Clear as a Foggy Day - Indian Realty (Part 3)

Now here is another foreign view, that will make us all in India feel like engaging in a song and dance sequence - Bollywood style. "India is doing great. Nobody talks about it." Words of wisdom uttered by none other than the world-famous Mr. Donald Trump. Okay, I think what he meant to say was 'India is doing just great, better than the US for now. Maybe Indians should stay at home and buy all the "Trump" branded apartments coming up in practically every Indian city. Make me richer. I have an election to fight.' Be rest assured, unlike the Middle East, Mr. Trump can "Treat" or "Trump" India the way he wants, and none of his Indian partners will pull down the "TRUMP" brand from their developments. Please note, we are a very tolerant nation unless it concerns the cow, and Mr. Trump considers the cow holy (gathered from his frequent use of the term "Holy Cow").


As a courtesy to all those who fell asleep reading my previous blog (no worries it happens to the best for far more important things), I will reiterate some of my key learning(s) from the RICS 2016 conference:


1. The Indian RE space is going through a "Value Contraction" phase.

2. Last year, Mumbai City demanded some 2 million affordable homes, but saw sales of some 40,000 units, leaving an inventory of 170,000 affordable homes unsold. Clearly what developers call affordable are either unaffordable or built of a quality that the customers call unacceptable. Most of the affordable homes could give the SRA (Slum Rehabilitation Authority) buildings a run for their money in terms of crappy design and quality.


3. In general, prices unlikely to appreciate for next couple of years, and real inflation with the current tax structure will worsen the situation. I may add here that the introduction of GST (Goods and Services Tax) at close to 18% will drive up costs of essentials even further for those really in search of a home to buy. Oil may have become cheaper than milk and bottled water in the US, and possibly in India too, but petrol and diesel hardly qualify as household staples.

4. Fund boys will make friends with a very select list of developers, those who have delivered and are executing projects at select locations. So those eligible get ready to party (lots of money on favorable terms), others do whatever you want to do man (as Salman Khan says on Big Boss).

5. Hybrid financing (fixed + floating) will continue to rule the private equity space in real estate until the market reaches a point of distress.

Those who had read my previous two blogs on Real Estate in "alert" mode would surely know that none of what I have said above was stated earlier. Whatever I have stated above certainly should make the entire RE landscape so very clear to all the readers.  As clear as one can see on a foggy day.

To begin with, it was private equity that pumped money in RE without understanding ground realities. As a result, it inflated market values beyond what was sustainable. Naturally, everyone climbed onto the gravy train, right from the seller of the land to those involved in selling construction sand. Small brokers to small contractors began to earn so much out of real estate, that they too turned into developers. Not that it's bad for people to move up in life, but it was this class that began to build homes for the lower end of the spectrum without much understanding of what the market really wants. Not that the big and established ones understood that aspect fully either. For example, in the Mumbai zone, I cannot understand why premium developments in far out places like Thane or Virar and even Panvel were built as expensive - small as pill boxes - super tall buildings - in the middle of a concrete jungle, when the market was actually looking for premium affordable larger format homes (not condos), spread out in the midst of open greenery with a work play eco-system built around it. The old FDI norms were specially designed to promote satellite townships (the precursor to SMART cities). PE money did not influence developments to better quality of life, it just decided to bed with developers promising the best returns. No offence, it is a broad and sweeping statement, but when I look at the number of good and bad developments, bad wins hands down.


The market is in general agreement that too much and too quick infusion of private equity made a select few too rich too quick. Wealth did trickle down, but not enough to match the inflated rates at which a home was being offered to the end buyer. It became an investor game, invest now and 100% appreciation in 6 months to 6 years. Over time, a sluggish economy resulted in foreign PE money in RE to virtually disappear. A lack of primary sales forced the developers to borrow capital as debt from local RE funds to hold the price points intact, and so began the vicious cycle of contraction. I was astonished (actually I should not have been) to hear that many large developers are currently offloading stock to bulk buyers at a 30%+ discount to market. The developers say that these are not really sales but securitization deals to capital lenders. This may actually be true. If the inventory was sold at such a deep discount the builder would certainly loose. The high cost of land and regulations ensures it. But, the lender knows that the true value of the market is 30%+ lower to seek such a haircut in order to secure the investment.

So the next question is, why don't the builders voluntarily allow the market to crack to its real value and take a short term hit? It will help recapitalizing the market. I know that my question qualifies as a "catch 22". It is in no one's real interest to allow the market to go into a free fall.The tragedy is that the very funds that helped create this price bloat with pure equity are still funding it with skewed debt. Longer the hold, better the chances of distress. Ultimately, like in gambling, the house always wins. I know many developers who showed PE boys the middle finger when asked by the latter for an exit. Now, I don't see too many developers with an intact middle finger.


Dramatic as it may sound, but this is the current reality of realty. By the way, I have heard that many impatient foreign funds, unable to find "quality" distress deals (I am really going LOL LOL now) have started returning money back to investors

Ask around, not many are convinced about the revival in the commercial estate. Yes, occupancies are higher, but at what rate? Rates in most locations have corrected sharply. Higher occupancies will allow the unfinished inventory to see completion, that means rents may retreat too, hence returns. Warehousing is now the new retail and not malls. Will malls get converted to expensive warehouses, unfinished hotels converted to expensive office complexes, and unfinished hotels into high end residential? Residential? What about it? There is always AirBnB to turn to. The price of real estate never goes down in India, so we have learnt. If it does, nobody's talking about it.