The Indian Real Estate Market saw a massive boom in the period between 2004 and 2008 alongwith the global real estate bubble. However after that the industry has been going through a down cycle particularly related to the volumes and sentiments. Though the prices have not come down, the volumes in key markets like Mumbai are a fraction of those earlier. Real Estate Brokerages which did extremely well during the boom times are getting killed now. With Indian real estate companies facing huge pressures of debt, corruption charges and low volumes, the smaller brokers are getting hurt. Due to their non existent bargaining power, these companies are being forced out of the market. The builders are not paying them on time even for the reduced number of deals that these manage.
The advent of well funded big brokerages like India Homes are further pushing them out of the market. With a pan India network and technology sophistication, these brokerages are taking the game to a whole new level. The smaller companies simply cannot match them on scale,size,technology and are being pushed out. The bigger companies can offer a larger variety of properties and bigger discounts to their customers. They also have a better bargaining position vis-a-vis the real estate builders which ensures payments on time and enforcement on contacts (always a huge issue in Indian real estate industry). Like in the stock market, where the smaller brokers are going bankrupt, the Indian Real Estate Industry is too seeing the small real estate broker go out of business.
India’s Real Estate Sector is known for its corrupt and dubious practises.The Real Estate Companies manipulate their financial statements to such an extent that even India’s “well connected” Fund Managers don’t trust them.This has been the cause for their poor performance in the stock markets and the stalling of 10-15 IPOs in the Realty Sector.Even Investment Bankers in India who are quite adept at selling Junk Offerings like Aster Silicates, Prakash Steelage, etc,are finding it tough to sell these Real Estate Companies. 450 Raids are being conducted on developers such as Paras and Amrapalli and huge cash stashes have been already been confiscated.These raids have a political angle to them as well as opposition businessmen are being targeted.
Is Real Estate in India a bubble?
The property prices are becoming increasingly irrational, since 2008. The causes of the Real Estate Prices increases in India are mostly due to the fact that Market Forces are not allowed to operate freely.The regulations,corruption,lack of transparency,vested interests,cultural factors all have a role to play.Here are some of the reason that I think Real Estate Prices are totally irrational in India. However, many will argue that Real Estate in India in not a Bubble but a result of High Population Density, Demand, India’s Economic Growth.
1) Corruption,Opaque Regulations,Use of Black Money – Real Estate in India is a Cesspool of Corruption and even India’s Prime Minister has also accepted it saying that high Stamp Duty on Real Estate Buys result in the preponderance of Black Money in Real Estate Deals.Due to the massive price appreciation and huge valuations,Land Scams have become quite common with Chief Ministers,Generals,Top Bureaucrats all involved in the murky environment of Real Estate in India.The most recent scam related to bribing of top public banks officials in the LIC Housing Finance Scandal has again put question mark on the fundamentals of the industry.Valuing the industry and making a real estate investment remains one of the most difficult investing tasks in the Indian Stock Market.Even Fund Managers are staying away from the Sector due to lack of trust in the Financial Statement given by the industry.
2) Global Real Estate Bubbles – One of the reasons for the sharp price rise in Real Estate in India is that Real Estate in many parts of the world are a bubble.Allowing Foreign Money into Real Estate in India has made these PE investors pay the same valuation for properties in India as outside.Note many of these “Real Estate” Private Equity Investors have yet to recover from the fall in property prices in the 2008 crash though many have been saved by the Bernake re-inflation.
3) Tax Laws and Policy Stupidity – India’s Tax Laws impose high capital gains on land that is sold and not reinvested back into real estate again.That keeps the huge sums from gains in the real estate to be funneled back again.Otherwise a lot of the money would have gone elsewhere bringing the Real Estate back to earth again.India also allows an exemption of Rs 1.5 laks ceiling on interest payments on Real Estate Payment giving an impetus to investing in RE.Note such misguided laws were a leading cause of trouble for the Real Estate in USA.
4) Local,State Laws on Real Estate prevent Market Forces of Demand/Supply to Operate – India’s Local and State Laws dealing with Real Estate are as bad if not worse than Laws at the central Level.These Laws in most cases prevent the normal working of the Market Forces of Supply and Demand.The biggest proof of this in the fact that the Rental Yields on properties on India are way lower than if you took out money from selling the real estate investment and putting in a safe government bond.People in Mumbai the biggest real estate bubble market in India have stopped buying houses and going for rental leases.
5) Peer Pressure,Cultural Factors – A lot of people buy real estate seeing other people buying at inflated prices.Not exactly a classical economic argument given that it assume people are rational and make decisions based on value.It has become acceptable to pay a huge amount of income as EMIs seeing other people do the same.Does not matter the benefits are hardly worth the costs.Cultural factors like buying real estate preference also have played a big role.In India people avoid stocks,bond but prefer real estate and bank fixed deposits.