India Real Estate

India’s real estate market has seen price stagnation over the last one to one and half years as buyers have disappeared from the markets, given the stratospherically high prices of apartments and villas. The real estate bubble which is sustained based on constantly rising prices, has seen one of its most fundamental tenets going out of the window. No price rise means that investors are now looking for other assets such as equities because with an inflation rate of 5-10%, no price rise means a real reduction in value. There are also numerous anecdotes of prices falling by 15-20% in select pockets such as NCR and Mumbai, especially for extremely high priced areas such as South Delhi and Mumbai.

The real estate market has been built on a foundation of huge debt from public sector banks and black money. Both are under strain now, with the new government making it more onerous to generate black money; and the banks reluctant to lend, given their massive non-performing assets which have plunged their stock prices to new lows. There is also massive inventory which is piling up and straining the balance sheet of developers. The NCR region is supposed to have inventory of around 71 months, which is way above normal. The buyer sentiment is going down each day, with the poor execution record of Indian builders who are not only steeped in corruption but also bad at execution. Many developers have just stopped construction as they have no money. Unitech which is the second largest builder has left buyers in the lurch, with delays ranging upto 5 years and no visibility on when it will complete those projects.

Real estate in India allows retailer to leverage their savings and get tax breaks. This has artificially boosted price along with massive amounts of black money. Most of the corruption money in India (Saradha scam, FTI scam etc.) gets parked into real estate, as it can absorb massive amounts of money without too much scrutiny. Most consumers have almost no right, as the developers have huge power due to political and police patronage. There are one sided agreements and construction quality is quite pathetic. There are a huge host of taxes and duties that buyers have to pay, along with hefty registration amounts. Parking is also an extra payable which beats me. Where would a consumer park his car – on his head? Governments even charge apartment buyers for providing infrastructure (utility, roads etc.). Is that not supposed to be why consumers pay normal taxes.

India’s professional white collar workers are the biggest pansies in the Indian system. They have to pay huge taxes and get little or nothing in return. The business and trader class do not pay almost any tax, by bribing and falsifying their income. Agricultural income in India is not taxed. Even if you make $100 million from agriculture you will have to pay zero tax, but if you make $500 a month by honest hard work in a company, then you have to pay tax. No wonder so many Indian professionals have emigrated. The new government will have to change these anomalies in order for India to become a modern economy. Just putting out slogans will not help unless these structural issues are resolved.

Enough of my rants and back to the topic. India real estate prices make no sense at all, compared to any valuation metric. The price to income ratio is extremely high and the rental yield is abysmally low. Getting a rental yield of 2-3% is considered great, that is if you can find a tenant. Most people like to keep their apartments and real estate empty because they think keeping a tenant is a risk to their capital, if the tenant decides to illegally occupy the property. The Indian fascination and real estate price appreciation was driven by cheap global liquidity, black money and bad policies. Given where the prices have reached, I think that stagflation is the best option for the real estate industries. Steep price falls is also a possibility if the global liquidity situation tightens. In summary, investing in real estate is the stupidest thing to do right now.