no replacement; unlike EV’s replacing the demand for fossil fuels, etc.. Although with increasing life expectancy, the incremental need for land might be largely covered by increasing the height of skyscrapers, but still we need space to live! So it seems that there is nothing to panic, is that the Real State of Real Estate in India?

When did the State changed!

What was 23 April 1992 (Harshad Mehta Scam) to stock markets, 8th November 2016 was to Real Estate in India! The disruption caused by the first took almost 10 years to convert it from the most unorganized, oldest stock markets of the world to one of the most mature, liquid, visible and modern financial systems! The aftershocks of the past 33 months into this disruption by demonetisation, have just begun to show effects in various areas, like liquidity, NBFC’s, unemployment, etc..

Is this the Real State of Real Estate in India

With the growing resentment of Indian population towards all the government policies, criticising the real estate for all the perils of the economy has become the hottest topic on party circles! But is the state of real estate in India so bad? NO.

The sales of housing units in major seven cities of India in 2019 has shown a growth between 5-10%! ANAROCK reports that almost $ 14.01 Billion of PE investment was done in Real Estate in India, between 2015 to 2018. A Colliers International report shows a growth of 26% to nearly $3.9 billion, in the first half of the current year and 42% of that has gone into commercial office assets. In fact, five of the top 10 investments in real estate in 2018 were in commercial realty. But almost all the above good news is confined to mostly 6-7 cities in India. It does that mean inventory is moving, but not the prices? Is this an issue of India and Bharat?

The Past of Real Estate in India versus Global

Five important aspects of real estate business happened in India;

Firstly, the entry barrier into real estate business was extremely low (Rs. 1lakh/US$1515); Secondly, it was being used to deploy the cash/black money component (increase in the way and value of agricultural land prices in India would have put even the stock market to shame); Thirdly, the investment was being done only for quick appreciation and not regular income; fourthly we had a real estate developer as SSI business and lastly debt was being used by developer instead of long term equity!

All this is contradictory to how Real Estate business works globally; Globally Real Estate companies are real estate development companies, with very strong money power, long term investors, they think through for a horizon of 10-20 years, have massive developments and invest for primarily regular incomes and long term appreciation is an added bonus.

The Present State of Real Estate in India

There is a paradigm shift in the way real estate business is happening in India at present. Large commercial spaces are being lapped up by PE investors and being offered on lease. The bigger cities showing a different trend than the rest of the country. Ready, near to CBD residential units, with reasonable prices are slowly being sold. Small investors are holding lands for which there is no buyer ! In Tier II and Tier III cities, middle category of investors and builders are on the verge of bankruptcy (they are overly leveraged and due to lack of transparency they cannot get equity)

Future State

There are four changes required to make this a mature robust business in India;

Firstly, the exit of direct retail investor; he should be investing through REIT etc., and be prepared for low, but consistent regular income;

Secondly, the corporatisation of this business in Tier II and Tier III cities; Real estate is among the last of the unorganized businesses in India and other businesses who have matured from cash to corporate, are giving sustainable results (Indian film industry is a classic example); Builders and developers in non metros have to prove their corporate governance, ethics, etc., and I don’t see why PE funds should not be investing;

Thirdly, moving from owning to leasing; The world is moving from ownership to sharing (do we need more proof after Air BNB, Uber etc..) and for a salaried middle class, housing is a need and a non-productive asset; Imagine taking a 10 year home loan at 9% and realising that the appreciation does not even cover inflation and what if one can get the same unit for 10 lease at 3-4% costs; easing of residential rental laws, so that the country also moves from owning to leasing (as per a Deloitte report, 54.3% of all residential units in Germany are rented); Budget 2019 was expected to give some relief, but it still is on the wishful thinking list. RERA needs to be seriously implemented and Rental laws to be made win-win for all.

Fourthly, this is an equity based business and not debt! Real Estate is supposed to be the most secure of asset classes and thus would give the lowest returns. Whoever knows the right mix of debt/equity, will be the winner!

After organised retail, organised real estate is here to stay! Just remember growth in real estate is not just appreciation in value, it is selling of units and generating regular rental income as well.

The future of Real Estate in India is very bright, it depends from which side we see the light!


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