Foreign Banks, Investors and Funds the Real Culprits Behind India's Criminally High Property Prices

India’s Real Estate Companies have seen a very tough 3-4 years with interest rates climbing, investors running away from shoddy accounting and the global macro scene being quite bad. One needs only to look at the stock price chart to see times have been very bad. Besides some of these companies have come under court scanner for their practices with Unitech CEO spending some months in jail for a telecom scam. However property prices have not come down as India’s real estate bubble seems immune from crises in the West and in India . Prices have more or less remained stable while other assets have seen a major carnage at one point or the other.

One of the major reasons is that Foreign Fund and Investors have continued to pour big money into the Indian Property Developers . They are getting a big pound of flesh getting returns of 20% per year or more as the Indian Realtor is squeezed for cash .Indian Banks have grown wary of lending while the IPO market remains closed because of the corruption and scamming. Foreign Funds have huge assets and bolstered by the zero interest rate regime in the West are spending money here where the returns are quite high.They don’t mind waiting for some years for returns given that Real Estate Demand in India is high and growing.

A large European bank, which continues to be an aggressive player in the Indian property market, is organising Rs 1,800 crore funding for a Delhi-based developer who will use the money to pay off its foreign bond holders. The foreign banking group will use its FII arm to subscribe to the securities that the property firms will issue. The same bank will also invest and rope in other investors for a Rs 800-crore non-convertible debenture issue of another large builder in Mumbai which is dabbling in multiple projects. Besides some offshore institutions, wealthy local investors (better known as HNIs) have emerged as the biggest buyers for real estate papers. They are either buying the papers directly or through the portfolio management schemes run by brokerages managing their money. In a few cases, investment banks and their finance companies are playing the role of anchor investors – a strategy that has helped in attracting HNIs

I have tried to explain the reason for India’s Real Estate Bubble here.

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 reinflation.

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 goverment bond.People in Mumbai the biggest real estate bubble market in India have stopped buying houses and going for rental leases.

Creative Accounting

India’s Real Estate Sector is one of the most unloved sectors in the Stock Market.Even Fund Managers shun this Sector because of the complete lack of trust in the financial statements published by the Real Estate Companies.With the whole industry most unogranized and companies playing with their books,its not a wonder that the sector continues to languish nearly 70-80% of its 2008 peak despite the broader market being only 10% below its all time peak.Real Estate Companies trying to raise funds in the Primary Market have been stymied by the lack of interest and distrust by the investor community.Recent IPO’s like Nitesh Estates and Jaypee Infratech have rewarded investors with huge losses in a rising Stock Market.The Industry is Synonymous with Frauds and Scams besides everyday violation of norms and contracts.Even the most famous Real Estate Groups are frequently in the news for scams and frauds.Here is a real life example of the ways that these companies inflate their revenues and profits through use of creative accounting.