The One Eyed King - Indian Realty (Part 2)

Does anyone like a naysayer? For one, they are never right, be it as old as Rev. Malthus (guys -economics-school) or any one of the new age prophets of doom. But, being wrong is exactly what they hope for, in the hope that predicting possible negative events hopefully wakes up those walking happily in their sleep - dreaming. That's how they become fixtures in the history books, for the wrong reasons.

Arun Nanda's keynote address at the RICS 2016 investment conference was conveyed more as an epitaph for an India story that is about to die, rather killed by risk aversion brought about by global circumstances. While he agreed that the global investment community does not have too many alternatives, India to them, appears as a "One eyed king in a world of the blind". When choices have to be made, and options are few, generally, the wise investors don't make decisions based on compromise, and India today does look like it is a big compromise. 


Last year, about the same time, there was talk of Europe's economy revving up despite Greece and Ukraine looming; Africa was the commodity bright star; oil was 60% down at US$ 50 a bbl and the world was cheering that would now stay in the comfort zone of $45 - $60 a bbl; the US Fed. was still playing wolf with the news of rate hike; Donald Trump was still not considered a serious candidate; China was showing signs of cooling its economy, but at 7.3% growth, was it really that big a deal? Then all of a sudden hell broke loose and we all know what happened next. Deflation, stagflation, recession, contraction, compression, expulsion and all the forgotten bad "ion" words in the English language are being retaught to the world. If Rev. Malthus was around today, he would once again have predicted "the end".



Yet India, kind of, does appear to be a bright spot when most of the world has switched off lights. It does have a real consumption story, real demand for building infrastructure, real thirst for quality homes, and a desperate hunger for foreign capital, and foreign capital too wants to flood this Country but..It won't until it sees real distress, real yields, real exits, real reforms, real execution capability, and real political credibility. I am already hearing many foreign tongues wagging that 2016 is the make or break for Modi Government, and 2019 may ring in the end of his "Acche Din" (happy days). This by no means is a negative sign, just one of a hypercorrection be it quantitatively in pricing and value, and emotionally in delivery and attitude.

JLL ran a survey with some 60 fund boys, both local and foreign were quizzed about what they felt about 2016 as a year for Indian Real Estate. In very short they feel; that Indian RE has a hope, especially commercial and ITES; affordable homes is a flop story; markets will consolidate. Investors will see more exits than entry; will see funds entering India from new sources - ones that have also been slaughtered by Dollar mania - like China and Japan; will focus on distress and grade A projects and grade A locations only. Money will align with yield, be it equity or debt;  pure equity deals will rise if valuations super correct and returns expectations would ease based on selectiveness on who it sleeps with. In all of the above, delivery would be key. Effectively, the big bad arrogant wolves in RE development will have to hunt elsewhere and the small good guys will have to learn to grow up to become the good big boys on their own or eat shit and die. Personally, I think the fund boys have lost the plot as the strategy is once again flawed as usual. But then, what do I know as a blind man in the ranks?

There was one man though in the gathering who decided to play the middle path Buddha. Michael Holland, the CEO of Embassy Office Parks (a Blackstone JV) felt that India is too large to be spoken off as one. The India average may look bleak, but if markets were isolated, there were great bets in quite a few pockets and sub-segments. Example Offices would be great in Bangalore and maybe Affordable Housing in Pune. Real estate investment cannot be seen as a year on year game but as a five-year plan to see a full cycle. He disagreed with Arun Nanda's view on India being a compromise destination for investors as institutional funding of real estate in India is a decade old and much has been learned about the market by all. It took China some two decades to win the trust of foreign investors, and on that front, India is well ahead because of tight regulators being in place. Okay, they are over tight at times, but then, that has saved India from suffering a Chinese style roller coaster too. He felt that the RERA (Real Estate Regulation Authority) that would be put in place once the "Real Estate Regulation Bill of 2015" gets fully passed is a great achievement for consumer protection and bringing in a much-needed discipline in the builder community. Such actions would help in jet starting real estate sales again. It's not like I am foreign struck but foreigners do have an out of the box view that cannot be set aside.

On RERA though, Arun Nanda, the veteran of some 40 years in business was busy shaking his head sideways in disagreement. According to him, it has now been engrained in the Indian consumer DNA that the builder community is full of crooks that commit more than it can deliver and then treats customers like shit. I agree with him that RERA will not really make much difference. Even with stringent regulations in place against "black" money, the practice of transacting with it is thriving, and now even more.

I don't know who the real Buddha is, and whatever may be your end belief, I certainly left this event seeing some light. Hallelujah! I may not be so blind, and just maybe, we are all looking at the King from one side, and that makes him look like he has only one eye.  Happy Republic Day - our 67th.