It is difficult to run into somebody in Delhi you know and not have them confess that they too are caught with their money stuck in stalled real estate projects in the suburbs of Noida and Gurugram. The bankruptcy process in the Jaypee Infratech Ltd case got the headlines, but the number of large developers in jail is not small. It includes companies such as Unitech, SRS Group and DB Reality, showing how deep the rot in real estate goes because rich people in India seldom go to jail for breaking the law.
Stuck in the still-to-be-Italian-marbled buildings are the savings of the urban mass affluent Indian who thought she was investing smartly in the property boom. Investors bought into the good deals offered by builders who offered to pay their first few EMIs (equated monthly instalments), who offered post dated cheques for those EMIs, who offered a free car if you booked a flat above a certain value. Real estate investors who bit the bait allowed themselves to believe deals too good to be true, to be true. They refused to listen to sane counsel of friends and newspaper articles that warned them against such deals.
The year 2017 was marked by four distinct money events. One, it was the year in which systematic investment plans (SIPs) in mutual funds became a household name, leading to a fat pipeline of over Rs5,000 crore a month (that’s Rs60,000 crore a year) flowing from households to equity funds. Two, 2017 was the year in which investors finally gave up waiting for real estate to recover. Despite the bravado of the builder, broker and banker on the future of real estate, the math just did not add up to support prices that are still very high. Why would you invest in something that yields less than a bank deposit after taxes? Renting clearly was the winner over buying. Three, gold and bank deposits lost their sheen as prices dipped and rates fell. Four, risk-averse investors, who feared mutual funds because of their risk, went all out on crypto-money—not just bitcoin, other cryptocurrencies were also on the investment radar, as were non-regulated initial coin offerings (ICOs). What lies ahead in 2018 for your money? The answer in one line is: a continuation of the 2017 trends.
How do we know when a market is overvalued? The equity market looks at price: earning (P-E) ratios, book value, price earning to growth (PEG) ratios and valuations to see if stocks, or entire markets, are overpriced or underpriced. Is there a similar metric for real estate, a rule of thumb that tells you when a property, or the whole real estate market, is overpriced or underpriced? Mature markets use some rough rules of thumb to decide over- or under-pricing in real estate. The first is the ‘gross rent ratio’. Divide the sale price of a property with the gross annual rent it will get. Gross rent does not account for costs of the loan, maintenance or society fees. If a flat sells for Rs1 crore and can be rented for Rs50,000 a month, or Rs6 lakh a year, the gross rent ratio is 16.6. Real estate investors use a rough rule of thumb that says: buy at 10 and sell at 20. Buy when the rent ratio is 10 and sell when it touches 20 because the property is overvalued. The second metric is the yield which just switches the two numbers. Divide the gross annual rent by the sale value of the property. The annual rent of Rs6 lakh divided by a capital value of Rs1 crore gives a yield of 6%. Mature market thumb rules say buy at a yield of 5% and sell at 10%.
Getting those real estate itchy fingers? Stock markets have been on a roll and the upswing in markets is usually a precursor of a jump in real estate prices as investors book profits and sink their money in land. The breathless expectations from a new real estate regulator, combined with an overall upswing in the mood of the economy, is making people begin sniffing the air for real estate deals one more time. One more time I write to caution real estate aspirants, specially those who cannot deal with the clunkyness of the asset, against jumping in. Of course, it still remains a really bad investment at current prices when you compare it to alternatives.
This year will be remembered for the contradictions of the post-war world order manifesting in many ways. If 2008 was when the crack became visible, 2016 was when the fissure became too big to ignore. A series of global events point to the rising voice of those left hurting by rising inequality in the world economic order, where the benefits of globalization have gone to capital rather than labour. Labour as one of the factors of production—land and capital being the other two—has suffered. Real wages have been stagnant in the developed world and restrictive labour mobility rules have hurt labour in the emerging world. The rules set by the owners of capital make for a world without borders for capital, but not for labour.
The excited real estate multi-bagger story exchange in the investing classes heard over the past few years in Delhi and Mumbai has given way to a grimace and a despondent shrug. I know from anecdotal evidence that people are down as much as 50% on their properties in select locations in Gurgaon and Noida. The volume of conversation is only growing—I’m increasingly accosted in public places to give my views on the future of real estate. Kuchh hoga kya? I’ll come to that in a minute (and will try very hard to take the I-told-you-so tone out of the column, but…) but first, a look at how deep the bleed has been. I looked at the Residex, a real estate price index across 23 Indian cities constructed by the Reserve Bank of India-owned National Housing Bank (www.nhb.org.in/Residex/Data&Graphs.php ).
Ask any group of people what gives the highest return and nine out of 10 will say: real estate. The 10th will name gold as the next best investment. Mention stocks or equity and the response is either hostile due to the stock market related scams (including the unpunished scam of unit-linked insurance plans) or fearful. Every time I’ve spoken to a group, I get the same response: a sure-thing with real estate and gold, and an overall feeling of mistrust with equity. Let’s unpack this a bit. Let’s look at return rates. I will do this in two parts. One, historical returns. If we begin with the Sensex at 100 in 1979 as a starting point for a meaningful comparison and look at returns across the market, real estate and gold, we get a positive return for all three. Investment in gold from 1980 to 2014 (I got gold prices in Indian rupees off gold.org) returned 11%. Investment in the Sensex returned 17% over the same period. Tracking real estate is tougher due to lack of data series and due to location issues. So I picked the village where buffaloes bathed turned boomtown of Gurgaon to see what the price change has been. Speaking to original inhabitants from the 1980s of what is now DLF City, I get rough rates of Rs.2 lakh investment turning into Rs.2 crore over 34 years, or an average annual rate of growth of 15%. Just to put it in context, I looked at Reserve Bank of India data and got an average annual return of 9% on a five-year fixed deposit (FD) across the same time period.